The soaring stock market has been the crux of Donald Trump’s argument for the competence of his reign. It might be his favorite tweet subject, outside the “Failing New York Times.”
Trump on August 18th: “Longest bull run in the history of the stock market, congratulations America!” August 24th: “Our economy is setting records on every front.” September 11th: “Where are the Democrats coming from? The best economy in the history of the country would totally collapse if they ever took control!”
But since the market hit an all-time high on October 3rd, Trump has shifted his tweets to other subjects. This makes sense, given that it took a nasty dive. The worst was a two-day sell-off in the middle of last week, during which the Dow Jones Industrial average dropped 1,377 points.
On Friday, the Dow opened with a big round of buying, then plunged again, then wobbled all day before finally ending 287 points up. This allowed the financial world to spend the weekend relief-boozing instead of planning for The End.
Maybe the stock market isn’t about to crash in the next 10 minutes. That doesn’t mean we shouldn’t be scared to our marrow over the future.
The sell-off last week was likely just a mild preview of what will happen once the blunt contradictions of Trump’s major economic moves — crazy even by his standards — set in.
“We’re fucked,” a market analyst friend of mine put it this weekend. “It’s all baked in the cake already.”
You don’t have to be a financial expert to see the irreconcilability of these three problems:
1. Fed tightening
Under Trump, the Federal Reserve is trying to end a decade-long party. Massive programs of money-printing and low-to-zero-interest rate lending were implemented to keep markets moving after the 2008 disaster. Terms like “unlimited liquidity” began to catch on to describe the level of central bank support the financial world could expect in the post-crash universe.
Programs like Quantitative Easing in the U.S. (and analogs in Europe and Japan) had central banks pumping an extra $12 trillion or more into the economy over the past decade. The cash was supposed to trickle down to the rest of us in the form of real-world investment. But the vast sums of free money pumped into the economy produced dependably unimpressive economic growth overall (prompting headlines like, “$12 trillion… for this?”).
Who benefited instead? You may be surprised to learn it was the financial sector!
QE and “ZIRP” (Zero Interest Rate Policy) allowed big companies to borrow recklessly and gorge themselves on buybacks of their own stock, which had the twin consequences of driving down bond prices and sending the stock market soaring.
The central banks of the world are finally trying to end the madness. The Fed is taking about $50 billion out of the economy every month, and now raising rates not just above zero, but close to (and perhaps even beyond!) neutral. The free-money era is over. Once the European and Japanese central banks follow suit, the net effect worldwide will go from “easing” to “quantitative tightening” in 2019.
Trump must be cursing his bad luck. After 10 years of Fed policy that turbocharged bank-sector profits and defined “austerity” as a thing for poor people, he’s now got a terminally cheery Fed chief in Jerome Powell who keeps insisting the economy is finally healthy enough to start re-introducing the concept of pain to Wall Street.
“A wide range of data supports a positive view,” Powell said earlier this month following a rate hike.
After last week’s sell-off, Wall Street analysts whined and pointed the finger at Powell, implying that he was causing this mess by cutting off the magic money-tap too early.
“The current dip in confidence can be allayed were the Federal Reserve to signal it is easing off its quantitative tightening and rates rises,” Jasper Lawler, research head at London Capital Group, wrote during the plunge last Thursday.
Trump agrees. He’s ripping the Fed for raising interest rates, as in, why do we have to come back to Earth now?
“I don’t want to slow it down even a little bit, especially when we don’t have the problem of inflation,” Trump said last week.
If the Fed turns off the rocket boosters entirely, he’s in trouble because…
2. Trump’s tax cuts depend on monster growth
When Republicans rammed through the administration’s tax-cut package, more than a few analysts warned that the cuts were based on too-rosy projections of economic growth.
Groups like the Tax Policy Center warned, “Trump’s tax cuts would drive new activity at first, but… the impact would be blunted in later years by rising deficits, forcing more federal borrowing.”
A year later, the Trump administration has indeed had to sharply increase the scale of federal borrowing in order to cover the shortfall in expected tax revenue.
Few noticed when the Trump Treasury borrowed $488 billion in the first quarter of this year, beating the record of $483 billion set in the first quarter of 2010, when the economy was still recovering from a crash. There was talk that the Treasury would roughly quadruple the number of T-bills issued in 2018 versus 2017.
If you’re wondering where all those deficit hawks in the Trump White House (like Mick “bring on the default” Mulvaney) and in the Republican Party (like Paul “It would take me too long to go through all of the math” Ryan) were when the national debt shot past $21 trillion for the first time last year, that’s a good question.
This is part of the reason Trump wants Fed rates lower. He doesn’t want to have to pay interest on the giant sums he will inevitably have to borrow to pay for his idiotic tax cuts.
“I think the Fed has gone crazy,” he seethed, adding that “they seem to like raising interest rates, [when] we can do other things with the money.”
Rising interest rates also hurt Trump’s own bottom line. The prez supposedly owes $300 million to Deutsche Bank, and interest payments there go up or down in accordance with Fed policy.
“I’m paying interest at a high rate because of our Fed,” he admitted.
It should be noted that even presidents whose personal fortunes are not massively affected by Fed policy have traditionally stayed mum about central bank moves. Trump’s comments broke two decades of presidential silence about Fed policy.
So we have a Fed-tightening colliding with a ballooning public-borrowing need. Awesome! To this we add a third factor:
3. Trump’s tariffs
Here’s how dumb Donald Trump is. First, he announces a massive unnecessary tax cut that can only be paid for by unsustainably high growth. Almost immediately, he has to increase national borrowing to pay for it.
The traditional Treasury note supply goes up right away, but even that’s not enough to pay the nut. In fact, this week — October 16th, to be exact — the government is going to debut a brand-new two-month Treasury bill, through which it hopes to raise $30-$35 billion immediately.
So we’re going to have to sell more and more Treasury notes. On whom do we depend most of all to buy those notes?
That’s right: China, which holds about $1.2 trillion in Treasury notes and about $1.5 trillion in U.S. debt overall.
In any trade war with China, the United States would seem to have an advantage. We import a lot more of their goods (last year, about $524 billion in Chinese products) than they import of ours (about $188 billion of U.S. exports). But all of this is moot if China suddenly stops buying U.S. debt, or even just slows down a bit.
Experts claim to think this is unlikely, given China’s own dependence on U.S. Treasuries as a safe destination for its trillions in foreign exchange reserves.
Bloomberg over the summer wrote, “Treasuries are nearly as crucial an underpinning to China’s economic plumbing as America’s.” They quoted a Goldman Sachs analyst who added: “We don’t see any evidence that China is planning to use Treasuries as part of its trade negotiations.”
But what if Trump’s big populist gambit announced in September — slapping 10 percent tariffs on $200 billion of Chinese products — hurts the Chinese economy to the point where they can’t afford to keep subsidizing our exploding debt? What if it just dulls their enthusiasm for doing so?
Under Quantitative Easing, we were inventing huge sums of cash to lend to ourselves, with the Fed buying as much as $45 billion in Treasuries every month. This time last year, the Fed had $2.5 trillion in Treasuries on its balance sheet.
Now that source of funding is drying up, and we’re in a trade war with our other major borrower, and Trump thought this was the time to bet our national economic health on a tax giveaway.
Who comes up with these ideas?
As we’ve seen in recent decades, even smart people are fully capable of driving the American economy off a cliff. What happens when the dumbest administration in history gets a turn at the wheel? Maybe last week wasn’t the time to start panicking. But that moment can’t be far.