Following the presidential election, the stock market shot up, consumer confidence climbed, and corporations forecast a wave of new demand. The optimism of change, while certainly contagious, will likely fade as the reality of obstacles still ahead sets in. And at the forefront, is the possibility of a near-term recession.
From the last recession to now is one of the longest periods without one in U.S. history. Recessions tend to happen every five to seven years. The conditions of the global economy are tenuous and political changes around the world are causing greater uncertainty. If recession does happen, at stake are a one-term presidency and loss of Republican majority in Congress. But timing will also be crucial.
Both Republican and Democratic leaders must suspect recession sometime during President Trump’s term. Trump can’t afford a recession late in his presidency. His opponents can’t afford one early. For the president, earlier is better. Blame can be cast on gridlock and past policy. The waves of the next election cycles can be managed on the momentum of a recovery. And too, an early recession could give Trump the power needed to push his agenda through.
“You never want a serious crisis to go to waste,” President Obama’s former Chief of Staff Rahm Emanuel famously said. What he meant was that crisis affords the opportunity to get things done. President Trump may need crisis to clear gridlock from both Democrats and his own party. Even Washington’s bureaucratic machine presents enough of a challenge to slow Trump’s agenda considerably.
America’s recovery, anemic and spotty as it has been, could again be prone to false start. The unemployment rate is low, but that alone doesn’t complete the economic picture. Business investment has lagged and is expected to continue from uncertainty. The value of America’s output is heavily skewed toward services for which productivity and growth are hard to improve on. And widening economic inequality is probably impacting consumer spending much more than most think. For the economy to return to widespread prosperity, all must turn for the better.
The U.S. is not alone with its tepid recovery. The International Monetary Fund (IMF) and the World Bank have projected lackluster global growth for the foreseeable future. Both have warned even this may be a stretch, given uncertainties caused by political turmoil and concerns over the level of the world’s debt.
The West’s Debt
Never have so many of the world’s leading nations been so indebted through routine consumption. Canada, France, Germany, Italy, Japan, the U.K., and the U.S. – all are encumbered by enormous government and private debt. For too long, claims on future productivity have been used to boost the West’s standard of living far beyond the wealth it produced.
The illusion of prosperity has been maintained by the record levels of debt and the asset inflation that naturally follows it. Facilitated by the need for the U.S. dollar as the world’s trading and reserve currency, foreign exporting nations continue to buy more dollars to support their own economies. Goods are produced and then exported to the West, driving the need for more and more dollars and credit creation. More money means more debt.
Addiction to the System
The continued growth of these exporting nations has become dependent on the West’s monetary and credit expansion. Likewise, the West has become dependent on the supply of foreign exports. Strong financial incentives exist for the system to continue, even though longer-term consequences can be disastrous.
As the money supply escalates, debt-induced asset inflation is a natural by-product. Asset owners benefit, as they witness their holdings rise in value. Although asset inflation has been a leading cause for wealth inequality in the U.S., it has also provided the incentive to continue support for globalized system. Home values and 401k’s have risen with more money and debt poured into the system.
Obviously, incentives also exist for the exporting nations and global corporations to continue pushing foreign supply, regardless of the West’s declining financial condition. As productivity and wealth shift to the exporting nations, formidable deflationary forces eventually take hold and escalate. Reliance on outsourced productivity reduces the incentives for domestic productivity and the primary drivers of the economy become consumption by an over-indebted government and services provided to a growing, but increasingly less well-off population.
It’s a terrible economic trap. Able only to be sustained by a finite supply of debt – expanding faster than wealth creation – the system eventually leads to its own demise. Unless of course, some hoped-for magic productivity bullet suddenly appears. Generations from now, economists studying this period will probably coin it, “The Great Monetary Folly” in the same way that economists today scoff at the economics practiced around the Great Depression.
The Less Well-off
Without debate, globalization failed many Americans. Policy-makers’ promises for widespread prosperity through global trade were wrong. Economic objectives for the largest working and consuming segment of the economy weren’t achieved. Instead, global corporations, foreign nations, and the better-off few benefited. Outsourced production caused wages to stagnate, while job stability became meaningless. And contrary to official inflation statistics, the real costs of living – food, shelter, media, education, health care, energy – have grown substantially.
Half of all households in America now average wealth of 100 times less and earn only one-tenth of the average of the other half. For the lower half, rentals account for most of its housing and annual household incomes average less than $35,000. Many of these households also find themselves now burdened by easy credit for products and services that could not be afforded otherwise. Not since the Great Depression has the inequality gap been this wide.
The positive economic spin of recent years has been on the totals, while downplaying the statistics of widening divergence between those benefiting and those not. The official unemployment rate is low – yes, but the work force participation rate distorts this statistic, along with the abnormally high amount of underpaid and underutilized part-time workers. Some say that if these distortions were considered, true unemployment rates would far exceed 10%.
And wage growth has remained dismal for decades. Although bad, the “in-total” wage statistics are again distorted by the bifurcation between high and low wage earners. Obviously, wage and employment hit hardest on the economic lower half. As long as half of the nations’ households remain financially fractured, sustained economic recovery is likely to be just another unfulfilled promise.
Global Slowdown and Showdown
World trade has already started to recede. Oil and commodity producing nations have yet to recover from recent price shocks and Japan wobbles in and out of recession. Europe still has not found footing from its credit crisis and debate surrounding the European Union’s survival. Even China’s economic powerhouse has stumbled from its own credit and building spree as it shifts from an export economy to more domestic consumption.
The global push for increased supply has resulted in excess production capacity – yet another formidable deflationary force. Consumer demand cannot absorb it, even with massive credit accommodation. Central bankers across the globe now admit to the decreased effectiveness and the greater risks associated with further monetary policy.
Capital investment can’t seem to pick up as long as current technologies have excess capacity and new ones are restrained. Replacing old technologies with new is more than contentious. It becomes cause for considerable division and conflict. Take for example, the carbon energy sector. Trillions of dollars are invested in the current technology – some nations’ success is based on it.
At this time, those nations – and the world for that matter – cannot withstand the economic and social effects of writing off the carbon energy sector and replacing it with more efficient alternative energies. As long as significant value remains in the current technology, any transition, even if it makes economic sense, will be hard fought and opposed with each step.
President Trump’s Agenda
Infrastructure spending, tax cuts and regulatory reform – all sound good. But doing it may be another matter. Delay is inevitable and confidence will sour as the congressional budget process unfolds. Typically, the budget is presented in February and debate continues long into the summer. The first fiscal year under President Trump won’t begin until October 1, 2017. And beyond that, the time lag for fiscal stimulus usually takes several quarters to materialize. The economy may not hold until then.
Controversy will mount over the size of government debt. Proposed spending choices on infrastructure versus entitlement cuts will stir further divisiveness. And tax reduction will have limited benefit caused by the nation’s current economic configuration – extreme economic inequality, excessive debt, low business investment opportunity, and outsourced production.
Additionally, regulatory reform alone could be a massive undertaking. The regulatory structure, amassed over the last three decades, has taken on a life of its own – self-sustaining and almost to the extent of its particular separate branch of government.
Whether or not politicians, their supporters, or global market participants can or do decide the economy for election results is a matter of some debate. But America’s political forces, already extremely divided on almost every issue, have very different interests in the success or failure of the new president’s policies. By which, the greater interests of America may be preempted. But only for a while. This too is unsustainable in democracy.
Change will undoubtedly happen. The current state of the system will force it. And those changes, for better or worse, will have near-term ramifications on the economy, including the follow-on occurrence of recession. According to contrarian thought, when most believe in the unlikely, the highest risk exists for the condition to become likely. The caveat: contrarian thinking usually only holds near the close of a long and finally unsustainable trend – times just preceding major change.
Christopher Petitt – financial executive, board advisor, and business consultant – is the author of the book, The Crucible of Global War: And the Sequence that is Leading Back to It. It is available at Amazon.com, Barnesandnoble.com and at bookstores everywhere.