The Trump Recession is taking shape

My Comments: Tariffs, pressure on the Federal Reserve to lower already low interest rates, shotgun diplomacy, all of it helping to increase uncertainty, which increases the chance of the next global recession.

For reasons unfamiliar to me, our President is determined in his attempts to marginalize China on the global stage. The tariff efforts are leading to lessening demand for goods and services in this country, are causing an increasing number of farmers and agricultural producers to face bankruptcy, and causing you and I to pay more for what we purchase every month.

Someone recently made me realize the push to reduce interest rates was not so much to increase the chances of growth in this country but to punish China. Over the years, China has purchased government issued bonds to the tune of trillions of dollars. They did that because they saw those bonds as a safe investment. They are now reducing their holdings, partly because as their exports decline, their less able to invest in US Treasurys.

China is effectively America’s largest banker which gives it political leverage. In 2018, we paid China over $300 billion in interest on those notes. That’s money collected from you and I as taxpayers. It’s expected to double by 2023. So if interest rates drop to zero, or less, do we pay less?

No, because the notes they hold, totaling over $1 trillion, are pegged at a positive number. We can quit paying them interest, but that will cause our credit rating to drop, meaning you and I will have to pay higher taxes to keep everything else the government is responsible for doing. In the meantime, the risk of a significant recession looms.

by Rick Newman \ August 26, 2019 \

Back in 2016, many reputable forecasters predicted a recession would occur if Donald Trump won the presidency. Trump won. There’s been no recession.

But those forecasters weren’t wrong. Research from Moody’s Analytics, Citigroup, Oxford Economics and many other firms predicted a recession if Trump did everything he promised to do as a candidate. Those campaign promises included a large tax cut and aggressive deregulation, which have, in fact happened.

But Trump also promised things he hasn’t done yet, such as deporting 11 million undocumented immigrants living in the United States, who account for about 5% of the U.S. labor force. He also vowed to impose 45% tariffs on everything imported from China and 35% tariffs on Mexican imports, and to withdraw from the trade deal with Canada and Mexico if those two trading partners didn’t meet his demands.

The scarier part of Trump’s economic agenda is gradually falling into place—and the economy is swooning the way forecasters predicted in 2016. He struck a new trade deal with Canada and Mexico last year, pre-empting new tariffs on those countries. But trade negotiations with China have obviously been rockier, with no deal in sight and tariffs mounting on both sides.

Trump’s latest move, announced on Twitter Aug. 23, was to ratchet up tariffs on Chinese imports up to levels ranging from 15% to 30%, with deadlines ranging from Sept. 1 to December 15. China has announced similar tariffs on similar deadlines on U.S. imports to China. We’re getting closer, in other words, to the 45% tariffs Trump threatened as a candidate.

Slowing economy

Stocks rose sharply during Trump’s first year in office, but they’ve flatlined since January 2018, which is when his protectionist trade actions began. The economy is slowing too, after hitting 2.9% growth in 2018. There’s a marked slowdown in manufacturing, and employers have been cutting back on hours. The next step, normally, is to cut back on payrolls.

Economists forecast GDP growth of 2.3% this year and just 1.8% next year, according to Bloomberg. That’s not recessionary—but Trump may push his China tariffs even higher, forcing growth lower. Despite Trump’s repeated claims that he wants a deal, and China wants a deal, trade experts think the standoff with China could get worse before it gets better. “The two sides [are] headed toward further escalation,” analysts at Eurasia Group wrote recently. “Trump’s actions are moving the dispute further away from the substance of a trade deal.”

The prospect of a recession during the next 18 months now turns directly on what Trump does on trade. “If the U.S. raises tariffs on all imports from China to 25% and China makes a matching response with those measures staying in place for 4-6 months, we believe that the global economy will be in recession in 6-9 months,” Morgan Stanley said in a recent note.

The U.S. can avoid a recession if the rest of the world is in one, and interest-rate cuts by the Federal Reserve might help offset some of the damage caused by tariffs. It’s also possible a plunging stock market will get Trump’s attention and dissuade him from escalating further. Trump still has some control over whether the Trump Recession happens.