What Awaits the U.S. Economy in the Long Term? Lombardi Letter 2018-08-15 12:34:18 annual GDP growth world bank trump tax cuts obama economy trump campaign promises flash crash stock market correction There are severe questions about how long the U.S. economy and Wall Street can keep growing at the current pace. President Donald Trump's foreign and fiscal policies could send debt and speculation soaring. Analysis and Predictions 2019,News,Stock Market,U.S. Economy,U.S. Politics,World Politics

What Awaits the U.S. Economy in the Long Term?

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What Next Awaits the U.S. Economy?

The world has stumbled into one of its most chaotic economic and political phases in recent memory. Whoever said that the collapse of the Soviet Union marked the “end of history”’ (actually, it was Francis Fukuyama) had a proverbial another thing coming. Uncertainty rules.

In this context of uncertainty, trying to lead a less-committed, if enlarged, NATO, the United States has not let go of its “Manifest Destiny.” That could prove fatal for the U.S. economy, especially in light of President Donald Trump’s overall foreign policy shift.


Whereas this destiny was challenged only by the defunct Soviet Union, other players have emerged. They want to demonstrate that the U.S. does not rule the world. Russia is one of these, but it has hardly been the most hostile. In fact, if the U.S. leadership wasn’t so lost in trying to grasp so many power-and-influence straws, it would find an ally in Moscow.

Rather than having fewer military bases after the Cold War, the United States has had more of them, spread much wider. The country has about 800 bases outside of territorial U.S. (or more than 1,000 if one includes embassies and missions with U.S. troops stationed there), literally covering all corners of the world. It may soon have bases in space.

Thus, military power remains the preeminent tool that America uses to project its authority. Whether you like or dislike the current resident of the White House, Donald Trump remains an untried president who likes to threaten perceived enemies such as Iran and North Korea—and others, if more subtly—for fickle reasons.

Trump Is Taking Big Risks

In many ways, Trump is doing the opposite of what he promised, betraying those who voted for him, hoping for a more isolationist United States policy.

Instead of showing far less concern for Tehran than for New York City, New Orleans, or Atlanta, Trump wants to go as far as changing the rules that govern the engagement of the U.S. nuclear arsenal. The idea of using nuclear weapons against certain targets has been discussed. No longer are nuclear weapons considered tools of last resort or deterrents against anyone scheming to use its own atomic warheads. (Source: “New Trump policy could strengthen role of nuclear weapons”, CNBC, January 12, 2018.)

And there’s little that the world can do about it. It’s like the Iraq invasion all over again.

There’s more doom and gloom in 2018. While North and South Korea are using the Winter Olympics as a test tube for peace, unification won’t please everyone. It could cause more tension than a nuclear weapons-equipped Pyongyang can even dream of achieving.

That’s because a united Korea would become a far more significant power, propelling it to a position from where it can challenge Japan and even China economically (and militarily). The U.S. military contractors might be happier with a hostile North Korea, which creates an incentive for ever bigger defense budgets and arsenals.

The board and investors of Lockheed Martin Corporation (NYSE:LMT) would lose precious sleep at the mere thought of a peaceful unification of the Koreas. Still, for the time being, they can sleep and enjoy sweet dreams.

President Trump has just put forth a $4.4-trillion budget proposal for 2019.

In it, Trump suggests an increase in military spending that would funnel some $716.0 billion to national security, of which $686.0 billion would be for the Department of Defense alone. (Source: “Trump’s 2019 defense budget request seeks more troops and firepower to deter threats,” CNBC, February 12, 2018.)

The budget proposal also allots $200.0 billion for infrastructure, and billions more for the border wall with Mexico.

What little is left over will be used for social and health programs, which would, nonetheless, be cut. Now, what’s left for ordinary Americans? How well is Trump keeping his promises to many of his voters?

What the Buoyant Stock Market Performance Is not Saying

During the 2016 campaign, then-candidate Trump promised four percent annual gross domestic product (GDP) growth. He promised adding 25 million new jobs during his term.

The World Bank estimates that the U.S. economy grew by 2.3% in 2017. Last January, the same World Bank revised the estimate upward, given the big push in the last quarter of 2017. It now expects that U.S. GDP growth in 2018 will be a respectable 2.5%. (Source: “Global Economy to Edge Up to 3.1 percent in 2018 but Future Potential Growth a Concern,” The World Bank, January 9, 2018.)

Considering that the same World Bank had predicted a 2.3% GDP growth rate, the revision suggests Americans should feel highly optimistic. After all, the economy also generated two million jobs in 2017 and unemployment dropped to a level last experienced in October 2000.

And then, of course, there’s the stock market. Even after a flash-crash 10% correction during the first week of February, the Dow Jones speaks of unbridled enthusiasm, bouncing back above 25,000 points after falling to below 24,000. At those levels, Trump can boast that the Dow has gained over 30% since he was inaugurated as president.

Has Trump Kept His Campaign Promises?

It would seem that Trump, by and large, has kept his campaign promises. But has he? Many of the economic and financial gains are carry-overs from the previous administration. It’s true that the Trump tax cuts have added the equivalent of turbo-boost to the markets. But, just as with turbo-equipped engines, too much boost can send everything up in smoke.

That’s the big question now. The effects of Trump’s administration will be seen starting this year. The prospects aren’t as rosy as they seem. There are severe questions about how long the U.S. economy and Wall Street can keep growing at the current pace. Apart from the evident risk of runaway national debt and frequent government shutdowns, the tax cuts passed in December 2017 are fueling speculative bubbles.

That’s not what Trump promised his many voters, especially the many who turned to him when the Democratic Party chose Hillary Clinton as their presidential nominee instead of Bernie Sanders. During the campaign, Trump promised that his tax cuts would address the grievances of the middle-class and poorer Americans. They are the ones who felt left behind in the Barack Obama economy, which began with a $1.0-trillion subsidy to the Wall Street banks, whose irresponsible (if not downright criminal) actions sparked the Great Recession in the first place.

Instead, Trump’s tax reform approved substantial corporate tax cuts, but it did precious little—or the familiar diddly squat—for the majority of Americans. The benefits of the tax reform focus on the richest 20% of the population. The result will be an artificial and excessive fear of inflation, which will stifle growth with higher interest rates even as the federal debt increases.

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