Friday, April 10, 2020

Trump's Past Greatly Distorts His View Of The Economy

Many old school economists believe that certain rules that must be obeyed to avoid disaster I look at what is happening with horror and amazement as much of the knowledge gained over decades is ignored. This article is not written as an attack on Trump but to point out the President has a skewed view of how the economy works. It has become clear that President Trump is no economist or financial wizard  During his time in office the economy he often pointed to as proof of his ability to lead has been built on deficit spending.

Trump sports a distinct view of the financial world that is rooted in his past. His willingness to manipulate numbers and facts to suit the moment flows from his background as a promoter, this is something he is proud of and a core part of his personality. The sick games of financial jiggering and engineering that business titans often engage in include such things as tax avoidance and shedding liabilities through bankruptcy. This is far different from running a profitable small business year after year. This explains why Trump embraces MMT and often seems more worried about today than the future.
Trump Pushes His Distinct Views As Fact

The President's "damn tomorrow" attitude is reflected in deficit spending and his constant call for lower interest rates. His delusion that his stock market can go straight up forever is not based on years of stock trading but rather his years in real estate where inflation treated him well as prices rose ever higher. Within the sector of the economy where Trump made his fortune, more spending, more debt, and lower interest rates have been the key drivers of expansion. Securing a low-interest rate loan and waiting for real estate values to rise has been a big winner.

The massive disruption in the economy resulting from the government’s response to covid-19 is likely to lead to a deep recession or depression characterized by reduced dividends, an end to buybacks and softer growth. The Trump administration's decision to jump into the breach with a $2.2 trillion relief package is another indication that his answer to such an economic disaster is mega-spending on hand-outs and social projects. Sadly, because of the political environment, we are experiencing, Congress rapidly gave near-unanimous approval casting aside concerns about the deficit or the unintended consequences it might usher in.

A theory exists that during a situation such as we are facing, the Government's efforts to intervene are useless and may make things worse. Sometimes when the economy is melting down, it is best to do little or nothing because the free market will over time self-correct and return to a healthy balance. The problem here is two-fold, first, Trump doesn't view deficit spending as a problem and second, he touts the stock market as an indicator of his ability to return America to its days of glory as promised when he ran for office. Unfortunately, much of his economy is generated using this old trick of deficit spending.

Debt Matters! (click to enlarge)
The chart to the right shows how the deficit has exploded over the last three years. This indicates the Trump economy is a mirage based on deficit spending. This, coupled with market manipulation fueled by changes in the tax laws have caused stock buybacks to explode. The bottom-line is that we are in the midst of a "false economy" and it is only by the grace of this huge deficit spending that we are not languishing at the bottom of a deep economic pit. Deficit spending is not a silver bullet without consequences and is a poor substitute for the free market when allocating capital to where it is most effective. It is not economic growth but simply a method of borrowing from the future.

An example of Trump's tinkering to boost the markets was visible in a story that unfolded last week. In a tweet, Trump bragged about how he had brought Putin and the Saudis together and agree on cutting oil production by 10 to 15 million barrels per day. This was an effort to raise oil prices which aids US oil producers and the banks holding their loans. This is a complete reversal from his position months ago when he wanted the Saudis to pump more oil to give American drivers relief at the pump. Ironically, it could be said this effort by Trump to manipulate the market threw the American consumer under the bus and benefited Russia. Still, it did accomplish his goal of rocketing the market higher even if only temporarily.

An article that originally appearing on a while back may shed some light on Trump's views. It delves into the remarks of tax-cut guru Arthur Laffer, an economist who served as an adviser to President Ronald Reagan and to President Trump’s 2016 campaign. After Trump bestowed the Presidential Medal of Freedom on him, Laffer jabbed at embattled Federal Reserve chairman Powell stating, “The Fed shouldn’t be independent of the administration. None of those people were elected. They were appointed. And there’s no reason for them being appointed. It’s a policy tool that should be in the hands of the Congress and the President to make our country better,”

Laffer, a conservative academic is credited for much of what most people consider Republican economic theory. This is centered around, the idea of “trickle-down economics” and how lower tax rates trickle down to benefit the overall economy. It often appears that Trumps sees a higher stock market as proof he is on the proper track but he is blind to how distorted markets have become. The ugly truth is American companies, even after Trump's massive corporate tax cut  have little reason to bring jobs home. The tax bill does little to level the playing field when it comes to other barriers such as healthcare costs and over-regulation. Simply put, the structural issues that haunt America's competitiveness far outweigh the benefits of lower taxes. 

Circling back to the crux of this article, I contend that while Trump touts a fondness and respect for hard-working Americans his policies will continue to create a great deal more inequality. Low-interest rates, coupled with printing money and deficit spending has always come with huge hidden costs. They include increasing speculation, distorting prices, and allowing boondoggles to be built while reducing income to savers. This money flows to big business and Wall Street first and less so to small local merchants. In short, it reeks of crony capitalism and fuels a false economy. As for the economic concept of  “trickle-down economics,” the problem is that those at the bottom share only a few drops of the benefits while those at the top swim in a pool.

There is an old sales adage that says “sell the sizzle, not the steak.” With this in mind, we should remember Trump excels at promoting. Trump appears to not see himself as the smartest man in the room but at times acts as if he is the smartest man on the planet. As we have come to know more about him we can see he is very comfortable with economic manipulation. One commentator recently said "Again, and again, it seems Trump creates a crisis then pulls back at the last second. After pulling back he then claims victory and that he has resolved the issue."

The problem facing Trump is the economy has been badly damaged and it may be difficult to manage the anger flowing from a public promised more. The scenarios we face include growing inequality, massive unemployment, and propping up zombie companies. The Japanification of America is well on its way. Stagflation or run-away inflation is also a good possibility as reality shows that a soaring national deficit is never a free lunch. Sooner or later it results in pain. Trump may refer to the campaign against the coronavirus as a "war" but it is just a battle. The real war is still before us as we begin to deal with the carnage the politicians in Washington have unleashed upon us.

The President did not get us here on his own, he was assisted by a willing and complacent Federal Reserve and Congress. It will be interesting how this plays out as the election draws closer. Trump's salvation may be that he faces an even greater free-spending Democrat as he argues that things would have been far worse if he had not taken us down this path. It is incredibility ironic that after criticizing Obama and the Democrats for taking us down this road we find Trumponomics is little different. Please forgive me for pointing out the obvious, the next election will again present the American voters with choosing between the least of two evils, an arrogant Trump or a tired corrupt Biden. Neither of these fellas are up to the task of addressing the mess before us or our prosperity lost.

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