Peronism in Trumpland
One of the primary rules of neoliberalism is to cut government spending and shrink the size of the state, so public services can be privatised for private profit. Profits which, incidentally, usually end up centralised in big US investment banks. Thus US imperialism (via the IMF and World Bank) has spent the last 40 years pressurising the governments of impoverished Latin American states into slashing borrowing and budgets, on pain of external fiscal punishment.
Most knuckled under. For instance, the new, fascist-sounding Brazilian president, Jair Bolsonaro, has reverted to the full neoliberal agenda and promised a 20 per cent cut in public spending. Those who occasionally dare to defy the Washington consensus – Argentina on the populist right, Venezuela on the left – and pump up public spending, soon find their sources of credit cut off. If they resort to the printing press to keep going, Washington soon engineers hyper-inflation and a trade blockade.
So it is fascinating that the latest, right-populist administration in the Americas to defy the Washington neoliberal consensus – and resort to massive public spending funded by profligate, unsustainable borrowing – is none other than that of Donald J. Trump himself. In just two years in the White House, Trump has boosted US public debt by a staggering $1.5 trillion – more than the GDP of Argentina and Venezuela combined.
He did it to create a fake economic boom, in order to “buy” the 2018 mid-term elections. And yes, the US economy did hit a growth rate of 4.2 per cent in the second quarter of the year. But fortunately, enough ordinary Americans were not taken in by this gigantic bribe and the Republicans duly lost control of the House of Representatives last Tuesday.
However, the full economic repercussions of Trumpian economics are still to come, especially if he doubles up and adds more borrowing in order to “buy” the 2020 presidential race.
Regular readers of this column will know I’m no fan of the neoliberal agenda and am supportive of progressive public intervention funded by taxation and judicial borrowing. But what Trump is up to is a very different kettle of fiscal fish.
Thanks to Obama’s fiscal injections after the 2008 banking crisis, the US economy was already at near full employment and capacity growth. By adding an even bigger economic stimulus – perhaps the biggest in US peacetime history – Trump has simply poured more water into an overflowing bath tub. The real impact – on jobs and output – has been close to negligible. However, the unintended consequences are largely negative.
And guess what? They impact on the poor and the working class. US domestic interest rates are surging as a consequence of the Federal government borrowing every dollar in sight. The standard cost of a 30-year, fixed mortgage has risen sharply in the past twelve months. As a result, home sales have slumped by 21 per cent.
This is only the start. The US Federal Reserve, the country’s central bank, has begun reversing the quantitative easing programme it introduced when the economy was a rock bottom in 2008. Simply put, the Fed is selling off the bonds it bought earlier (with printed dollars) at a rate of $50bn every month. That’s $50bn coming out of the banking system and into the vaults of the Fed every four weeks. By draining liquidity out of the banking system, this move constrains lending just by itself. Next stop: a recession.
WHERE DID THE CASH GO?
But where is all the cash going that Trump pumped into the US economy? Most of his stimulus was by way of tax cuts to corporations. They were supposed to invest in more blue collar jobs. But with the US economy already at top speed, there is no slack to build more factories or manufacture more machine tools. Capital investment is actually falling. Instead, most of the Trump tax cuts have been used to buy back existing company shares, boosting their nominal capital value. The rich get richer by financial manipulation, with the big investment banks taking a cut via charging huge fees for managing these buy-backs.
Meanwhile, the scale of US public borrowing is simply out of hand. The IMF predicts that debt as a proportion of GDP will hit 106 per cent this year, rising to 110 per cent in 2020, and a whopping 117 per cent in 2023. And this is before Trump starts borrowing more to try and hold the White House. By comparison, UK public debt is circa 85 per cent of GDP.
Where does this leave the rest of us? The US economy is about to hit a brick wall. Rising interest rates are going to undermine investment and private consumption. Existing over-production will undermine profits. Already, rising US interest rates are sucking dollars out of developing markets around the globe, signalling a global economic slowdown. Sometime between now and the mid-2020s, the next crash is looming. Let’s hope US voters dump Trump in 2020, or we are all in trouble.