Could Trump Take the Economy Down With Him? & Can Presidents "Make or Break" a Market? - The Comprehensive Minds

Could Trump Take the Economy Down With Him? & Can Presidents "Make or Break" a Market?

Could Trump Take the Economy Down With Him? & Can Presidents "Make or Break" a Market?

Can Presidents "Make or Break" a Market

The 2020 presidential election for the United States has been scheduled by just about and every organization covering the event in some form, and although the final decision will not be made until the special club, which is the electoral college, has made its final decision, but it is obvious that Joe Biden will be the next President of the United States. 

This is the first time in nearly three decades that an incumbent president has been voted out of office before a second term, amid a host of national and global disasters. 

To add fuel to a fire threatening to ignite the global economy, the outgoing president has vehemently questioned the results, raising doubts about the smooth operation, a continuation of much-needed government support, and the foundation of national systems as a whole. 

And all of this begs the question of whether a president could unintentionally or maliciously harm the American economy, and thus the world economy. There are Checks and Balances to control the influence of an individual man in the United States on things that were relevant when these Checks and Balances were written. 

But it must be remembered that economies then depended much more on successful crops and much less on tweets. Our modern economies are incredibly complex and incredibly fine-tuned, but complex fine-tuned things are usually very easy to break, and the results of throwing a proverbial wrench into the works could be just as devastating. 

Thousands of people die when unemployment rises, and many more could lose access to health care, housing, and living space even in a brief period of economic turmoil. All of this means that a president waging war on an economy can be just as dangerous as the war on a nation. 

What direct impact does a president have on an economy? 

Do they deserve credit for everything going well? 

And what could a president do to fuel the economy if he really wanted to?

Disclaimer time: This article is not going to be directed at any particular president specifically and it’s more an exploration of the power of the office over an economic system. But common, I know you guys aren’t silly and yes these hypotheticals may very well be tested in the coming weeks. But either way, we are not here to get political, as much as can be avoided. 

Trump’s plans for 2021 could be claiming squatters’ rights in the west wing of the Whitehouse and that is none of our concern, beyond the impact it would have on the economy. 

Now one of the final press conferences that will be held by the current presidential administration was a victory lap of sorts to celebrate the dow jones industrial average passing 30,000 points, which was its highest level ever. 

We have made many articles discussing just how crazy these stock market records are during a global economic catastrophe but one of the key takeaways was that the policies of the Trump administration have been good for business. 

Things like the massive tax cuts rolled out in 2017 and the trillions of dollars in stimulus given to business in 2020 were only really going to pump up stock prices, but the stock market is not the economy and short term gains are pretty easy to facilitate even on a nationwide level, lower taxes, raise government spending you’re done. 

Of course, this comes at the expense of taking on more and more government debt which could be the first major weapon a president could use to destroy their own economy. They could go over the national Credit limit If you get a credit card it will be given to you with a credit limit that takes into account your income as well as your credit score. 

People who have higher incomes and have proven themselves to be responsible with money will be able to use credit cards with higher limits than someone who only has a part-time job and has maybe missed a few payments here or there. 

The same kind of common-sense approach is taken to how much money the US government can borrow. And trust me that’s probably one of the few times that common sense and US government debt will be used in a sentence together. 

Anyway, the government wants to make sure that it is not giving complete free reign to itself to spend whatever it wants so there is control in a place called the debt ceiling. This is a number set by Congress that the government debt can not exceed until it is raised. 

Now, this figure is normally raised quite regularly because the American government has not had a budget surplus since 2001 so naturally, it is taking on more and more debt. Now you might think oh no this is really bad, stories about taking on more and more debt normally end with sad garage sales and involuntary camping trips.  

Look in reality, it’s not ideal but government debt works very differently from personal debt, especially for the united states, because they are special. In reality, this government debt is just a running tally of the difference between government spending and taxation over the last 2 decades or so. 

Can Presidents "Make or Break" a Market

Now another reason why constantly raising the debt ceiling isn’t as scary as it might sound is that just like a regular person, economies tend to make money as time goes on. Some bottom-feeding scum of society like a grad student should rightfully only qualify for a $500 credit limit on their no-frills credit card. 

But as they progress throughout their career and get a job with a decent salary they might upgrade, and upgrade and upgrade again until they are some upper management executive with a wiz-bang platinum Amex with a limitless spending cap. 

In the same way, the American economy has doubled in size since 2001, which means that there are more people making more money and paying more taxes, so the government has more capacity to repay a larger and larger debt burden. 

This might be part of the reason why in August of 2019 the debt ceiling was suspended, meaning that America became that corporate executive with a no-limit credit card. There was a catch though, this spending holiday has a deadline which will end in July of 2021, which is uhh oh geez only 7 months away... how did that happen. 

Now if this debt limit isn’t raised or suspended again it could have some very serious impacts on the economy. Record spending on fiscal stimulus has meant that the balance on the government credit card is at an all-time high and not being able to extend this limit will have some very serious consequences. 

For starters, it could stifle all government activities causing yet another government shutdown. These are major hiccups in their own right to the economy. People have more or less forgotten how serious the fallout from the December 2018 shutdown was because it got corrected quickly, but it could have easily sent the whole nation into a tailspin especially if it hadn’t occurred during a time of relative prosperity. 

Which is where things could get ugly in 2021, the same kind of shutdown would have much more serious consequences because it would be combined with the halting of continued stimulus which is likely to continue to be necessary well into the new year. 

If public servants are out of work at the same time that government assistance dries up it could make for a very bumpy ride indeed, but not nearly as bad as what could happen in a potential doomsday scenario. If the debt ceiling was not altered quickly enough it is possible for the government to lose access to enough money to make repayments on the money it already owes. 

Every few days the US treasury has to roll over its debt, by replacing bonds that are expiring with new bonds to pay off the old bonds. Kind of like refinancing a loan on a much larger scale. 

Now the debt ceiling shouldn’t actually matter to this process too much because technically the old debt is being replaced by new debt and the total outstanding liability has remained exactly the same but this ignores potential accrued interest or the possibility that investors might demand higher interest rates on government bonds from a government that is actively trying to suffocate itself. 

Now is this likely? Well no especially in today's low-interest-rate environment. But it is possible. Has something like this actually happened? Well yes, sort of. In 1979 the treasury accidentally missed a payment of 122 million dollars to government bondholders. This was caused by basic human error and was corrected within 24 hours. You might think ahh well that’s no big deal… but it was a big deal. 

In 1989 research paper later found that this minor slip-up raised the cost of borrowing by 0.6% which may not sound like much, but if it was applied to the current outstanding debt today it would cost the government an extra 132 billion dollars a year in interest. That’s enough to pay for NASA, 6 times over. 

This is also assuming that the cost of borrowing will only rise by 0.6%, there is a big difference between a human error that was swiftly corrected and a sovereign government playing chicken with itself for political points. 

It might already be starting to happen. In the same way that a credit card user that takes on too much debt or starts to get a bit shaky about repayments may lose points on their credit score, the US government's debt has already been downgraded from triple-A to double-A plus. 

This downgrade was announced in august of 2011 and since then the government has been unable to reclaim its perfect credit score, and in fact, there are murmurs that in the light of global uncertainty that US bonds could be downgraded again. 

Now, what does this have to do with the president? Or specifically a president hell-bent on taking down their own economy? Well, these credit extensions are passed by congress but they need to be signed off by the president. At this point, a malicious head of state could just veto the changes to the debt ceiling, or just refuse to sign it, which is called a pocket veto. 

Congress can get around this by passing the law again with a two-thirds majority in both the house and senate. But cmon who are we kidding, congress didn’t pass a law granting life-saving treatments to 9/11 heroes by a 2/3rds majority this kind of politically heated fiscal bill would have no chance. 

Since 1789 less than 7 percent of presidential veto’s have been overturned in the united states and a majority of those overturned during a time when politics was slightly more partisan than it is today. Now the fallout of the US defaulting on its debt would be so catastrophic to the world economy that it really truly is hard to speculate about what would happen, but it would make borrowing far more expensive for the government, and it would potentially mean the US dollars defacto use as the worlds reserve currency would be in jeopardy. 

You see major institutions and we are talking real big fish here, fortune 500 companies, sovereign wealth funds, and even entire nations all have cash but they don’t keep it in a regular old bank account like you or me, they will note it as cash and cash equivalents. 

Apple for example is the most cash-rich company in the world, it has more than 200 billion dollars listed on its global balance sheet as “cash” but a vast majority of this money is kept in Ireland, and it’s kept as US government treasuries. 

Why Ireland you may ask, go and watch this video here, the short answer is tax shenanigans, it’s always tax shenanigans. Now the idea is that treasuries are so priced stable and easy to sell for cash that they are basically as good as cash itself. Hence cash equivalents. In fact for large piles of money, they are actually safer than cash itself. Cash in a bank account is only guaranteed up to $250,000 by the federal government. But treasury bills are guaranteed by the government up to an unlimited amount of money on account of them literally being guarantee by the government. 

Now, this is all fine but if there is ever an inkling that these bonds would not get paid, well then these big money institutions will look to more stable alternatives. 

Now you might be asking. Mr economics man, did you just use the news cycle surrounding the election turmoil to trick me into learning about reserve currencies, debt ceilings, and corporate cash equivalents? And well yes, But please still like this article, chances are that will be more relevant information to all of you rather than how to cook your own economy as a tyrannical head of state. Or at least I would hope so. 

But I don’t want you to be angry at me so alright alright, can trump take the American economy down with him? No not really, any major policy decisions will be made by the next administration, so to will the process of raising the debt ceiling. 

Can Presidents "Make or Break" a Market

The Senate might be able to cause some drama there but that’s not going to be at the discretion of the president. Congress isn’t going to support a frivolous war, and even threats directed at trade partners or specific companies are not carrying the same weight they once did. 

Quack Quack I suppose. But with the benefit of a bit more time here is Economics Explained’s simple guide to destroying your own economy that you can do right now from home.

 Assuming this is your home. There are going to be 3 key areas that you need to take out, currency, industry, and the skilled population. An economy can lose one or two of those three things at a time and still effectively bounce back. 

A skilled population, given access to advanced industrial capital, will be able to thrive and create a well-respected currency. A smart population with a well-respected currency will be able to buy up industrial capacity, and even a nation with strong industry and currency but a less than stellar workforce will be able to bring in professionals from overseas or train up their own population. 

Even if a nation only had one of these they could fill in the blanks quite easily by leveraging that position. So starting with the currency we already saw how to do that, run up a massive debt that you then don’t pay back, or alternatively print away from all value in the currency causing hyperinflation. 

With any luck, you will then need to adopt a foreign currency as your own and be beholden to that country for all monetary policy decisions. Getting rid of the industry is a little bit harder, unless you can convince the military to wage war on your own nation it’s going to be difficult to directly remove the countries productive capacity overnight. 

Instead what you should do is massively underfund infrastructure spending so that bridges, highways, canals, shipping ports get to a point where they are no longer usable to increase the efficiency of the nation’s workers. 

Now as for those workers, well you are going to want to cut off the supply of skilled labor by reducing funding for education and making tertiary studies prohibitively expensive, and it’s probably also wise to reduce skilled labor migration as well just to ensure that none of those intellectual blanks get filled. 

If you can do all three of these in unison you will also decimate any confidence people have in the stability of the nation and be sure to cement the demise of your economy. Congratulations you have completed the program, I hope you had short calls on SPY. 

No comments:

Powered by Blogger.