EC No, Mr. President, There Isn’t A Santa Claus

President Trump’s economic policies are mostly very sensible, yet in two areas he has indulged in wishful thinking, proclaiming essentially that Santa Claus will bail out the United States. One is fiscal policy, where he has not restrained spending nor produced any plan beyond faster economic growth to solve the nation’s yawning budget deficit. The other is monetary policy, where he rails against the Fed’s attempts to restore sanity, and believes its job is to act as Santa Claus, bailing the U.S. out of recessions. Well, Mr. President, there is no Santa Claus.

The essential problem is that the entire country, under the influence of Fed policies, has been running its businesses like Trump ran his casino empire in the early 1990s. New projects are financed by debt; more dangerous, debt is used for stock buybacks (more dangerous because no additional source of revenue is being created when this is done.) This appears justified, because low interest rates have always bailed out the gamblers, and so the gamblers assume they always will do so.

The Fed abandoned sound monetary policy in February 1995 and started printing the money that brought the gigantic late 1990s stock market boom and all that has happened since. Fed chairman Alan Greenspan noticed the problem quite quickly; his “irrational exuberance” speech was made in December 1996, more than 3 years and 40% on the Dow below the eventual peak in March 2000. However, he notoriously did nothing to correct the problem.

Trump very likely owes his financial survival to the February 1995 change in Fed policy. 1995 was the year that Trump’s tax returns showed a $916 million loss, and his ability to survive such a write-down owes much to his relationships with his bankers, certainly, but also to the Fed’s encouragement of the kind of speculative high-risk lending he needed to survive. Now, 23 years later, Trump regards the Fed’s sloppy encouragement of asset bubbles as the proper state of things. However, the Fed’s policies have produced immense damage throughout the economy, and those chickens are now coming home to roost.

1 2 3 4
View single page >> |

(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of "sell" recommendations put ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
Barry Hochhauser 3 months ago Member's comment

Martin Hutchinson, why do you suppose #Greenspan did nothing to correct the problem even after he identified the issue early on?

Angry Old Lady 3 months ago Member's comment

Wait a minute... Santa isn't real??

Gary Anderson 3 months ago Contributor's comment

I can't believe I just read this.

Alexis Renault 3 months ago Member's comment

Why not?

Gary Anderson 3 months ago Contributor's comment

The trend growth is likely below 3 percent. Most rational people do not hope Trump wins in 2020. He is doing great damage to our nation on many fronts, including economic policy. He is a dreadful human being on many fronts. The author does not share my views, which is fine. But it is a tough read.

Alexis Renault 3 months ago Member's comment

I agree that #Trump is a dreadful human being. Personally I can't think of a single positive thing to say about him personally. But I was under the impression that Wall Street and business in general were supportive of Trump and his policies.

Gary Anderson 3 months ago Contributor's comment

I don't think Wall Street thinks tariff wars, full blown tariff wars, can be won. Certainly, Wall Street gives Trump the benefit of the doubt, that he is negotiating. But this is really how business in the US feels about the potential tariff war, and certainly the steel tariffs are just killing American business slowly by 1000 cuts: https://www.uschamber.com/tariffs

Alexis Renault 3 months ago Member's comment

:-(