Charles Kolb | Deputy Assistant to George H.W. Bush
President Trump is racing the clock. With today’s economic recovery a few weeks away from setting a record for the longest expansion, Trump knows that the business cycle has not been repealed. An economic downturn surely lies in our future, and Trump fears that if it happens before November 2020, his re-election prospects will be slim. That worry explains his jawboning the Federal Reserve earlier this year against raising short-term interest rates. In fact, Trump wants even lower interest rates right now.
With unemployment, interest rates, and inflation low, why worry? Even BlackRock CEO Larry Fink expects a sustained equities boom. But will Fink become this decade’s Chuck Prince, the infamous Citigroup chairman and CEO who, on the eve of the Great Recession, announced that “as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” And dance he did: until the music abruptly stopped, the stock market tanked, and he was fired.
What’s fueling today’s economic prosperity? As the Reagan administration’s former Office of Management and Budget Director (and my former boss), David Stockman, explains in his daily “Contra Corner” blog, today’s boom (Stockman calls it another “bubble”) depends on two unsustainable drivers: loose monetary and fiscal policy.
For almost a decade, the Federal Reserve’s easy monetary policy entailed three rounds of quantitative easing (pumping money into the economy by expanding its balance sheet to include some $4.5 trillion in government bonds and other asset purchases) plus a zero-interest-rate policy (after inflation) that has distorted real asset price discovery and deepened the financialization of the American economy.
Only now are economists beginning to assess the potential distortions of the Federal Reserve’s accommodative monetary policy. Theoretically, financial markets exist to direct capital to its most productive economic uses. So far, the biggest beneficiary has been Wall Street, with record mergers and acquisitions, stock buybacks, dividends, and exorbitant CEO compensation. Tech stocks are flying high with share prices often divorced from earnings reality. Meanwhile, American manufacturing still languishes.
Money is an asset that, according to the economic textbooks, plays three roles: a store of value, a medium of exchange, and a unit of accounting. Money’s value is not zero, and, until recently, it has not been negative. Today, however, we have nearly a quarter of the world’s economy (Europe, Japan, Denmark, Sweden, and Switzerland) still experimenting with negative interest rates intended to stimulate spending.
A nickel is “worth” five cents as a means of exchange. The value of the metal itself may be less than five cents, but its value is definitely not zero or negative. Negative interest rates mean that you pay the bank to hold your money. The economic incentives are to spend now, not save for later. In today’s economic world, Benjamin Franklin’s famous adage that “a penny saved is a penny earned” appears quaint; thrift now seems foolish.
Fiscal policy also presents an alarming trend. Barack Obama almost doubled the national debt during his term, and Donald Trump’s policies have us, again, anticipating $1 trillion annual budget deficits. It’s a vicious circle: low interest rates entice the politicians to amass more deficits and debt, and the politicians want more spending given ultra-low borrowing costs. Profligate monetary policy enables profligate fiscal policy.
Immediately before the 2007-2009 Great Recession, the prevailing assumption among economists and on Wall Street was that housing prices would never go down. Today’s prevailing assumption is that interest rates will never go up. As we have seen with previous bubbles, prevailing assumptions are often wrong, and today’s economic assumption is clearly unsustainable. The late Herbert Stein, chairman of President Nixon’s Council of Economic Advisers, put it memorably: if something is unsustainable, it will stop. The question is when?
Look around the world. With the possible exception of Germany, today’s good times have been underwritten by unsustainable financial engineering and deficit spending. China, too, has been goosing its economy through massive deficit spending on infrastructure projects to counter the Global Recession. Stockman calls China’s economy a giant “Red Ponzi scheme.”
George H.W. Bush lost re-election after only a mild economic downturn that ended months before 1992’s election day. The next economic downturn will make that Bush recession look like a minor blip. Trump and his advisers surely recall 1992, and they’ll do anything they can to push the next downturn well beyond November 2020.
Expect more borrowing and spending. How about $2 trillion for infrastructure?
Charles Kolb served as deputy assistant to the president for domestic policy in the Bush White House from 1990-92.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.