‘Those that fail to learn from history are doomed to repeat it’ – Winston Churchill
It’s no secret that Donald Trump would love to be the next Ronald Reagan to all adoring Republicans, and to a lot of the other non-Republican Americans, and foreigners. Reagan had a sincere, affable charm and a love of people that won everyone over regardless of ideological differences.
Initially, Reagan began as a Democrat but became a Republican, and then went on to be remembered as an iconic Republican President. He racked up a number of World-changing accomplishments in the foreign policy arena, the most significant of which was the staring-down and eventual collapse of the Soviet Empire, and the ‘tearing down’ of the infamous Russian Berlin Wall. Reagan also restored America’s reputation and credibility in the outside World, after the disastrous foreign policy stumbles of Democrat President Jimmy Carter.
On the economic front, Reagan was and still is famous for the introduction of the now largely discredited ‘Supply-Side’ economics, which came to be known as ‘Reaganomics’. Supply-side economics believes in big tax cuts to the wealthy and large corporations, massive deregulation for businesses, and smaller governments as the answer to all economic ills. Supply-siders believed that the accumulative benefits of all those actions would have a ‘trickle-down effect’ in the economy, thus eventually benefiting and lifting the majority. Those ideas and actions didn’t quite work.
After the implementation of his policies, the economy rose for a while, but then slid right into the next recession - interest rates and monetary policy were eased and fiscal deficits climbed steadily for the two terms of his Presidency. Yet, at the end of his term there was another recession as George Bush-I took over and had to raise taxes to deal with the growing deficits, which doomed his Presidency.
But, Reagan’s iconic status is enshrined in Republican memory.
It is apparent Trump is trying to be the next Ronald Reagan: by undertaking big, bold and World-changing initiatives on the international stage, like the denuclearization of North Korea, the crushing of Iran, and the realization of the fiendishly elusive Middle East Peace between the Israel and the Palestinians.
Being Trump, he started to tout himself as a potential candidate for the ‘Noble Peace Prize’ before anything was accomplished in any meaningful way. And as those goals remain elusive, so does his Noble Peace Prize.
Also, on the economic front, Trump has followed some of Reagan’s most famous moves: he gave a big tax cut to the wealthy and the largest corporations, initiated massive deregulation across most government agencies, and the reduced government services for the average and poor Americans, while running deficits.
But Trump obviously did not read about the general failure of the ‘Supply Side Economics’, now universally accepted, after the tenures of its proponent Republican administrations - Presidents Ronald Reagan and George Bush I & II.
Trump and the Republicans are proud of the massive tax cuts they passed in the early part of his Presidency. And even though both Trump and the Republican lawmakers had promised tax cuts that would benefit the ordinary American people, an estimated 80% (plus) of the benefits went to the rich and the big corporations. As is now well documented since Reagan’s time, the resultant bump in economic growth was short lived, while the longer term impact is negligible.
And that is exactly how Trump’s tax cuts are playing out.
The rich and the corporations have benefited greatly, while for the average American the effects have been negligible. For the economy, the boost was short lived, and now the impact is negative as the fiscal deficits climb and Trump runs up record deficits, while the economy slows in spite of the tax cuts, AND a reversal of the Federal Reserve’s plan of additional interest rate hikes and monetary policy tightening for this year.
Recently, Trump’s frantic calls on the Federal Reserve to dramatically lower interest rates by a full 1%, and initiate another round of Quantitative Easing (!) is testament to the fact that even he is not buying his own BS of the ‘best economy ever, in history’.
Over his term, not only Trump, but a lot of financial experts and economists have been touting the extraordinary strength of the American economy (especially during the past year). And a lot of them gave credit to Trump’s policies for that strength. But as the proof and numbers keep rolling in, it is becoming clear that:
The economic growth trend was unbroken from the steady rise through the two terms of the Obama years - and Trump’s aggressive policies and tax cuts initially boosted the economic growth, but are now having a generally negative effect on the US and global economies - especially his trade and tariff policies.
The great Trump and Republican tax cuts gave the rich a big boost, and made the corporations a lot of after-tax profits, but apart from that they did not appreciably boost business investment, but did spike more stock buybacks which in turn boosted the share prices, resulting in bigger bonuses for executives.
The soaring stock markets, and the continuing economic growth, are ultra sensitive to the Fed’s constant and unrelenting support, so-much-so that even modest tightening crashes the markets, and drains confidence in the economy.
So Trump, his advisers, and the experts, are very afraid of the modest interest rate increases that the Federal Reserve undertook last year, on its way towards continued ‘normalization’ this year, after the decade of extraordinary monetary easing. And, they are putting extraordinary pressure on the Federal Reserve to reverse its tightening cycle.
If an economy cannot withstand even the most modest rise in interest rates from the absolute historic (near zero) lows, then in our view, the economy is not very strong, instead it is precariously and artificially held up, ready to fall at the slightest bit of sustained ‘tightening’, or no real tightening at all, but by being just put on hold, as the Chair of the Federal Reserve, Jerome Powell, is doing right now.
All the signs are there that Trump’s emulation of the Reagan tax cuts, massive deregulation, and slashing of social services and government programs are not strengthening the economy, but are in fact hurting it. Therefore, according to Trump and his minions, the need for radical reversing of monetary policy in the midst of an otherwise oft-touted economic boom is desperately warranted! They don’t seem to recognize the inherent contradiction in their professed opposing views. It would be more helpful to everyone, if Trump and the experts made up their minds whether the US economy is ‘strongest ever’, or is weak and weakening. If it is as strong as they say, then no interest rates cuts and monetary easing is required, instead the Federal Reserve should be tightening. If, it is weak and weakening, then rate cuts and easing are required just to keep it going.
By their words and actions they are stating that the economy is weak and weakening, and in desperate need of support. For our part, we think the economy is weak and weakening, and thus the panic from Trump and his advisers for immediate rate cuts and the premature start of more Quantitative Easing.
What history shows us is that under the governance of Republican Presidents, prior to Reagan, tax cuts have been generally an expected requirement, and while the Democrat Presidents that followed tended to raise taxes somewhat to address the economic requirements of their terms, and the deficits left behind by the Republicans, yet, the years of Democrat rule inevitably resulted in greater economic growth, and generally better fiscal management.
In the following Chart (Presidents and precedents), one can see that Democrat Presidents going back to Lyndon Johnson did better with economic growth than the Republicans, including Reagan.
Ronald Reagan also famously started the decades of monetary easing trend that has persisted till today. From the interest rate hike to 20% (!) in 1980, implemented by the then Federal Reserve Chair, Paul Volker, which induced a sharp recession to tame rising double digit inflation, interest rates have been moving steadily downward, and the monetary policy has been of relentless easing. This steady easing has led to some spectacular asset bubbles and crashes in these decades.
The Chart also shows the performance of the American economy under Republican Presidents and Democrat Presidents. The performance under Democrats is generally better regarding economic growth rates and fiscal responsibility, regarding the running of deficits. Democrat President Bill Clinton comes out as the best performer of all the Presidents highlighted in the Chart, from sustained high economic growth rates over his two terms, and budget surpluses, after inheriting accumulated deficits from the previous two Republican Presidents, Reagan and his successor Bush Sr.
It is also significant to note that under Reagan there was a recession early in his first term, and two major financial crisis, ‘Black Monday’ in October 19, 1987 (attributed primarily to commuter trading glitches), and the ‘Savings and Loans (S&L) Crisis’, which began in 1986 and lasted till 1995, where over 1,000 S&L associations were ‘resolved’ due to their insolvency. The S&L Crisis was primarily attributed to massive deregulation and seriously diminished ‘oversight’ functions under Reagan’s ‘laissez-faire economics’ philosophy (free from government regulations) which Republicans have adopted as their economic and political mantra, in spite of excesses that inevitably follow such laxity and result in repeated business and financial market disasters, which strike inevitably as a result of policies of such administrations. (Source of Chart: Economist.com)
The speculative Tech Bubble, and its subsequent collapse at the end of Bill Clinton’s 2nd term is attributed to his policies by his critics, and that may be the case, but if one looks at the steadily loosening monetary policy trend from the early 1980’s to the present time (seen in the following Chart), one could argue that the uninterrupted, increasingly loose monetary policies (economic stimulation) over the decades, has led to a greater likelihood of asset bubbles and their subsequent and inevitable collapses. We are in one such inflated dangerous time now.
It seems rather self-evident that monetary easing, coupled with tax cuts, and massive deregulation, and running deficits, has caused some serious problems in the past, as George W. Bush Jr.’s Presidency showed. George W. Bush brought in additional significant tax cuts for the wealthy, very extensive deregulation and reduction in oversight, and the continuing loose monetary stance of the Federal Reserve, which led to the greatest financial crash since the great Depression of 1929, which almost collapsed the global financial system at the very end of his 2nd term. What followed was the ‘Great Reset’ as the (at the time novice) Barack Hussein Obama stepped right into the biggest financial and economic crisis of modern times.
All in all, Obama managed the crisis well enough, considering he had both Houses, Congress and the Senate, in Republican hands for most of his 2 terms, who were sworn to oppose everything he tried to do regardless. Yet, at the end of his two terms he handed over to Trump a steadily growing economy and an unbroken trend of steadily declining unemployment rate, and government spending to GDP ratio.
But Trump was not going to be satisfied with just managing the relatively stable US economy handed to him, with low unemployment rates and growing jobs numbers, and declining deficits, after relentlessly criticizing everything that Obama had done during his two terms. Trump wanted to make bold statements, both on the domestic and foreign policy fronts, and more than anything he wanted to obliterate Obama’s considerable accomplishments and legacy, by attempting to destroy everything that Obama had done - and by shaking up the status quo through Reagan-style bold moves.
So far, Trump has not been able to accomplish his boldest moves; the dismantling of ObamaCare, the building of the ‘Wall’ (very un-Reagan-like but bold), the denuclearization of North Korea etc. (in spite of having control of all three levels of government when he started), but, he did manage to pass, with the enthusiastic encouragement of the Republicans (in majority), a massive tax cut that overwhelmingly favored the rich and the big corporations, while significantly increasing deficit spending. The result, massive tax cuts, rising deficits in the teeth of an aging ‘bull market’, and an overly long expansion cycle.
He also took a machete to ‘regulations’, and oversight, unleashed the banks and financial institutions from constraints put on them in the aftermath of the 2008 Crisis which was, in large part, due to their unbridled greed and improper behavior, and he has been calling for evermore easing of the monetary policies through the reversal of interest rate cuts, and more controversially, the restart of Quantitative Easing by the Federal Reserve. He is following a well worn historic path to another potential disaster.
Stock Markets are flying higher than ever, buoyed by the heady winds blown by an overly enthusiastic President who is throwing caution to the wind in an effort to score Reagan like wins, without really looking at Reagan’s two terms closely, and recognizing the seeds of trouble that are sown in an overly lax financial and regulatory economic environment, coupled with policies that cater to the wealthy, and blow asset bubbles to create the ‘Wealth Effect’.
So under Trump, government deficits and debt are soaring, as he and the Republicans revel in massive tax cuts for the wealthiest, they decimate oversight and regulations till bad behavior is once again encouraged, put pressure on the Federal Reserve to further loosen the monetary policy to sustain an inflated stock market and economy, and indulge in brinkmanship with global trade as the economies head for the next recession. As has been said, ‘…ignore history at your own peril’.
As the following Chart states and shows, interest rates are a function of economic growth, wages and inflation. All three functions have been on a steady decline since Ronald Reagan’s Presidency. Since the 2008 crisis, all three were in historic declines and had just started to creep up in the past few years. And this was in spite of unprecedented injections of liquidity into the financial systems.
But two things resulted after this time of extraordinary monetary easing, historically low interest rates, and low tax rates (from tax cuts of Bush II, which Obama continued) – no appreciable ‘trickle-down’ effect took place as it was supposed to, according to ‘supply side’ theorists, instead wealth inequality increased dramatically during this time; and, GDP growth rate remained stubbornly weak, in spite of all factors being present that were supposed to boost economic activity. That trend, except for a bit of a bump because of the massive Trump tax cuts and deregulation, is persisting, in spite of all his claims of extraordinary economic performance during his first two years.
The only thing that will boost economic growth sustainability is ‘demand’, and that is disappearing from American and global economies.
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