If the Trump administration achieves its goal of cutting the projected deficit in half, and thus removing a trillion dollars in stimulus spending—all deficits are stimulus, whether you call them that or not—if they cut the deficit in half, a recession seems inevitable.
However, I'm not sure the media and other political posturing on the terror and ruin posed by recessions is even close to what actually happens across a population of 345 million people. This is not 1873 or 1893 or 1933, the safety nets are a bit stronger than they were in those retrograde economic eras.
A different analog that may be more instructive is the 18-month 1920 - 1921 recession, brutal for those unemployed but setting the stage for the 1920's boom in the economy and in the mass adoption of consumer technologies that 100 years later still shape society, telephones, appliances, automobiles, radio, Hollywood etc., etc.
So who knows?
The other, more important point is that the interest required to service the ever-increasing debt will destroy both the economy and the constitutional republic if the detox does not happen.
From Wolf Street, March 14:
“We’re focused on the real economy,” Bessent said. “Ouch,” stocks said. Where did the Trump put go?
One issue is, how do you get an economy addicted to government deficit spending off this drug?
Another issue is, how do you get Corporate America addicted to cheap labor overseas off this drug?
The US has two huge structural deficits: The fiscal deficit and the trade deficit in manufactured goods – the “twin deficits.” Both are massive long-term problems and need to be addressed by sending the economy and Corporate America into “detox,” as this is now called, but it’s going to ruffle some feathers, especially of stocks.
And a third issue is worming its way into the detox conversation: The stock market has gotten addicted to the government’s deficit spending, to the fat profit margins from offshoring production, and to the Fed’s erstwhile free-money policies, including trillions of dollars in money-printing, of which $2.2 trillion have so far been un-printed via QT.
They’re saying the right things, but it’s OUCH for stocks.
“The market and the economy have become hooked, become addicted, to excessive government spending, and there’s going to be a detox period,” Treasury Secretary Scott Bessent told CNBC last Friday.
“There’s going to be a natural adjustment as we move away from public spending to private spending,” he said.
When asked if “detox” was a euphemism for a recession, Bessent told CNBC: “Not at all. Doesn’t have to be because it will depend on how quickly the baton gets handed off,” he said. “Our goal is to have a smooth transition.”
“If you start looking at micro horizons, stocks become very risky”: Bessent.
“We’re focused on the real economy,” Bessent told CNBC on Thursday. They want to “create an environment where there are long-term gains in the market and long-term gains for the American people,” he said. “I’m not concerned about a little bit of volatility over three weeks.”
“The reason stocks are a safe and great investment is because you’re looking over the long term. If you start looking at micro horizons, stocks become very risky. So we are focused over the medium-, long-term,” he said.
“I can tell you that if we put proper policies in place, it’s going to lay the groundwork for a both real income gains and job gains and continued asset gains,” he said.
So where the heck is the Trump put?
“There’s no put,” Bessent said. “The Trump call on the upside is, if we have good policies, then the markets will go up.”
Trump agreed. They’re singing from the same hymn sheet. “You can’t really watch the stock market,” Trump told Fox News last Sunday.
“Markets are going to go up and they’re going to go down,” Trump said on Tuesday from the Oval Office.
Tariffs might cause “a little disturbance, but we’re OK with that”: Trump.
“There will be a little disturbance, but we’re OK with that. It won’t be much,” Trump told Congress to address the side effects of imposing tariffs to encourage companies to manufacture more in the US. Fact is, modern highly automated manufacturing provides huge and important long-term benefits for the economy, including secondary and tertiary benefits.
In terms of the inflationary impact of tariffs, Bessent said that inflation is defined as a persistent increase in prices across a wide variety of goods and services over time, but “the tariffs are a one-time price adjustment.”
How much of that adjustment will make it all the way through to consumer prices is unknown. Automakers, including BMW, have already said that they will have to eat the tariffs because they cannot raise prices without losing sales. That’s why they hate tariffs so much. They wouldn’t mind tariffs if they could pass them on.
That’s what happened last time; they tried to raise prices, but then lost sales and had to roll back those price increases. Inflation is measured by transaction prices, not fantasy sticker prices, and when people don’t buy at higher prices, but buy from a competitor at lower prices, it’s the actual purchases from the competitor that go into inflation measures.
Consumer durable goods would be hit the most by tariffs. This is the CPI for durable goods, shown as price level. There was no visible impact from tariffs in 2018 and 2019:
Even if a portion of the tariffs will get passed on to consumers, given that the economy is now in an inflationary environment, that portion, as Bessent said, will be a one-time bump.
When will a stock market rout trigger a recession?
Tariffs are a tax on corporate profit margins that may be difficult to pass on, so tariffs hit stocks, and they did last time: The S&P 500 tanked 20% in 2018. But it didn’t trigger a recession last time, not even close....
....MUCH MORE
So Scylla/Charybdis; rock/hard place.
Either scenario from our 2024 pre-election thinking:
"Hotshot Wharton professor sees $34 trillion debt triggering 2025 meltdown as mortgage rates spike above 7%: ‘It could derail the next administration’" if nothing is done or
This is the sort of stuff I was thinking about in the intro to March 6's "Michelle Obama's office says the former first lady 'will not be running for president' in 2024":
...On the other hand, I'm not sure you would want to be President during the next four years, there are so many problems that have been growing and metastasizing just beneath the surface of the daily news that the person in the hot seat could end up just plain reviled.If I were a Democrat strategist I would propose letting Donald Trump win a second term while concentrating on House and especially Senate (to bottle up judicial, including Supreme Court, nominees) races.
A Trump win would give an excuse for riots (for the visuals) and if he is handcuffed by the Legislative branch to limit the range of possible responses, you go beyond polycrisis to the omnicrisis. Throw in a bit of Frances Fox Piven with her "overwhelm the system" and "motor voter" strategies and you could see one-party rule for thirty years....
