Now comes word that the Federal Reserve is about to cut a key lending rate by about a quarter of a point. Even if you don’t routinely pay attention to financial news, this is a story you need to be following.
Over the past few weeks, we’ve seen economic data that basically confirms what honest economists have been saying all along: The Trump Economy is essentially the Obama Recovery, but with a dollop of stimulus in 2018 from an enormous trickle-down tax cut that has already — all by itself — added $1.8 trillion to the national debt.
You’ll remember that tax cut from late 2017: Its passage saved Trump’s presidency. Before that chaotic, rushed-through, end-of-year vote, Trump’s December 2017 approval rating was more than 21 points underwater. The ill-conceived, scribbled-in-the-margins bill was literally his Presidency’s first — and I would argue only — achievement.
But the promised boom — remember, Trump ran on the assurance of at least 3 percent economic growth — fizzled. A year later, Goldman Sachs estimated that rather than paying for itself in jobs and investments and tax revenues that would stoke the economy for years to come, all of the modest economic benefits from the Trump/Ryan/McConnell tax cut would be played out by the end of 2019.
(Imagine another scenario for a moment: Trump and the GOP could have just borrowed that $1.8 trillion, rather than laundering it through a tax cut for the rich, and given every household in America roughly $14,000, no strings attached. Imagine the effect that would have had on the economy. But I digress…)
So here we are, summer of 2019, and the economy is — by most superficial measures — chugging along much as it has since the turnaround began 10 years ago. Annualized GDP is somewhere in the solid but unspectacular 2.1 to 2.5 percent range. Unemployment is low, but working is awful — anemic wage growth and chronic underemployment have been the hallmark of the Obama Recovery.
But as the longest economic expansion in the history of the United States (it passed the JFK expansion last year and the Clinton expansion this summer) forges deeper into unknown territory, warning signs are accumulating.
Corporate debt is high. Student debt is off the charts. Consumer debt has crept back up towards its pre-2008 levels, but with credit card companies charging record 17.6 percent average interest rates. The bond markets have inverted this year — a signal that investors are more worried about protecting their gains than in maximizing risky profits. The transportation sector is softening (never a good leading indicator), and manufacturing is down. The federal debt — now $41 trillion — would be rousing Republicans to passionate rhetoric about inflation, except for the fact that, you know, they only do that when they’re not occupying the White House.
Analysts agree: The only thing sustaining our economy right now is consumer spending — which is only adding to the consumer debit alarm.
Now add to that a factor that investors no longer seem to regularly price into stock trades: International uncertainty. We have no idea what the outcome of Donald Trump’s trade wars will be. Our destruction of the Iranian nuclear deal has destabilized the Persian Gulf again. The Conservative Party in the UK just picked a posh-boy nihilist to be its prime minister, and after years of mocking those who warned about the economic consequences of a no-deal Brexit, it’s now just three months away.
Which brings us back to the Federal Reserve Board’s anticipated rate cut this week.
In 2007, when the recession that sparked the 2008 Global Financial Crisis began, the Fed rate for interbank loans was around 4 to 5 percent. After the meltdown, it dropped to a top-end range of 0.25 percent, or essentially zero, and remained there until 2015. Investors demanded the rate increases even though there were worries about their effect on the economy.
Those worries were felt most severely, perhaps, by Democrats. Raising interest rates ahead of a Presidential election is always a risk for the incumbent party, but the Federal Reserve Board showed no qualms about that in 2015 and 2016. To be blunt about it, that’s why the Fed is supposed to be independent. We don’t want the people who make decisions about our money to be influenced by partisan considerations.
And yet here we are, four years later, and is there any reasonable doubt that Trump’s pick for Federal Reserve Chairman is taking his orders from the President’s manic Twitter account? Trump has blamed every bit of bad economic and market news on The Federal Reserve and demanded interest rate cuts to spark “his” economy.
There are arguments for and against raising the rate, but the basics aren’t that complicated. GDP growth is solid, unemployment is historically low, and the Fed rates (a range between 2.25 and 2.5 percent) are, themselves, low. The whole point of managing the economy through interest rates is that you’re trying to keep growth stable and inflation low during expansions, while cutting rates to stimulate growth during recessions.
So why are we cutting interest rates in the midst of what Trump recently called “perhaps the greatest economy in our country’s history?”
Because he’s lying. Because it isn’t. Because even Trump knows that part of the Republican strategy for Mitt Romney’s 2012 challenge to President Obama was the coming recession that never happened.
Why were GOP operatives so optimistic about a coming “Obama Recession?” Because historically speaking, we were already overdue for a recession by the time Obama stood for re-election.
The Obama Recovery, now in its 122nd month, passed the Clinton Recovery record for duration in June. Only one other U.S. economic expansion (the JFK-LBJ expansion) lasted more than 100 months. Before Obama took office, a recession occurred once every 49 months, on average.
The question isn’t whether another recession is coming, but when it will begin. And since Trump and the GOP have no hope in 2020 if the next recession happens on their watch, rest assured that they will do everything in their power to push the start of the next one past Nov. 3, 2020. The more they artificially delay it, the worse that correction is likely to be.
So the Fed is going to cut rates this week, and the rich and powerful are already celebrating from Wall Street to the White House. But make no mistake: This is about politics, not economics. And we’re all going to pay for it.