Trump’s fiscal insanity, Macron’s spending and what market tremors are telling us about politics
A consensus has formed around the idea that Donald Trump will most likely win re-election as President in 2020. It is almost a tradition that sitting Presidents are given the chance by American voters to spend the full eight years in the White House. George H.W. Bush, who died ten days ago and who was commemorated in such style, was the last occupant of the office to be turfed out after a single term. In 1992, third party candidate Ross Perot split the vote, and Democrat Bill Clinton triumphed. Before that Jimmy Carter only lasted four years, following a miserable spell in power that was ended by Ronald Reagan in 1980.
Trump starts with the advantage of incumbency; Mueller has a lot but none of it brings down a President; although it is early in the cycle, the Democrats have a long list of challengers but no-one yet looks strong enough; Trump’s base hates the left and is motivated by winning the culture war against political correctness; and above all the US economy is strong.
So Trump, more than likely, wins.
On a trip to Washington and New York last week I heard that version of likely events several times from those well-plugged in enough to make a good assessment. But I also heard something else creeping in – the suggestion that the key advantage Trump has (the economy) is overdue a downturn. It is one thing for Americans to suffer Trump’s ridiculous and unstatesmanlike behaviour when the deal maker, the businessman who is supposed to know the recipe for the secret sauce labelled “growth”, is presiding over an expanding economy. If the economy does less well, then he becomes vulnerable to the charge that he failed on the main pillar of his platform.
There are warning signs.
As I write, the Dow Jones industrial average, the leading stock indicator, sits at 24,338 . There has not been a crash or anything like it, but the Dow Jones is approaching the end of the year roughly where it started – at 24,824. After a long rise, 2018 has produced (with various gyrations along the way) a flatlining. Since the start of 2014, the Dow Jones has risen from around 16,000 points, a climb that represents a remarkable accretion of wealth for the many Americans depending on retirement plans or well off enough to invest even modestly. This year, the rise stopped.
Why? Those in the markets pay attention to the bond market, and it may be pointing to a slowdown of sorts. There is, as ever, disagreement on how serious the problem is. Here’s a good explanation.
Against this backdrop, with those in the markets stressing about prospects for a recession, the Trump administration is charging ahead with major spending increases at a dangerous moment in the cycle. After years of growth (the US has grown every quarter since the first quarter of 2014) the US government should be running a budget surplus or close to it to reserve firepower in case an overdue recession comes along.
Instead, the US ran a deficit of $779bn in the fiscal year 2018, up 17% on the previous year.
The latest Congressional Budget Office monthly review (that’s non-partisan research) maps out the full extent of what is happening. The terrifying headline figures for November and December are skewed somewhat by the way the weekends fell and payments being moved between months.
Even so, the Trump administration is spending money like it is going out of fashion, which it might be just about to.
Look at this:
“Outlays for net interest on the public debt increased by $5 billion (or 8 percent), largely because interest rates are substantially higher in 2019 than they were during the same period in 2018 and the amount of federal debt is larger than it was a year ago.”
And this:
“Spending for military programs of the Department of Defense rose by $9 billion (or 9 percent), mostly in the area of operation and maintenance.”
Elsewhere, President Macron in trying to get out of his difficulties has had to announce increases in spending. The market reaction was negative today and the impact on French debt will cause concern.
The UK’s broader performance is, after a healthy summer, sluggish to the point of slowdown, and the excitement of Brexit has not even happened yet.
Hands up, considering the condition of May’s deal I advocate a “managed no deal” scenario for Brexit involving the government increasing the deficit for a while on infrastructure and tax cuts if it has to. But such decisions will not take place in a vacuum. The economic climate and global borrowing environment may be very cold, soon.
Elsewhere, let’s not look at Italian banks. I haven’t mentioned the plans of the worried German government to make a “mega-bank” out of the country’s major lenders either.
This is not a prediction of unremitting doom and gloom. I’m simply pointing out that most of the political assumptions being made right now – about Trump’s re-election, Macron’s plans for survival, and the future state of British and German politics – are predicated on the US economy ticking along, even roaring along, nicely. The warning signs point to that assumption being false.
If that is the case, the last five years or so were not a slow recovery leading to a golden period in the final years of this decade. Perhaps that was the full recovery. This is the economic cycle. There may be trouble ahead.