Thursday, June 9, 2016

A Possible Perfect Economic Storm For Donald Trump

Right now Donald Trump is down in the polls, with his remarks about the judge on his Trump University case reverberating and Hillary Clinton getting a bounce from having finally captured the Dem nomination (I know, I know, Bernie still has a chance if she gets indicted before the convention, but... ).  But it was just quite recently that they were nearly even in the polls, and that condition could return.  Nobody should forget that at this time in 1980, Jimmy Carter had a double digit lead in the polls over Ronald Reagan and Dems were just salivating at the chance to run against that "extremist." But, well, heck, there we go again.

So the problem is that it looks like the US may be weakening.  Last month's job report was simply dismal, and most are writing it off as a one month wonder.  I hope so.  But there have also been reports that the US job market has been weakening since January.  We may be on a trend here that may be hard to reverse.

Janet Yellen has been still talking up interest rate increases, but even she recognizes "four uncertainties," and a concatenation of more than one of these could easily tip a weakening and fragile world economy downwards even into a recession, possibly with a market crash this fall.  The obvious near term shock could be positive Brexit vote, and while I think some have exaggerated the near term badness of this for the UK economy, even a small shock at the wrong time can push things over, as old chaos theorist me knows all too well, and we may have such a fragile situation.

Once things get going down this can easily spread.  Parts of Latin America, especially Brazil, are not doing well.  Europe has interest rates as low as they can go pretty much, even though all of the EU except Greece currently has positive GDP growth.  Concerns about China have retreated somewhat, but its property market remains way overvalued, and its growth has decelerated.  All this is fragile.  And one of the uncertainties is oil, where a shock of one sort or another could show up with little warning.

In short, the probability of the US economy actually going into a decline prior to the November election is higher than many think, I think.  All it probably takes is a couple of those uncertainties hitting, and the Fed is pretty limited  in what it can do in the short term, and, of course, there will  be no fiscal policy stimulus.  Heck, the Republicans in Congress would welcome such an event,  given its likely political result.

Throw on top of this the non-trivial possibility that terrorist groups will make a major attack shortly before the election in an effort to get Trump elected (having an overtly Muslim-hating US president would be great for  their recruiting), and, well, I shall be holding my breath all the way, whatever others may be doing.

Barkley Rosser


ProGrowthLiberal said...

The 1979/80 recession was one of the problems for Carter indeed but this was very much a self inflicted wound that was caused by Volcker's zeal to kill inflation at all cost. Fortunately the current FED is not that crazy - although the talk of interest rates increases now is insane. Let's hope insane talk does not turn into unfortunate actions. I would say we could and should spend a lot more on public infrastructure investment but I am remind that the Speaker of the House refuses to pony up even a couple of billion dollars for addressing the Zika virus issue. We need 2016 to be a campaign to rid Congress of its GOP dominance.

Jack said...

How can the economy not be on the edge of a recession there continues to exist such a gross distortion of the income distribution. If 10% of the working population receive 45% of the total aggregate income how do the rest of income earners to be able to spend and support the economy? When a small group has such a huge share of the spendable assets in an economic system how is that money to circulate and keep the economy moving forward? Shifting the ownership of capital assets doesn't keep businesses, other than the financial industry, from producing and selling goods and services. There will be no solution to the threat of recession until a greater amount of the earned income is free to circulate by being paid to a greater number of people.