Three Colliding Problems Leading to a New Economic Disaster
By Matt Taibbi, Rolling Stone
15 October 18
Last week's stock sell-off was merely the beginning of what's to come
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.
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