Trump Knows the Truth About the Market Sell-off but Can't Say It Publicly

Donald Trump believes that the Federal Reserve is the greatest threat to the US economy. That's true, but that's only a small part of a bigger puzzle.

In a recent interview with The Wall Street Journal Trump singled out the Federal Reserve and its Chairman Jerome Powell as the biggest threats to the US economic growth:

“Every time we do something great, he raises the interest rates,” Mr. Trump said, adding that Mr. Powell “almost looks like he’s happy raising interest rates.” One of the obvious reasons why the US President is concerned about the Federal Reserve actions is that the stock market is tanking. The US stock market lost nearly $2 trillion in October and it was the worst month for the S&P 500 since September 2011.

If the current stock market correction becomes a stock market crash or a fully fledged bear market, the chances of Republican candidates in the midterms are likely to take a hit. If the stock market crashes and stays in bear market territory for a year or two, Trump's own hopes for reelection will likely be dashed by an angry electorate. To a certain extent the President has to blame himself for exposing his reelection hopes to risks associated with the stock market. He touted the stock market performance as a gauge of his successful presidency but now the stock market is acting like a toxic asset on Trump's political balance sheet.

It is safe to say that the current market volatility is not the President’s fault, despite the fact that he’s being blamed for it. Trump’s trade war, however disruptive, is nothing more than a minor negative factor, dwarfed by the bigger issues plaguing the American financial markets and the American economy as a whole. Moreover, there is almost nothing he can do to fix those issues.

As a candidate, Donald Trump was willing to admit some bitter truths about the US economy. Let's take a trip down memory lane. In December 2015 candidate Trump said the stock market is in bubble: “Remember the word bubble? You heard it here first. I don’t want to sound rude, but I hope if it explodes, it’s going to be now, rather than two months into another administration.” https://www.nytimes.com/2017/08/03/us/politics/trump-praises-the-stock-market-he-once-said-was-a-bubble.html 

In April 2016, he doubled down on his assertion: “I think we’re sitting on an economic bubble. A financial bubble.” Moreover, in an interview with The Washington Post, he predicted a “massive recession”.   He identified, with pinpoint accuracy, one of the reasons for the future recession, namely the ultra-easy monetary policy of the Federal Reserve. An artificially low cost of credit and an unsustainable increase in money supply always lead to malinvestment and formation of financial bubbles. Massive malinvestment and financial bubbles are the perfect ingredients for a massive economic crisis. Trump knew that and he was concerned that ordinary American savers were exposed to an inherently unstable stock market.

When Trump became President, he had to chose between bursting the bubble and trying to keep the bubble alive in order to have a shot at a second term in office. He chose the later, and then used the artificial growth of the stock market as a proof that his economic policies were working. He now “owns” the bubble he used to criticize and can’t even admit publicly that the American economy remains a “false economy” wholly dependent on the continuous provision of cheap credit. “False economy” is a term used by Trump himself in order to describe the state of US economy after decades of mismanagement and misguided monetary policy.

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Sadly, that’s not the whole problem. All the economic stimuli, created by the Trump administration, including the tax cuts and the infrastructure investment programs, are one-off events and have to be financed via borrowing and record-breaking budget deficits at a time when foreign investors are increasingly reluctant to buy US Treasury Bonds.

During his first televised debate with Hillary Clinton, Trump said that "the only thing that looks good is the stock market, but if you raise interest rates even a little bit, that’s going to come crashing down. We are in a big, fat, ugly bubble." Nothing material has changed since then, except the fact that the President has to lie about the state of the economy. His prediction about the negative effects of a modest raise in interest rates came true and now he’s basically at the mercy of the Federal Reserve. Ironically, the Fed can now crash the stock market but it is Trump who will be blamed for the ensuing crisis.

In a recent Bloomberg interview, renowned financial expert Nassim Nicolas Taleb said that the economy is more vulnerable now than it was in 2007 and compared the measures taken after the global financial crisis with a dose of painkillers given to a patient with cancer.  "In 2008, we transferred debt from individuals to the states…now ten years later, we're starting to raise rates. We have to raise rates. It's unhealthy to keep rates at zero. So someone is going to have to pay the price," he added. Taleb’s assessment is correct. Someone will have to pay the price for a decade of misguided policies. In a fair world members of “deep state”, the Obama era apparatchiks, a number of Fed officials and the Wall Street crony capitalists would have to foot the bill for the consequences of their actions. However, we do not live a fair world, so when the bubble bursts and a new financial crisis begins, ordinary Americans and ordinary people from all over the world will bear the brunt of global recession. Maybe, Donald Trump still thinks that a new recession can be avoided, but he is most likely wrong. He inherited a “false economy” and there is nothing he can do about it.

The views and opinions expressed in this article are solely those of the contributor and do not necessarily reflect those of Sputnik.