We are due for a recession

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New York Stock Exchange, courtesy wikimedia.org

I hate to say I told you so, but it looks like the world is starting to catch up to the fact that the “Trump Bump” isn’t going to happen. As I detailed in my earlier post, stocks have been rallying around Trump while the real economy (wages, job growth – the types of economic factors that impact our daily lives) has been stagnant or growing very slowly, and that is a cause for concern.

Wall Street had hoped that Trump (and perhaps more importantly a Republican government) would bring them what they had been craving for decades – tax reform and entitlement cuts. This was their moment, the moment the business class had been dreaming about since they were drinking out of kegs, finally arrived with billionaire Trump sitting in the White House. What the business class had not factored in was the obvious dysfunction a Trump White House would bring to Washington (as if we needed more dysfunction in Washington), as well as the fact that the market was rallying far before he had even done anything.

This has been the singular issue in the entire economic recovery since the 2008 crash – the stock market has been rallying to new records while the average American sees no change in their daily lives. They are paying more for the same services, making the same amount of money, and seeing the job market dry up – all while Wall Street is all over their TV in a record-breaking rally. It’s no wonder the one uniting factor in our most divided political climate is a resentment for Wall Street. The only thing keeping demand moving has been the artificially low interest rates, so it’s not like the Fed can just cut rates again.

This time, the stock market had hoped that Trump would provide a foundation for the record growth in stock valuation since 2008, but it seems this will not be the case as Wall Street finds itself built upon quicksand. And worse than what happened in 2008, we do not have competent leadership (or good ideas) to help us ride the storm in case of another crash.

So far Trump’s economy looks a lot like Obama’s, with the exception that Obama had been trying to lead our country towards the movers of the 21st century economy – energy independence through solar, wind, and natural gas energy; easy access to community college and training; apprenticeships in the trades; healthcare; automation; etc. Trump has moved against all of this in a totally reactionary shift in policy in an attempt to protect 20th century sectors like coal and manufacturing. So while the United States moves to protect the jobs of the past, countries like China will pass us by with the jobs of the future.

Every 7 or 8 years since the dawn of the market, there has been a recession, and we are long overdue now. How Trump and the Republican government respond to a crisis like this is anybody’s guess.

Dow 20,000: Cause for Celebration or Concern?

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President Trump meeting with business executives, source: nymag.com

Not too long ago, the Dow Jones Industrial Average (an index of a number of benchmark stocks, often used as a measure of the overall health of the stock market) hit the landmark number of 20,000, its highest peak ever. In the few weeks since it has continually closed at higher and higher records. This is due largely in part to the election of Donald Trump, who has promised tax breaks and deregulation in an effort to grow the economy to his promised 4% GDP growth, the type of economics Reagan Republicans have been pushing for quite a while now.

A little background: Ronald Reagan introduced “Reaganomics” to the world in the 1980s. The basic idea is that by cutting taxes and deregulating, you free the market to grow on its own outside of government control. This is also referred to as “supply side economics” (and also “trickle down economics” by its detractors) because the theory is that policies that increase supply (supply of capital, supply of goods and services, etc.) are the most effective at driving economic growth.

On the other hand, the prevailing theory on the left is Keynesian economics. This is a theory opposite to supply side economics in that Keynesians believe that the most effective policies to drive economic growth focus on the demand side of the equation, especially in economic recessions. This is why Keynesians love policies like stimulus bills that put capital in the hands of consumers, which is believed to drive growth because the more money in your pocket, the more likely you are to spend it on a good or service.

It seems, with President Trump, the theory is that a federal government under Obama and the Democrats have hamstrung economic recovery with too much regulation – environmental regulation, banking regulation, etc. In order to reach his target 4% GDP growth, Trump is going the path of supply side economics, which Wall Street was swooning over even before any policies were enacted.

Opinions:

Reagan inherited an economy very different from the economy inherited by Trump. Fed interest rates were around 20%, with rampant inflation, relatively high unemployment numbers, and an energy crisis. Compare that to today, where we have quite the opposite situation – historically low interest rates, low inflation, low unemployment. Reagan’s policies worked (arguably) at the time under a totally different set of circumstances – they increased supply when supply was in trouble. Neither supply side or Keynesian economics work universally – they are both responses to specific economic conditions. This is why the stimulus bills under Obama were such a success and pulled the world out of the clutches of depression – it bolstered demand when demand was failing.

Dow hitting record highs is exciting, but also a little frightening. The economy has been growing, however slowly, but Wall Street is somehow going wild. It is a largely psychological boom, with very little change in the real market, in people’s everyday lives, to back it up. GDP growth has disappointed, real incomes have stayed stagnant, real unemployment (which accounts for people who have stopped looking for work) is improving but still high, and good jobs remain relatively weak. Demand is still very much the area most in need of improvement today, and increasing supply at this point is not going to have the same effect it had in the 80s. Deregulation is going to suck more growth towards the top 1% while simultaneously destabilizing the market by taking away key laws aimed at preventing another crash, making the economy more volatile and more recession-prone.

Even worse than this, however, are the huge economic problems that are being mostly ignored. The Euro is in trouble; most of the European Union is still in the process of quantitative easing (inflating the money supply to mask debt). China is dealing with a real estate bubble. Domestic factors like student loan debt and a retiring baby boomer generation are trends that are slowing growth to a halt. America has a stronger case to ride out another recession than the rest of the world, but we are not (and cannot be, regardless of how much Trump wants to try) immune to the factors at play around the globe.

If we want economic growth in 2017 and beyond, real economic growth, the type that improves the lives of everybody involved – we need to let the market run free with 21st century propellers of growth. Energy independence, automation and robotics, free trade, medical and retirement care for our aging population – these all represent massive growth opportunities if taken on responsibly. A long overdue investment in infrastructure – not just repairing but modernizing our outdated infrastructure to meet new demands – is one area where the Trump administration gives me hope that it can put us on the right track, at least economically speaking. Most of all though, growth has to come from innovation and entrepreneurship, from creating value out of the power of the mind.

What we are seeing right now in the DJIA is not real growth, it is Wall Street profits. The fact that President Trump wants to reject transition in a hope to protect 20th century jobs, while simultaneously rubber stamping a Republican supply side economic plan, is not only irresponsible but could be a recipe for disaster in the coming years. Now is not the time.