An economic or financial crisis is obvious to everyone after it happens. It always is.
Every crisis is portrayed as if it just came out of nowhere. However, there is almost always a confluence of factors building up over years before the crisis comes to ahead. The majority respond to the tipping point when the crisis erupts, paying little attention to the pressures previously building.
This phenomenon is why behavioural finance is such an important part of understanding economics and the world of financial markets. Still, even with advancements in this field we do not seem to learn from our mistakes. Crisis after crisis. There is a different set of characters, but the story arc is usually the same.
The next financial crisis
There are most certainly pressures building that should have people concerned. A decade of cheap money – central bank policy once considered radical became the norm – has propelled stock markets and other asset prices higher, even creating the absurd situation where bonds offer investors negative yields. Yes, broad measures of economic activity and employment have recovered, but beneath the numbers the picture is not quite as rosy as some might like to paint.
The real issue is long-term sustainability, but everyone is once again distracted by the short-term noise. The underlying issues within the global economy have not been addressed, most notably the rising inequality and record debt levels (public and private). Real wages have remained flat for decades, wealth has become even more concentrated and we have emerged from a debt crisis with even more debt. As ever, economic growth has come at the expense of our environment. Sustainable?
Sustainability failure
There is a tendency to look at financial sustainability and environmental sustainability in isolation, but it is the same mentality pushing us into the red on all fronts, spend today and pay tomorrow.
Year after year we continue to run a climate budget deficit; we are effectively using up our ecosystem at a rate much faster than it can support. In turn, while the climate debt accumulates under the watch of the current generation, it is future generations who will be landed with the bill.
Behind this, we have an unsustainable economic model, whereby companies do no have to pay for the negative externalities they produce – most notably their part in the destruction of our environment – or pay a fair value for the use of our natural resources. These costs are socialised, we all pay.
Trump’s rocket ship
In this headline driven world, the story of development has been reduced to short term metrics, such as the latest quarterly GDP number or Donald Trump’s favourite: the stock market. Trump touts himself as the President who has “led the Greatest Economic BOOM in the history of our Country” (June Tweet). On July 5th, in his comments following the latest jobs data, Trump proclaimed:
“Our country continues to do really well, really really well. So, we’re very happy about it. I think we are going to be breaking records. If we had a Fed that would lower interest rates, we’d be like a rocket ship”. (Source: CNBC)
This is not the first time he has used the reference. In September 2015, in an interview when he was on the campaign trail, Trump claimed his tax plan will be a rocket ship for the economy. He also stated his plan was about cost cutting. (Source: Today)
“Stocks are up”
For Trump and his ‘fiscally conservative’ cronies, their corporate tax cuts (35% to 21%) have been painted as a massive success because it has helped pushed stocks higher; yet the sharp increase in the budget deficit – on track to hit a $1 trillion – and the record debt levels are for someone else to deal with down the line. To raise such an issue is just considered anti-Trump or anti-Republican.
But to anyone of sound mind, cutting corporate taxes and increasing debt fueled spending (a large part being on military spending) is not fiscally conservative. Just as pulling out of the Paris Accord on Climate Change is not environmentally conservative. Trump’s obsessive focus on the stock market as the metric for policy success is concerning, as are his blindly following cheerleaders.
More rocket fuel needed
With little care for the inevitable descent, Trump has continually berated the US Federal Reserve in order to get more cheap money to push his rocket ship higher. On Thursday, the Fed bowed to pressure from the bankruptcy specialist, cutting interest rates for the first time since 2008, a cut of 25bps to a target rate of 2% – 2.25%. Whether it was bowing to Trump or US economic weakness, both are concerning.
The strongest economy in the world, as portrayed by Trump, has cut rates to try and stave off a recession. That alone should give one pause for reflection on the outlook for the global economy. Or, if the US economy is as strong as Trump has portrayed then the Fed’s independence is no more.
“Big fat ugly bubble”
Of course, President Trump is a big fan of cheap rocket fuel but in September 2016, during a Presidential debate with Hilary Clinton, Candidate Trump warned of the “big fat ugly bubble”, a stock market supported by a political US Federal Reserve keeping rates artificially low:
“Believe me: We’re in a bubble right now. And the only thing that looks good is the stock market — but if you raise interest rates even a little bit, that’s going to come crashing down. We are in a big, fat, ugly bubble. And we better be awfully careful. And we have a Fed that is doing political things….by keeping the interest rates at this level…When they raise interest rates you are going to see some very bad things happen. Because the Fed is not doing their job. The Fed is being more political than Secretary Clinton” (Watch video: Bloomberg Politics)
Candidate Trump was focused on getting elected, President Trump is focused on staying in power. In the long-term, he won’t be around to have to deal with the repercussions of short-sighted policy and Trump has taken this mind-set to the extreme. MAGA is no beacon for the world.
Final thoughts
Ten years after the financial crisis of 2008/2009, the most powerful countries in the world still don’t have their financial house in order. Central banks who previously came to the rescue have already pushed the limits of monetary policy. Aside from the economic fallout, we should also be concerned that the next downturn will give world leaders another reason to delay action on the greatest crisis of all, our environmental crisis.
Hence, we need a much more sustainable economic model, not a rocket ship. We need to move beyond the boom and bust cycles of extremes, focusing less on the % level of growth in GDP and more on the quality of the economic growth. From Kyoto to Paris, repeated rhetoric by the world’s leaders has not been met with the changes needed to bring about more sustainable economic development.
Trump’s economic rocket ship will come back down to earth in the near term but in the long term we need to make sure we have an earth worth falling back to.
End