Donald Trump suspended US rates above 10% on imports from different countries in China. Investors emit a collective sigh of relief. Even so, the events of the last few weeks show that the president is serious when he promotes the interests of his political base at the expense of Wall Street. His administration also promises to reduce commercial and tax deficits in the United States. Trump’s policies are an existential threat to the economy of American bubbles. As Japan discovered three decades ago, there is no easy way out.
A bubble economy is the one in which the financial sector replaces the real economy. The prices of the activities are considerably infected and disconnected from their bases below. Companies are managed to maximize financial services instead of the market share. As the prices of activities increase, the excess value replaces real savings. A bubble economy is based on the continuous increase in debt, which is mainly used for financial purposes and not for investments. Credit growth also promotes corporate benefits.
The United States meet that description. The contribution of its financial, insurance and real estate sector to GDP has doubled since 1945, while that of the manufacturing sector has been reduced to more than half. In recent years, US actions have mentioned almost record levels. At the end of last year, the aggregate richness of families was located 5.7 times the GDP, well above its long -term average. Savings is about half of its long -term level. Last year, the total debt (private, public and financial) exceeded 100 billion dollars, more than three times the American national income. Private capital companies and companies spend billions of dollars in the reconstruction of shares and purchases, but company investments have been relatively weak.
Capital tickets in the United States contributed to supporting the economic bubble. Currently foreigners have 57 billion dollars in US financial activities, according to Federal Reserve data. Their purchases of US financial values have maintained the returns of the bonds and have increased the prices of the shares. Tickets for capital contributed to financing the huge tax deficits of the United States government. In turn, these deficits have promoted aggregate demand, contributing directly and indirectly to the record benefits of US companies, according to John Hussman, by Hussman Funds.
The economy of the United States bubbles has political problems. His financial benefits have been distributed unequally. The wealth of families can be close to a historical maximum, but, as the Treasury Secretary, Scott Best,, 10% of the richest Americans underlined 88% of the shares in the United States, while 50% of the poorest are bogged down in the debt. Furthermore, what the former manager of the roofing fund calls “highly financed economy” has not led to strong wage growth. The transfer of the manufacturing industry was useful for the margins of benefit of the companies, but damaged the workers.
The bubble economy is intrinsically fragile. The debt cannot continue to increase indefinitely faster than income. Sooner or later, it will be necessary to stop tax deficits or the country will break. According to Bestent, the United States has become dependent on public spending. A “detoxification period” is necessary, “he says. Stephen Miran, president of the Council of Economic Consultants, believes that the big capital tickets in the EU have given rise to a continuously overrated dollar, who has damaged competitiveness and is responsible for his great commercial deficits. Rates intend to reverse these pressures.
Neither Trump nor his economic directors explicitly recognize that they are trying to explode the economic bubble. But this is what their actions are equivalent. As Julien Garran, of Macrostrattegy Partnership points out, in his last note, if Trump takes on the idea of seriously put the prolonged pressure on workers seriously, this means ending decades of policies that have been very favorable to financial capital.
The participation of the work in national income will have to increase at the expense of the company benefits. Reducing the tax deficit would also damage commercial benefits. Impose import rates and force more companies to produce in the United States increases pressure on the results. If the benefits of companies decrease, the stock market, which continues to mention a historically high level, could fall much more. Once the capital gains are replaced by losses, families will have to save an even more depressing aggregate question. A vicious circle could replace the virtuoso that has maintained the economy of the bubble to the surface.
Richard Duncan, Macrowatch, fears that the reduction of foreign demand for American values will increase long -term interest rates in the United States. He is also worried about a possible race against the dollar since foreigners reduce their US financial securities.
A unique advantage in the issue of the Currency of the World Reserve is that the United States have long been able to support enormous commercial and tax deficits without losing the market trust. However, at the beginning of this week, the yields of the ties of the United States Treasury have shot. The drop of the bond market has aroused the concern that the Trump administration could face its “moment of the goat”, referring to the ephemeral administration of the British Prime Main Street at the expense of Wall Street. The recent turbulence of the market suggest the opposite. In addition, the experience of Japan suggests that the renovation of an economy on the bubble is a difficult process.
During the second half of the 80s, the real estate sector and the Japanese shares reached extreme evaluations. Debt and financial engineering have increased commercial benefits. Towards the end of the decade, Tokyo’s political leaders have decided to change course. The Bank of Japan has increased interest rates with the intention of piercing the bubble. A high official declared Washington Post that “the real productive economy will not be damaged. The earth and wealth will not disappear, but false wealth does it”. This was an illusion. The collapse of the economy of the bubbles of Japan was followed by several banking crises and two “lost decades” of economic growth. At the beginning of this year, the American equity market represented 64.4% of the total world value, according to the annuary of the return Global Ubs. By coincidence, the Japanese stock market represented in 1988 the same share of the MSCI EAFE index, which follows the evolution of the actions of the countries developed in Europe, the Middle East and Asia-Pacific. In the following decade, the weight of Japan in the reference index was reduced by more than two thirds. Investors in American values should take note.
The authors are editorialists of Reuters BreakingViews. The opinions are yours. The translation, by Pierre Lomba Leblanc, is of responsibility Fifodie.
