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Screwing It All Up

The news is full of Trumpestuous nonsense. Denials of Russian involvement in our election devolved into a tweetstorm lasting for days, apparently without sleep, causing many to question his mental health and/or drug use. You can read about this nearly anywhere, so consider this the main attraction of the circus.

Away from the noise there is a lot more going on, of course. As we have said here before, the real stories will be away from the nonsense presented front and center. For all of our reasonable worries about his stability and allegiances, Trump poses a far greater danger to our nation.

Where we should reasonably be about to enter a great period of economic activity, it is still entirely possible to screw it up.

Larry Summers

Larry Summers

The latest voice of concern over Trump’s policy proposals is Larry Summers, economic policy advisor to many Democrats and sometime key voice of reason. His list of concerns is useful mainly because it touches on how exactly this could be screwed up.

While an overhaul of corporate tax code is certainly warranted, a huge slash with nothing in return has the potential to be a disaster. If corporate profits rise dramatically, as they would almost certainly do, there would be a corresponding rise in US stocks. While this would put more money into circulation and help many things, it would do so primarily for top income earners. That’s not where we need it.

Any great increase in economic activity will result in inflation at this point. The Federal Reserve is ready for this and intends to raise rates further. That’s a good thing, generally, as we need to get to the point where there is a reasonable return on any loan to offset the risk, causing more loans to be made. In other words, there is a chance that in an inflationary world the spiral already has all the fuel it needs to get out of control.

That’s when the Fed really steps in.

Not everyone can do this.

Not everyone can do this.

The main effect of higher interest rates will thus be an strengthening of the US Dollar. If you’re in manufacturing, or at least hoping to bring manufacturing jobs home, that’s the worst thing possible. All other developed nations have been engaged in a “currency war” of a kind, keeping their own currencies low to encourage exports. A stronger US Dollar means we lose.

What is the net effect of these combined efforts? More money at the top and fewer jobs at the bottom. Income inequality only gets worse – and there is real inflation in danger of eroding what gains workers have.

On the flip side, Trump promises tariffs on imports. It seems unreasonable that this could possibly happen, given a genuinely Republican Congress, but the threat is real. The Mexican Peso has dropped 14% since the election on fears of such new taxes, which is to say everything made in Mexico just became 14% cheaper. The threat of tariffs thus has precisely the opposite effect anyone actually desires.

But it makes for good theater at home, especially in a 3AM tweet. Expect more of this nonsense.

Banks won't be offering money this cheaply ever again.

Banks won’t be offering money this cheaply ever again.

How could we screw up the coming good times? Again, it’s based on solid progress on wages combined with relative financial stability. Keeping the pressure on wages along with great uncertainty is the best way to mess it up, especially when there is only strong upward pressure on the US Dollar.

Which brings us to the other things Trump has promised, a repeal of Dodd-Frank. While this legislation is far from adequate, it does require financial institutions to maintain reasonable deposits and not take unreasonable risk. Removing these controls while simultaneously amid other uncertainty and rising interest rates is a recipe for additional risk to be taken on.

Would another collapse be far behind? In this environment, probably not.

There is indeed a strong threat to good times coming. It’s a threat formed in 140 character bursts in the wee hours of the morning. It’s nowhere near as sexy or interesting as the thought of Putin directing our foreign policy, but it’s at least as dangerous.

Will 2017 actually be the year we turn the corner? Perhaps not. And that is very, very sad.

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21 thoughts on “Screwing It All Up

  1. I find it so dishonest that people who said in late October that suggesting the election was rigged was preposterous, are now stating that it was rigged. It cannot be any clearer that Hillary and her cronies did in fact manipulate the process. That is why she lost; she is dishonest, and has been for a long time. People outside of the major cities, still think of honesty as being an important quality. Sure, Trump is a blowhard New Yorker, but his brashness has an element of honesty. Sometimes the truth hurts. When he stated that certain women would let a rich guy grab them by the hoohaa, that is true. Almost all men would allow a beautiful woman to grab them by the hoohaa. This is the human condition. Men and women are attracted to certain qualities of the opposite sex. Anyone who is reading this and tries to deny this, is being dishonest with themselves. Before you get your panties in a bunch, and start flaming me for honesty, I don’t condone this behavior and I don’t know anyone who does, I’m just telling it like it is. This whole Trump is evil and racist has been the dumbest argument I’ve ever heard. I know that it’s a bloggers job to rant about these things and over analyze everything….but holy cow. Settle down people; it is not the end of the world. Imagine if there was this uproar when Obama got in. Of course everyone who voted for whoever the Red team clown was, was upset, but this ridiculous over reacting is just crazy. The same people that were complaining about the intelligence community when there was “weapons of mass destruction”….and there weren’t….are now cheering the people who claim that there was a “hack”, when it appears to have been a leak. I have yet to hear a denial from the Blue team that the CONTENT of the emails was fake. There is just too much smoke around the Clintons for there to be no fire….and that’s why she lost, not the Russians.

      • Is that honestly all you got from this?
        Can you actually read English?

        Please go away if you are that wedded to the main attraction of the circus.

      • I meant no offense, just stating what many people are feeling about this whole story line. It’s fine that you disagree with the guy that’s about to go in to office. That’s fine. I had many problems with the last four Presidents. I think we’ve had a bunch of dolts in DC for all of my adult life. I’m pretty sure I can read. Usually when people write, especially in this arena, they have an agenda; yours is clear. You have your opinions; I have mine. Everyone walks away – but it does seem like it is you who is wedded to the main attraction (distraction) of this circus.

      • OK, I’ll stop being pissy. Sorry about that.
        My point is that while everyone frets about Russia this and that there is something more important at stake – an ideology which will be crammed through despite having obvious pitfalls in this current environment. And to put that on top of saying exactly the wrong things and giving the wrong impressions all over, ie that a trade war is about to break out, is just irresponsible. It’s almost exactly the wrong thing to do in this delicate situation.
        That’s what bothers me. And this is all getting lost in the noise about Russia etc. Trump is getting a relatively free hand in economic areas because he has a handy distraction.

      • We’ll have to see what happens. I whole-heartedly agree that all of this nonsense is a distraction. It just seems like more scare tactics. The older I get, the more the entire media complex seems to be in bed with the government, to create a new boogie man every few years – gotta keep the scary monsters fresh! It seems to me that the entire political system is a side show. Look over here! Never mind that Bill we pushed through with 2,000 attachments that nobody read….on a holiday weekend, at 3 in the morning.

        The old saying “Do SOMETHING, I don’t care if it’s wrong.” may come into effect. With the Red team aligned in DC, something will happen (maybe) and some of it will be good. If you are a blue team person, you will likely disagree with some of it. The Red team people have had to stomach plenty for the last 8 years. So, soldier on.

        On the economic front, most people outside of DC will tell you that the last 8 years have been terrible. We’re surviving, but growth is sloooow. Where I live, it’s been growing, but this growth has been driven by the very wealthy basically laundering money in giant mansion construction. This wealth has been created by stock market valuations that are once again in the stratosphere for no apparent (productive) reason. As usual, the regular guy is getting by, but not thriving. That said, if it weren’t for the mega wealthy, I’d be unemployed.

        Being a wealthy land baron (Hahaha) I am for zero property taxes and a 10% sales tax, nation wide. Maybe that would get rid of some of the consumerism that plagues our culture.

        All in all, I have a more positive outlook on the US economy than I’ve had in at least 8 years.

    • Again, this isn’t about Russia, scary as they are. And I’m not even sure it’s for his buddies. This is a core Republican agenda item that is going to be pushed through now that they can.
      Thinking it through a bit, the moment the Fed starts really raising rates is the moment their independence is threatened. That will be another distraction – one that all thinking people need to be ready for. Sigh.

  2. So what is the right thing to do? You can’t support corporate taxes as we have them today. What’s your alternative?

    • I am not against wholesale reform of corporate taxes. Generally, the lost revenue is made up with a VAT, which is very regressive – and I would be OK with even that if we had some mechanisms for making it less regressive. I do feel that a stock transaction tax would be even better to make up lost revenue. BUT – the main point remains that this is a delicate thing that should not be rushed through given how many ways corporate tax is screwed up and the resulting implications of these many ways being “fixed”.

      • I know for sure I haven’t been paying enough attention, but this is the first I’ve ever heard anyone mention a stock transaction tax. What a good idea! Could there be a downside? Would it discourage people from trading? Economics is my weak point in the social sciences, but I am planning a post on it none the less. Your insights are helpful again!

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