Monday, 27 June 2016

A Brief Deconstruction of Moody's: The Macroeconomic Consequences of Mr. Trump’s Economic Policies - A Reply Made to a Facebook Comment.

COMMENT: Here's a report from some so called 'impartial' 'experts' on the Trump economy, so safe to ignore..

REPLY: You mean the experts at Moody's who failed to pick any of the major downturns and that provided Triple A ratings to securities that were essentially junk?

Although I think Trump's tax reductions go too far, they will stimulate economic activity within the country along with a protectionist tariff policy that is designed to bring back internal productive activity (Obama just put a 500% tariff on Chinese steel) The paper speculates (wrongly) that corporations will simply move production to places in South East Asia and that the tariff policy will only target places like China and Mexico. This indicates an incomplete understanding of the policy. The goal is to bring back the US manufacturing base that has largely been offshored. The fact that they don't explicitly point this out makes me suspicious.

The fact that they talk about Globalisation in glowing terms throughout makes me even more suspicious especially when juxtaposed to US growth prospects (more on this later).

The paper begins by justifying itself via appeals to authority - but a record of rating agency performance in recent years reveals that the these authorities have a record of getting things wrong.

Here is a joke: Q:Why did God create economists?
A:In order to make weather forecasters look good.

Going into the specific claims made by the paper ... It says that Mr Trump's economic policies will lead to a more isolated economy with less cross border trade and immigration, and less direct foreign investment (as if this were a bad thing - the US has capital generating capacity). That is the whole point of the Trump economic policies anyway.

It's not like the US will be completely isolated either. Consider what is happening in Russia after the sanctions. Despite actually being economically isolated from their major European partners, the Russian economy, after declining, is now growing again. The country did not fall apart. Internal productive activity necessarily had to increase. And more jobs and business activity means more tax revenue for the Government outside their resource heavy revenue base. Besides, Russia has other trading partners such as India and China that compliments internal job creating activity. US 'isolationism' will not be as extreme as the Russian example or detrimental to their long term growth.

The thing that irked me most about the Moody's paper was its repeated claim about how GLOBALISATION contributes to the 'ongoing economic growth' of the US economy - which is plainly false. How did it contribute to US growth when there wasn't any?        

The US economy never recovered from the 2007-9 recession: unless you believe the inflated stock prices on the Dow Jones. You should ask yourself why the Swiss Central Bank has been buying US equities, presumably along with the Federal Reserve plunge protection team, in stocks that comprise 100% of gains on the US S&P500 for the half year in 2015. This is a central bank, but it's acting like a hedge fund.

This is not to say that there are no real buyers here, but the markets are clearly being propped up (along with Gold price suppression - you can research that yourself).

Then you have to consider real US unemployment figures, that the Moody's paper simply states as being at 5% (the U3 figure). A more accurate official measure of unemployment in the US is the U6 figure that has unemployment at closer to 10%. However, with 46 million people on food stamps, record low labour participation rates, and the continuing decline in fulltime employment (admitted in official figures), a real unemployment rate of nearer 20% is more realistic (see This is a disaster - something that Trump has pointed out.

Globalisation has simply been used as cover for corporations of all sorts to engage in labour arbitrage (capital and industry flight aimed at low wage countries) - to places where there are also less workplace health and safety concerns or environmental considerations. The outsourcing of the productive capacity of First World countries to the Third World, to increase corporate profit, is what has destroyed the US economy.

The Moody's paper neglects this fundamental issue of trade - and Trump's trade policy. There is an over-focus on his across-the-board tax cuts where they assume this will lead to (only short term!?) lower growth. They assume offshore industries will simply move to places like South East Asia if Trump puts tariffs on China and Mexico - which shows their modelling must be deficient - because Trump will simply extend the tariffs. Their modelling should assume the building of new factories within US borders.

The biggest problem Moody's pointed out, which I agree with, will be a period of lower revenue and increasing debt if Trump gets in. Nevertheless, their model on these points still cannot be accurate because of their assumptions about trade (and Trump's actual actions against rising US debt are unclear but it is likely to be a default, the debt is practically unpayable anyway).

Their lead chart shows that under Trump, they think there will be a recession and then a period of growth. They assume that EXISTING POLICY will not cause a recession, although there are many indicators of economic activity at present that points to recession:

I simply do not believe their no-Trump/no-recession chart based on existing indicators and Moody's past record. The funny thing is, they do predict growth and relatively low unemployment even with Trump's most hardline policies but after a recession with unemployment going from 5% to 7% and with increased debt and slightly lower GDP. (note: I don't think their 2026 predictions are credible tho. 10 year economic forecasts?)

Whatever happens the US will be faced with some sort of economic Reality Check regardless of who is President. Their idea of 5% rising to 7% unemployment within 5 years shows how out of touch these people are with the reality of today. Things are ALREADY very bad - much worse than reported.

The authors 'warned' that under Trump household income will decline, as well as stock and house prices. But real wages are going nowhere anyway as full time jobs have been converting to lower wage part time jobs. When the US officially falls into recession stock and house prices will go down regardless!!

The biggest problem is we have experienced is what has been characterised as a "jobless recovery" -
Those recent employment numbers are rigged: Although not mentioned at that link, fictional 'unreported jobs' numbers are always added to the employment figures that assumes(!) growth over stagnation or decline. Honest analysis of recent (5 years) jobs figures shows declines or very low added numbers. As I pointed out before, other indicators, like the labour force participation rate shows what is really going on.

And large numbers of people without jobs, or declining income, generally damages prospects for economic growth. People without jobs, or living close to poverty, cannot buy those cheap imported goods in a Globalised marketplace. You could buy plastic buckets perhaps (good for catching rainwater), but what about more expensive goods, and daily food purchases, and the water and electricity bills etc?

The icing on the cake for me was reading their brief comment about the TPP and the 'liberalisation' of trade - that these things are helping growth. Not in the USA. Trump's issue is that such trade deals have not helped US growth and he is right.

I do have reservations about Trump's tax plan in terms of revenue, but, combined with trade tariffs, this will generate non-government growth. The biggest problem will be with the value of the US dollar. High finance has kept the dollar afloat (via Fed/central bank purchases of US Treasuries, Gold price suppression) and forgiven the US debt repayments - where I think Trump will simply default. Plus the US dollar as the reserve (Petrodollar) currency has stopped it declining too.

Yes, I agree with Moody's that Trump won't be able to spend big on the military (if we want to get real on US spending commitments), although he plans to close overseas US bases unless countries pay more for their 'protection.' If he goes after the military-industrial-corporations he will save a lot of money (presently what goes on is a rort) - in the order of tens of billions.

I don't disagree that things will turn bad for the US, but this Moody's thing (they are part of the Washington special interest group club) underplays the benefits of Trumps policies (which will not necessarily be without recession) and MASSIVELY overplays the status quo.

Go and research all the key points I raised about the present state of the US economy before you answer. Thanks for taking an interest.

One more joke:  A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of peas washes ashore. The physicist says, "Let's smash the can open with a rock." The economist thinks that's hilarious, and says, "That's ridiculous, you'll have peas all over the place.". The chemist says, "Let's build a fire and heat the can first." The economist thinks that's even more hilarious, and says, "That's ridiculous, the can will explode and you'll have peas all over the place." Both the physicist and the chemist are getting rather irate, and the physicist say, "What do you suggest?" And the economist says, "It's simple. Assume we have a can-opener....."

Also, for fun, watch a few episodes of the Keiser Report (YT). I don't agree with everything that is said on the show, but they do point out key issues concerning financial corruption and most of their guests have expert knowledge that runs counter to what is commonly reported in the mainstream press (although mainstream business news is not all bad - they do point out a lot of things that are then conveniently forgot).

[Posted at the SpookyWeather blog, June 27th, 2016.]

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