By Kumar David –

Prof. Kumar David

All-bark and no-bite Trump tilts at windmills and charges at scarecrows: US Economic and Foreign Policy Woes

Impeachment in the US House of Representatives followed by the trial in progress in the Senate at this time of writing is not the worst of the viruses infecting American politics in this period. DJT will not be removed from office but damage has been done to his November 2020 re-election prospects. It is said he is idiosyncratic, unpredictable, unethical, given to rash mood swings, a nut case and a danger to world peace who he perches atop a huge arsenal, but his Neanderthal base remains stoic. Nevertheless, in truth, he is no threat at all to world peace; the pantaloon is all piss and wind, no substance. 

Consider his foreign policy record.

a) How many times has he barked like a mad dog and ended wagging his tail like a happy puppy?

Kim Jong Un, Venezuela, Mexico, China-trade and Iran many times. A barking dog that never bites.

b) Iran cannot afford to take on the US; the power disparity is too hefty. It’s game, local and long-term, is to creep forward step by step. Will it go nuclear? I don’t know when but eventually yes.

c) Trump has screwed US interests in the Middle East, Asia and Europe. It is out of Syria, on its way out of Afghanistan, not friends with Turkey and likely to be kicked out of Iraq soon.  All good for the Middle East and for the American people.

The link below (click here) explains how Trump’s blunders have taken pressure off Iran. “Iran has already declared the 2015 nuclear deal dead announcing that its nuclear program will now have “no limitations in production and enrichment capacity”. If Iran’s leaders believe that the US will seek to avoid committing the same strategic mistakes as Bush they may opt for bolder retaliation.” 

A hilarious clip of Trump damning Obama for an Iran cock-up that Obama never did but Trump himself did is at this site; visit it, a useful 30 seconds.

The next clip is typical of how American networks (except Fox) are having a field day taking the mickey out the President. The presidency now is burlesque!

Trump’s trump-card is the improvement in the US economy and statistics support him copiously. Unemployment down to 3.6%, approaching the theoretically lowest possible limit, inflation below 1.8%, real interest rates pegged at 1.5-1.75%, stock markets at record highs and housing “starts” in December at a high 1.6 million units. But real unemployment should include underemployed, the marginally attached, and discouraged workers. For that reason it is double the official rate. Health care occupations account for 18 of the 30 fastest growing occupations because of an aging population. Computer jobs and alternative energy production will grow rapidly. Three groups will lose jobs; production, administrative support and sales. These jobs will be replaced by IT and other technologies. Retail sales will lose out as e-commerce predominates and also increases jobs in transport and warehousing.

The Phillips curve states that inflation and unemployment have an inverse relationship. Higher inflation accompanies lower unemployment and vice versa. However standard economic theory (Philips Curve included) is violated in that in that unemployment and inflation have remained determinedly low for several years in the US and the West. This is a bonanza for a president seeking re-election in normal times. With these employment and inflation numbers and a booming stock-market behind him would be a sure-fire winner. But these are not normal times. Three things contradict this picture; the US economy massive though it be, is not “an island separate unto itself”, second the spectre of Herman Minsky and the third exploding and uncontrollable debt enlargement. The first two require some care in explanation, the third is an obvious enough calamity.

Global Dependence

Familiar economic truisms, such as the Phillips Curve, or the rule that only two of the three variables, exchange-rate, balance of payments account and interest rates, can be controlled, or the renowned principle of comparative advantage, are all no longer true. In a pervasive global economic system the notion of a closed national economy, which underlies these and other traditional theories, is a myth. They are honoured as much in the breach as in the observance. International trade, capital flows and national and corporate debts, disturb domestic economic variables. The Phillips Curve can be violated in the US if global supply chains tie wages, exchange of goods, trade balances and inflation rates in the US with those in say China, Mexico or Vietnam. Instability in global supply chains spoil the rosy picture on which Trump’s re-election prospects ride. US imports, as a % of GDP, have averaged about 16% for the last 15 years. This is not a high percentage compared to other countries but the size of the US market influences global supply chains and hence keeps both inflation and employment low in Western countries. Rising debt will and theoretically must disrupt this equilibrium. Overall, prospects for the global economy remain bleak as the OECD’s November 2019 projections show.

DJT will be restrained by Congress, his Cabinet and the military from destabilising the world by further warlike antics. As the OCED stats project, the potential for growth in Europe, Japan and the US in the next two years are extremely fragile. More tomfoolery will not be permitted.

Minsky Moment

Hyman Minsky (1919-1996), along with John Maynard Keynes (1883-1946), Piero Sraffa (1898-1983) and Michał Kalecki (1899-1970) was one of the four weighty economists of the twentieth century. None was awarded a Nobel Prize in Economics which lolly is reserved for pettifogging second-rate tinkers in econometric numbers. Their origins were American of Belarusian descent, English, Italian and Polish, respectively.  Minsky provided a theory of financial crises linking it to the fragility of financial systems. The gist of his thesis is that long periods of stability end in systemic instability because investors ignore that higher reward equals higher risk. They behave as if a new stabilising paradigm has appeared and take on increasing debt to finance ever more speculative investments. 

Crucial to his thesis was the insistence that liquidity is not the same as solvency. Central banks pump trillions in stimulus, making it absurdly easy to invest. But what happens when earnings from new investments become too low to pay interest on debt? This is what happened in 2008 and it is called a Minsky Moment. Today the Fed is belatedly reducing its $4 trillion in “Treasurys”, known as quantitative easing (QE). It also needs to increase interest rates but is in a fight with Trump who opposes this for fear that higher interest rates would jeopardise his election prospects. Trump wants investors to borrow to buy stocks and believes a high stock-market is a key to electoral success and will cement Wall Street loyalty. However, this mad commitment to pump up stock-markets brings the next Minsky Moment ever closer.

Source – http://www.new-normal.com/financial-events/will-stock-markets-see-a-minsky-moment-in-2020-2/

In the three months from 7 October to 3 January tech giant (Apple, Netflix, Facebook, Microsoft, Google and Amazon) stocks bubbled to dizzy heights adding credence to the premonition that Minsky’s spectre is being invoked. Even run of the mill bourgeois economists are steeling themselves for “the coming recession”. This is inevitable (but when?) and it may be as catastrophic as Minsky feared. To be fair I need to add that there is a small group of ‘radical’ economists who hold that an economic crash need not ever happen again. Snake oil vendors that we have seen umpteen times before. 

US national, private and corporate debt

The U.S. government’s public debt is now more than $22 trillion — the highest it has ever been and 110% of 2018 GDP. The new debt level reflects a rise of more than $2 trillion from the day DJT took office in 2017. Corporate debt is $16 trillion, 74% of February 2019 GDP and household debt, including mortgages, car loans, credit card and student debt is $14 trillion. This data comes at a time when the US Treasury groans that tax revenue is falling and federal spending continues to rise. US foreign debt is $6.5 trillion. The rest of the world is prepared to hold this mountain of US Treasury Bonds because the dollar still rules the world and foreigners are comfortable that they can always dump these bonds for dollars. But what will happen to the dollar if central banks and foreigners lose confidence in Uncle Sam? Gold was about $300 an ounce at the turn of the century, it is $1600 now. The world economy is altogether more unstable than at any time except critical moments like the Great Depression of the 1930s, the Dotcom Crash in 2000-2001 and the 2008-2009 Great Recession. As in all these cases the fragility remains concealed until the ghost of Minsky summons the demon.  

This column argues that in the midst of global economic and political instabilities – Brexit, anti-Muslim intolerance and undermining India’s secular Constitution by Modi, Putin’s dramatic proposals to transform the structure of the Russian state and Year of the Rat (remember the plague?) coronavirus – Donald J Trump is the worst possible US President both for the United States and for the rest of the world though he too fluffy a pussy to start WW3.