We have all been observing the stock market volatility for the days of February 5,6 of 2018 which has shocked the business pundits back into the real world. This followed Wall Street’s great run as the Dow kept rising up over 26 percent from January 2017 to January 2018.
Over the past 2 years, the stock market had been climbing to a precipice after a series of new record increases only to have the inevitable happen, a “Tower of Terror” drop resulting in about at least 6% correction in a couple of days.
This correction was pivotal. For the last 2 years, the US economy was buttressed by the trifecta of accelerating global growth, low inflation and loose central bank policies, all of which are now in position to burst the bubble.
There are too many republicans in the US Congress who have been believing that their partisan 2017 tax cuts would grow the economy by 4%. This is a pipe dream. All credible forecasters are predicting a growth in the US GDP for 2018 to be in the mid 2% range. It is very unlikely the US can reach 3%.
Welcome to the real world. The republicans increased our US deficit by about 1 trillion dollars over a 10 year period, at a minimum. This expenditure in order to give major tax cuts mostly to wealthy individuals (donor class) and corporations may have been politically advantageous for republicans but it was also reckless as it was done when corporations were sitting on tons of cash, the stock market was soaring and unemployment was at its lowest number in years at 4.1%.
As per a 10/10/17 CNN report by Matt Egan, “With the United States already $20 trillion in debt, additional deficit spending may make bond investors nervous.”
“A selloff in bonds would lift Treasury rates from their historic lows (1.4%), and that would be bad news for stocks. Ultra-low bond rates (1.4% in 2016)) have forced investors into risky assets like stocks, and higher Treasury rates (2.8% in Feb. 2018) make stocks look less attractive by comparison.”
“”If bonds start to protest the outlook for the U.S. budget deficit, that could create problems,” said Yardeni.”
“Dallas Fed President Robert Kaplan told CNBC he would be “leery” of a tax cut that is financed by increasing the deficit.”
“My concern is you get a short-term bump” that would leave the economy “more leveraged,” he said.”
“GOP leaders have sought to ease concerns about the deficit by arguing that lower tax rates would boost economic growth enough to offset the loss of tax revenue.”
“Those claims are extremely optimistic and rely on growth that may never happen. Even if it did, the Fed would be forced to raise interest rates more quickly to prevent the economy and inflation from overheating.”
The 2017 tax cut was also done at a point in time where the Federal Reserve has been planning to pivot back to standard, more conservative pre-recession operations. Recently, the Fed had announced plans to begin unloading the enormous portfolio of bonds it bought during the Great Recession.
The central banks will not continue to keep printing money like it’s just paper, holding interest rates at record lows for extended periods of time to prop up the US economy as it was recovering from a major recession in 2008-2009. Experts are saying that the US stock market is now about 25 percent higher than it would have been had it grown at its historic average pace.
Now that there are fewer jobs and as wages start to rise, the bogeyman of inflation is inevitable. This situation is exacerbated by the president and his republican cronies wanting to cut back on legal immigration by 50% at a time when businesses will be begging for an increase in the number of needed workers. In addition, the president’s withdrawal from TPP and his anti-trade impulses doesn’t help.
There may very well come a time when the corporations which benefited from 2017 tax cuts and less regulations delivered by the republican President Donald Trump and his sycophants in the White House and the US Congress, may come to terms that the price of putting up with this president and his policies, was not worth the steep price.
As per the 2/6/18 NY Times article by Ruchir Sharma, Fewer workers also mean labor shortages and higher inflation. Unemployment rates are close to a 40-year low in developed economies, including the United States. If the US economy keeps adding 200,000 jobs per month, as it did in January, the unemployment rate could fall below 3.5 percent by the end of the year. And a rate that low has never been sustained in the past.”
This then is the big picture: Over the past year, investors worldwide have been pleasantly surprised by an unusual combination of economic growth beating their expectations and inflation undershooting expectations. Over the coming year, these forces are likely to reverse, as labor shortages slow growth and begin to drive up inflation, and bring a normal level of volatility back to the markets.
“Watching their market wealth soar, even average middle-class Americans started spending aggressively again, after dialing back in the wake of the 2008 financial crisis. The US savings rate has fallen to a mere 2.4 percent, from post-crisis peaks well over six percent. Consumer credit card debt is rising. By some estimates, the confidence inspired by rising stock prices accounted for a third of the economic growth over the past 2 years.”
“In the past, whenever the stock market has been this expensive, an increase in interest rates has brought it back down to earth. In recent years, the swelling size of the stock market has magnified the potential economic impact of a correction. If the stock market suddenly reverts to its long-term trend, implying a fall of almost 25 percent, it could push the American economy close to recession.”
“All eyes are now on the central bank. Confidence that the idyllic economic conditions of the last year will last indefinitely has been rattled, particularly as wage growth begins to signal a return of inflation. Many investors are fretting that the Fed may be compelled to raise rates faster than anyone had expected, just the kind of negative surprise that could deflate sky-high prices in all assets.” 2018 may be remembered as the year when the moody market beast returned to its natural state.”
On November 30, 2017, Robert S. McElvaine of the Washington Post penned the following report, “I’m a Depression historian. The GOP tax bill is straight out of 1929.”
“There are 2 ideas of government,” William Jennings Bryan declared in his 1896 “Cross of Gold” speech. “There are those who believe that if you will only legislate to make the well-to-do prosperous their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous their prosperity will find its way up through every class which rests upon them.”
“That was more than 3 decades before the collapse of the economy in 1929. The crash followed a decade of Republican control of the federal government during which trickle-down policies, including massive tax cuts for the rich, produced the greatest concentration of income in the accounts of the richest 0.01 percent at any time between World War I and 2007 (when trickle-down economics, tax cuts for the hyper-rich, and deregulation again resulted in another economic collapse).”
“Yet the plain fact that the trickle-down approach has never worked leaves Republicans unfazed. The GOP has been singing from the Market-is-God hymnal for well over a century, telling us that deregulation, tax cuts for the rich, and the concentration of ever more wealth in the bloated accounts of the richest people will result in prosperity for the rest of us. ”
“As a historian of the Great Depression, I can say: I’ve seen this show before.”
“In 1926, Calvin Coolidge’s treasury secretary, Andrew Mellon, one of the world’s richest men, pushed through a massive tax cut that would substantially contribute to the causes of the Great Depression. Republican Sen. George Norris of Nebraska said that Mellon himself would reap from the tax bill “a larger personal reduction [in taxes] than the aggregate of practically all the taxpayers in the state of Nebraska.” The same is true now of Donald Trump, the Koch Brothers, Sheldon Adelson and other fabulously rich people.”
During the 1920s, Republicans almost literally worshiped business. “The business of America,” Coolidge proclaimed, “is business.” Coolidge also remarked that, “The man who builds a factory builds a temple,” and “the man who works there worships there.” That faith in the Market as God has been the Republican religion ever since. A few months after he became president in 1981, Ronald Reagan praised Coolidge for cutting “taxes four times” and said “we had probably the greatest growth in prosperity that we’ve ever known.” Reagan said nothing about what happened to “Coolidge Prosperity” a few months after he left office.
In 1932, in the Great Depression, Franklin D. Roosevelt called for “bold, persistent experimentation” and said: “It is common sense to take a method and try it; if it fails, admit it frankly and try another. But above all, try something.” The contrasting position of Republicans then and now is: Take the method and try it. If it fails, deny its failure and try it again. And again. And again.
When Bill Clinton proposed a modest increase in the top marginal tax rate in his 1993 budget, every Republican voted against it. Trickle-down economists proclaimed that it would lead to economic disaster. But the tax increase on the wealthy was followed by one of the greatest periods of prosperity in American history and resulted in a budget surplus. When the Republicans came back into power in 2001, the administration of George W. Bush pushed the opposite policies, which had invariably produced calamity in the past. Predictably, that happened again in 2008.
In the 1920s, Republicans were in full control of the federal government and used that power to pursue their objective to “make the well-to-do prosperous.” It didn’t “leak through on those below.” In that decade, the mass-production American economy became dependent on mass consumption. For it to work, the masses need a sufficient share of the national income to be able to consume what is being produced.
Republican policies in the ’20s instead pushed to concentrate more of the income at the top. Nine decades later, Republicans are rushing to do it again — and they are sprinting toward an economic cliff. Another round of Government of the People, by the Republicans, for the super-rich will be catastrophic.