Many Counterindications to Trump's Rosy Picture at Davos

January 30, 2018

The "booming America open for business" presentation President Donald Trump gave at the Davos World Economic Forum was being belied, at the time, by a number of indicators.

The Commerce Department reported Jan. 25 that fourth-quarter U.S. GDP rose at rate of 2.6%, meaning that the rate for 2017 as a whole was just 2.3% — better, at least, than Obama's 2016, but not such as to make the United States an engine of growth. Durable goods orders excluding aircraft and defense — the proxy datum for business capital investment in the economy — dropped by 0.3% in December, although it had grown the previous three months, which were revised downward. Sales of both new and existing homes fell substantially in December, after rising sharply in November (again, now revised downward). The Federal Reserve's report on fourth-quarter "employment dynamics," out Jan. 26, showed that employment grew by just about 500,000 in the quarter, the 2 million jobs/year pace which characterized 2017 as a whole, and was substantially lower than either 2015 or 2016.

The dollar is now down almost to $1.25/euro, having fallen a very substantial 18% in 18 months against an index of other major currencies. The decline has recently accelerated. This is what lowered the fourth-quarter GDP, by producing a very large U.S. trade deficit.

This decline has come despite the Federal Reserve, alone among the "big four" central banks, raising interest rates, even slowly and cautiously; and despite the U.S. growth rate, low as it is, still beating those of European nations or Japan. Global Times, in an op-ed Jan. 29, blamed "the Federal Reserve's policy of quantitative easing which was pursued for many years after the 2008-09 financial crisis; the extraordinary expansion in money supply made the U.S. dollar worth less. Some now claim that the U.S.' massive money-printing to flood the world market with dollars could be about to backfire." They mean that the Chinese and Japanese central banks have agreed to hold these trillions of dollars; if the Trump Administration pursues tariffs on Asian exports, that could end, and the dollar will really plunge.

Speculative investment is, indeed, pouring into the United States; the stock market rises at least 100 points every day. At Davos, the most experienced economists warned that this is about to end, in disaster. They included both OECD Board Member and former BIS chief economist William White; and also Prof. Kenneth Rogoff of Harvard Economics Department, co-author of the best-known history of financial crashes. Rogoff observed the incredible zooming of high-yield debt exposure (Citigroup and Barclays alone arranged $180 billion in new leveraged loans just in 2017), and said, "If interest rates go up even modestly, halfway to their normal level, you will see a collapse in the stock market."

It is estimated that the U.S. Treasury will issue $1.42 trillion net debt in 2018, nearly triple the $550 billion in 2017. That, and pressure from a falling dollar, could make interest rates rise rapidly, the most likely trigger for the crash.