What ever happened to the “R” word?

All the ten year federal budget forecasts assume different GDP growth rates, tax income and spending to come up with deficit estimations. For hundreds of years capitalism has gone through economic cycles of boom and bust. Although recessions are inevitable, none of the forecasts include any. These projections are economic mirages. It always looks like the good times will go on forever as we approach a bust or recession. It even looked rosy in 1929. The next recession may not be far off. Even former Federal Reserve Chairman Ben Bernanke has said in June 2018 that, “in 2020 Wile E. Coyote is going to go off the cliff,”.
 
Republicans are coasting on the tail end of a boom that started in 2009 that they didn’t create, but too many voters will give them credit for. There is also a misunderstanding about the 4.1% GDP growth figure. It is an annualized growth rate not actual growth. This means if all 4 quarters had 4.1% annualized growth rates, the year would have 4.1% actual growth not 16.4%. So the 2nd quarter was actually about 1% added to GDP.

If the 2nd quarter 2018 4.1% annualized growth rate in GDP holds up to revision and revision of the revision, we see a growing economy with yet increasing deficits. This is obvious despite Trump’s top economic adviser Larry Kudlow’s false statements that the deficit was shrinking. He now says they will start shrinking someday, but what if the economy tanks?

Trump in his economic ignorance is making some wildly optimistic claims like a baseball team fan seeing a few runs scored in one inning predicting a won game; the playoffs and the World Series. A little premature, and worse, that one good GDP number was inflated by exports especially soybeans rushed out to avoid the coming Chinese tariffs. Next quarter we’ll see a dearth of exports and a lower GDP growth rate. What will Trump say then? “How could anyone know economics is so complicated?”

The labor market is at what is considered “full employment”.

  • The economy can’t grow much because there are few without jobs. Who will fill new job openings?

  • With little or no capacity to grow due to labor shortage, who will invest in new ventures or expand?

  • At full employment, businesses will compete with each other for the existing labor supply. This would be good if the costs are not just passed on to consumers. If it is it is inflationary. It probably will be.

  • Trump’s deporting workers shrinks the labor supply increasing the “demand pull” inflation on wages.

  • Labor cost inflation will cause job losses to automation and cheaper foreign labor competition with businesses closing for good or moving overseas.

  • High after tax profits will probably be used for stock buy backs, automation and overseas investments not domestic business expansion.

With little or no growth, the rationale behind the Republican tax cuts goes to pieces. They blew it in Kansas and Oklahoma with excessive tax cuts. Their faith in tax cuts overrides reason and results.

With cost of labor inflation and Trump’s tariffs inflation the Fed won’t stand idly by. It will raise interest rates more and more. With a growing demand for borrowed money from larger federal deficits, interest rates on money will be pulled up. Maybe explosively if China does not continue to buy huge amounts of US federal debt due to saturation or part of the trade war.

We will probably be driven into much higher interest rates. Economic growth will suffocate with higher mortgage, and consumer loan rates. Just paying the higher interest rates on the growing federal debt will increase the deficit further. It will feed on itself.

We are at the beginning of the end of the present boom and possibly America’s economic future. As George Will points out: Jay Powell, chairman of the Federal Reserve, says fiscal policy is on an “unsustainable path,”. The next recession will probably be the worst ever thanks to the recent Republican tax cuts. The damage will probably be permanent with runaway deficits and choking interest rates unless the tax cuts are repealed soon. We don’t want to suffer something similar to what Japan did in the 1990’s, a lost decade. Or more. Who knows how far down Wiley E Coyote will fall.

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