The age of economic growth is over.
In this century, economies have added $2.55 in debt for each dollar of nominal growth. In most cases, there was very little productive investment put in place with all the money that was borrowed — a total of $89 trillion. But, of course, the debt endures, indenturing the population.
The U.S. economy is the most highly indebted in the history of the world as a percentage of the global economy. The debt has piled up precariously on an eroding foundation of collateral. Think of trying to build a skyscraper out of pick-up sticks. The higher it gets, the more certain it is to collapse…
Donald Trump has been elected the 45th president of the United States. We all heard his campaign promises, chief among them a pledge to “make America great again.”
I am a friend of Donald Trump. I hope he defies expectations and runs a successful administration.
“Make America great again” was a compelling campaign theme. Unfortunately, it is more easily said than done. The dramatic market reception to Trump’s win from November 9 on vividly underscores the grave challenges Trump faces in trying to mobilize the U.S. economy to grow more rapidly.
Why the Economy Can’t Grow Rapidly
The economy Donald Trump inherited at the end of January is no longer a dynamic, free market miracle, but a mongrel hybrid system where 90 million American adults of working age are not productively employed. They are not contributing to the means of sustenance. How do they (and you) survive their early retirement? Obviously, someone is paying their bills.
If they are not being supported by wealthy relatives, chances are that you are paying their way.
But you can’t afford that. So their fallback solution is spending out of an empty pocket.
Today, the government borrows about 43 cents of every dollar it spends on its budget array of entitlements and crony-capitalist scams. The U.S. has undertaken history’s most concerted effort to substitute debt for growth as a formula for economic success. This is the “house of cards” that Donald Trump inherits.
President Trump has proposed a sensible reform to encourage the repatriation of those funds by sharply reducing the tax that would be imposed.
That makes sense on many levels. There are even suggestions that Trump hopes to prime his great infrastructure rebuild with this repatriated money. So far, so good.
But what happens next?
Withdrawing even $1 trillion that has previously been warehoused overseas will drain liquidity from an already shrinking euro dollar market, precipitating a severe liquidity crisis in global dollar funding markets.
The result to be expected would be a deflationary collapse.
This a large reason why I doubt that the economy will grow robustly under Trump. The economy is already limping as we have detailed for many months.
As I’ve stated in issues of Strategic Investment, the U.S. and global economies are bogged down by structural difficulties that seem beyond the power of any politician to remedy.
Jump-starting growth will be a daunting challenge. For the average growth of the U.S. economy since 2009 to accelerate to even 3%, GDP growth would have to surge to 5% annually for the next 14 straight quarters.
But the last time the economy grew by 5% annually for even a full year was between 1984 and 1985 — more than 30 years ago.
The so-called “expansion” we’ve experienced has been the weakest, as well as one of the longest, ever. This points to an early recession. If Trump were to avoid a recession for the next four years, it would mark the longest expansion in the nation’s history. Not likely.
Another reason to predict a recession in 2017 is the end of Obama’s two-term presidency.
Remember, the pricking of the dot-com bubble happened after the two-term Clinton administration, and the subprime collapse occurred in the midst of the 2008 presidential election after two terms of Bush.
Considering the standard lead times, even if President Trump gets his whole stimulus program enacted almost immediately — which is highly unlikely — it wouldn’t have much effect until the first quarter of 2018, at the earliest.
That said, the economy will immediately feel the deepening deterioration caused by the Fed’s dismal inheritance of financial-system liquidity stresses.
Twenty-five years ago, when the U.S. economy was still growing, annual real growth in retail sales at or below 2% was a dependable signal of the start of a recession.
In today’s no-growth economy, 2% growth is no longer a stark contrast with “new normal” conditions. But note, real retail sales have grown at 2% or lower since February 2015. That suggests a recession is coming.
James Dale Davidson
Editor, Strategic Investment