Jul 19, 2019

The cost of the bacchanalia

Illustration: Rebecca Zisser/Axios

Rarely has the U.S. and global economy been under such self-inflicted pressure, weighed down by a frenzy of deficit spending, attacks on trading partners, and a broadside to the fundamental system of business.

Why it matters: So far at least, global stock markets have seemed to shrug off the relentless jostling of the financial system, mostly by President Trump, with all three major U.S. exchanges rising again on Thursday. But experts tell Axios that investors ultimately will price in a costlier assessment of his "America First" policies.

Among the economic hits are:

  • The 2019 U.S. budget deficit is on track to exceed $1 trillion, its first time to cross that threshold since the aftermath of the financial crash, and national debt to reach $33 trillion in a decade, 50% higher than today.
  • The U.S. trade war with allies and rivals is attacking hundreds of billions of dollars of business, with no sign of a letup soon. And now Japan has started one, too.
  • Those wars are causing a massive disruption to the movement of stuff that big companies buy and sell, and the parts that go into it, forcing them into a costly reconfiguration of the essence of how they conduct business.

"The Trump tax cuts, lax regulation, and talking down the dollar are for the economy like drinking a lot of RedBull. You get a lot of frantic energy, a low attention span, a crash later, and an elevated though small risk of a heart attack," said Adam Posen, president of the Peterson Institute for International Economics.

The big picture: No one knows how long the economy's resilience will hold up against the incessant pressure — or whether Trump will abruptly lift layers of it, such as his tariffs and other trade threats.

And Trump's aggressive policies are hardly alone in weighing on the economy — one force is the length of the expansion, already the longest in U.S. history and bound eventually to peter out of its own accord.

  • Notwithstanding Trump's $1.5 trillion tax cut in 2017, businesses are barely investing in new projects, with capital spending growing at just 3% this year, compared with 11% in 2018.
  • Factory production has fallen for two straight quarters.
  • That has put a damper on U.S. growth. In the second quarter, U.S. GDP grew at a 1.6% annual rate, down from 3.1% in the first quarter. China and other major economies are slowing, too.

Economists say that the U.S. economy is currently being propped up by services and consumer spending. "The secular stagnation world we are in was already pushing down on investment. Trump's policies are driving it towards zero," Posen said.

Karen Dynan, an economics professor at Harvard, said she's surprised the financial markets have "not shown greater concern." But she and other economists pointed to Wall Street's repeated failure in recent decades to foresee coming disaster. "They weren’t exactly flashing red before the financial crisis," Dynan said.

The bottom line: "Markets don’t respond until there’s a meaningful crisis. We aren’t there yet," said Ian Bremmer, president of the Eurasia Group. "The tariff 'war' has been mostly talk, interest rates are low so debt doesn’t feel urgent. [But] that’s not sustainable."

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