Prospects for the Economy Under Trump
This article will come in two parts. This month, I examine policies of the Federal Reserve and Trump’s domestic policies. Next month, I will end this series with an examination of Trump’s global economic policies.
The Federal Reserve and Donald Trump
On December 14, 2016, the Federal Reserve Open Market Committee announced that it had finally decided to raise the federal funds rate—the rate that commercial banks, not the Fed itself, charge each other for overnight loans—by a quarter of one percent. Instead of targeting a rate of 0.25 to 0.50 percent like it did between December 2015 and December 2016, its new target is 0.50 to 0.75 percent. (1)
Since Trump’s victory on November 8, long-term interest rates have risen sharply. This combined with the decision of the Fed to finally nudge up the fed funds rate indicates that the money market has tightened since Trump’s election. In the course of the industrial cycle, once the money market starts to tighten it is only a matter of time before recession arrives. The recession marks the end of one industrial cycle and the beginning of the next.
As it became increasingly likely that Trump could actually win the Republican nomination, the Fed put on hold its earlier plans to raise the fed funds rate multiple times in the course of 2016. The normal practice is for the Federal Reserve System to raise the fed funds rate repeatedly in the later stages of the industrial cycle. Indeed, this is central banking 101. These policies are designed to hold in check credit-fueled “over-trading” (overproduction), as well as stock market, land and primary-commodity speculation that can end in a crash with nasty consequences.
If the central bank resists raising interest rates too long by flooding the banking system with newly created currency, this leads sooner or later to a run on the currency, which is what happened in the 1970s. The result back then was stagflation and deep recessions with interest rates eventually rising into the double digits, which effectively wiped out the profit of enterprise—defined as the difference between the total profit and the rate of interest. At the end of the stagflation in the early 1980s came the explosion of credit, sometimes called “financialization,” the aftereffects of which are still with us today. (2)
Under the present dollar-centered international monetary system, the repeated failure of the Federal Reserve System to push up interest rates would lead to the collapse of the U.S. dollar and the dollar system. The inevitable result would be a financial crash and thus the military and political crash of the U.S. world empire, which has held the capitalist world together since 1945.
In this cycle, however, the Federal Reserve waited more than eight years after the outbreak of the crisis in August 2007 before it began to push up the federal funds rate. The reason for the prolonged delay is that the current U.S. economic expansion, which began in 2009—representing the rising phase of the current industrial cycle—has been the slowest on record.
During this extraordinarily feeble expansion, the U.S. GDP has grown, with some fluctuations, at a rate of only about 2 percent a year. This performance contrasts sharply with the double-digit U.S. GDP rates of growth that occurred during the expansion of 1933-1937 and again after the severe but brief recession of 1937-1938 during the Great Depression. Far more than in the 1930s, the current era has been marked by “secular stagnation” in the U.S. as well as Europe and Japan.
Beginning with the panic that broke out with the failure of the giant Lehman Brothers investment bank in September 2008, the Federal Reserve engineered an explosion in the dollar-denominated monetary base designed to stave off a new super-crisis that could have been much worse than the one in 1929-1933. This effort succeeded in preventing the crisis from reaching the extremes the earlier super-crisis did in most countries—but not all. For example, the crisis/depression that began in the U.S. in 2007 has been far worse in Greece than the crisis of the 1930s was in that country. But even in countries where a full-scale repeat of the 1930s Depression was avoided, the post-crisis stagnation has been far more stubborn than anything seen in the 1930s.
Quantity theory of money takes it on the chin
The continued unprecedentedly stubborn stagnation and the Fed’s so far unsuccessful efforts to end it ultimately drove the fed funds rate down to a range that fluctuated between 0 and 0.25 percent—an all-time low. The monetary explosion engineered by the Federal Reserve failed to lead to what the political right feared would be a highly inflationary boom predicted by Milton Friedman’s version of the quantity theory of money. Instead, the U.S. economy advanced at a snail’s pace—the economies of the other imperialist countries have also experienced stagnation or even renewed recession at times—while the general price level remained largely unchanged.
The reason for this most “un-Friedmanite” performance of the U.S. and global economy has been the huge overhang of debt, both public and private, which has spotlighted the role of money as not simply a means of circulation but as a means of payment. When money is used to pay a debt as opposed to purchase a commodity, it does not represent a demand for a commodity and therefore does not stimulate either production or employment.
Instead of triggering the inflationary boom that Friedman and other champions of the quantity theory of money would have predicted, the profound and prolonged period of economic stagnation that has followed the Great Recession created the conditions for the election of Donald Trump to the U.S presidency. In the 2012 election cycle, many middle-class whites and white workers in the former industrial districts of the U.S., called the “rust belt,” were still hoping that Obama’s policies would revive the U.S. industrial economy, much like Franklin D. Roosevelt’s policies did according to the conventional history of the 1930s.
Indeed, many progressives and socialists—though not this blog—were looking forward to a repeat of New Deal reformism. But by the U.S. election cycle of 2016, there was still little sign of a revival in the so-called rust belt. Unlike the depressions of the past, including the Depression of the 1930s, the current depression conditions in the industrial districts of the Midwest seem to have no end. In the minds of many white voters, Obama’s policies had failed just like conservative Republican policies had before then. They wanted to try something radically different.
Many of these white middle-class people and white workers, along with middle-class and working-class people of color, were ready to give the “democratic socialist” policies of Bernie Sanders a try. But the Democratic machine succeeded in preventing Sanders’ nomination and instead insisted on nominating the conservative Hillary Clinton. In the minds of the voters, Clinton was the very symbol of the policies that had failed to revive—or worse yet were not even designed to revive—the industry of the U.S. heartland.
In order to ensure the nomination of the conservative Clinton, the Democratic machine and its National Committee used “voter suppression” methods similar to those used by the Republicans against Democratic candidates in the general election. In the wake of the victory of liberal George McGovern, who ran in the Democratic presidential primaries in 1972 on a platform of ending the war in Vietnam and carrying out social reforms at home, the Democrats instituted a system of un-elected “super-delegates” to prevent the nomination of another candidate too far to “the left” for Wall Street tastes. (3) The super-delegate system helped ensure the defeat of Bernie Sanders in the struggle for the Democratic nomination in 2016.
But there was another “radical” presidential candidate—Donald Trump. Trump was not really much of an option for most voters of “color”—defined as people who are not European, whites as the neo-Nazi white nationalists put it—because of his extreme racism and the even greater racism of many of his supporters. Instead, voters who were not “European whites” either reluctantly voted for Clinton out of fear of Trump and his racist supporters, voted “third party,” or simply stayed home. But large numbers of “European white” voters were willing to give Trump a chance.
Trump revived the slogan “America First,” which was popular among U.S. admirers of Hitler and Mussolini in the late 1930s. He made outrageous proposals such as his promise to deport millions of Mexican immigrants who he claimed were rapists and criminals. He promised to build a Wall along the U.S.-Mexican border and make Mexico pay for it. The idea here is if Mexican and other “illegal immigrants” are driven out of the U.S., the bosses will be forced to hire unemployed white people.
Trump also promised at one point to ban Muslims from even visiting the U.S. until “we find out what is going on,” thus insulting a billion Muslims on top of hundreds of millions of Hispanic people. He outraged Native Americans with his racist anti-Native American attacks against liberal Democratic Senator Elizabeth Warren. As always, African-American voters are extremely sensitive to any type of racism.
Trump’s support of “our police” against the Black Lives Matter Movement and his vocal support of the death penalty against the Central Park Five, who were later proven to be innocent, were not forgotten. Still, Trump managed to win more African-American and Hispanic votes than traditional Republican Mitt Romney had won in the last election cycle. This shows how desperate working people are to escape from the years of economic stagnation and chronic long-term unemployment and underemployment—not reflected in the official “low” unemployment figures that Clinton boasted about—that have persisted throughout the entire eight years of the Obama administration.
Of even greater concern to the politically dominant section of the U.S. ruling capitalists was Trump’s promise to return to U.S. protectionism. This, Trump claimed, would help reverse the stunning industrial decline of the U.S., which actually began not with the Great Recession but rather with the stagflation crisis of the 1970s. The all-time peak in manufacturing employment occurred not in 2007, the year the Great Recession began, but in 1979, 37 years ago.
A serious return to U.S. protectionism would undercut the very basis of the “world order” that emerged after World War II—an order under the guise of a bipartisan foreign policy that has dominated the capitalist world since 1945. Under this “order,” the U.S. government guarantees access to the U.S. home market and protects the access of foreign corporations to other markets and sources of raw materials as long as their governments do not challenge U.S. foreign and military policies.
Despite the boasts of its defenders, the current “order” is so unjust that a roomful of billionaires have more wealth than the rest of the 7 billion people who currently inhabit this planet. Such an order can hardly endure in the long run, though Obama, Clinton, as well as the traditional Republican leadership are blind and deaf to this fact. However, the defenders of the current world order, who I call our modern “Party of Order”—after the French bourgeois parties in the era of the 1848 revolution and the rise of Napoleon III—point to the unprecedented 70 years of peace between the major capitalist countries that their beloved order has bought. But this world order is held together by the mailed fist of U.S. military power.
As the 2016 presidential election cycle unfolded in 2016, an increasingly massive and desperate effort was launched by the U.S. Party of Order of Democrats and Republicans alike to keep real-estate billionaire and political adventurer Donald Trump out of the White House. All in vain! On January 20, Trump and his gang will take up residency there.
A story told in numbers
Though they will not for obvious reasons admit it, the U.S. Federal Reserve System played a major role in the failed efforts of the Party of Order to keep Trump out of the White House. The story of this failed effort is told in numbers. These are the rate of interest on the 10-year government bond and the dollar price of gold. The latter number actually measures how much real money—a fraction of a troy ounce of gold bullion—a dollar represents at any given moment in time. When speculators expect the Fed to ease monetary policy, they tend to buy government bonds, which has the effect of lowering the interest rate paid on the bonds. Conversely, when they expect the Fed to tighten monetary policy, they will sell government bonds, which has the effect of increasing the rate of interest on government bonds.
Back in January 2016, a Trump victory in the race for the Republican nomination, not to speak of in the general election, appeared to the champions of the current order unlikely to say least. Let’s look back at how the political and economic situation appeared just a year ago.
From the point of view of the wealthy leaders of the Party of Order, despite the continued disaster of the “rust belt” and the overall low U.S. GDP growth, the U.S. economy overall had recovered remarkably well from the crisis years of 2007-2009. The economic numbers that count for them are the quotations on the stock exchange. The real economy from the viewpoint of the billionaires who dominate the Party of Order is merely a device to raise the price of stocks traded on the New York and NASDAQ stock exchanges.
To gain some perspective, from the viewpoint of the leaders of the Party of Order, let’s compare the impact of the Great Recession that occurred on their watch to the Great Depression on stock market prices. The Dow Jones Industrial Average after setting an all-time record up to that time—in September 1929—then crashed in October-November 1929. The Dow did not again set an all-time high until 1954! How the rich suffered!
So as far as the stock market is concerned—not the real economy—the Depression that began in 1929 didn’t end until 1954, 25 years later. Now that was a really long Depression! How long did the Great Recession, if measured by the period of time stock market prices remained below their all-time highs last? At the beginning of the crisis on Friday, October 12, 2007, the Dow Jones industrial average closed at the then all-time high in terms of Friday closings of 14,093.08. On Friday, March 8, 2013, the Dow Jones Industrial Average closed at 14,397.07, shattering the October 2007 record.
While it took 25 years after 1929 for the Dow to again close at an all-time high, it took only about four and a half years for the Dow to shatter its old record set at the beginning of the Great Recession! Since then, the Dow has kept climbing. On Friday, December 27, the Dow closed at 19,964.73.
What we do see is a huge change in the relationship of the Dow Jones Industrial Average in the 1929-1954 era—which corresponded to the flood tide of the U.S. industrial economy—to the relationship that prevails today. What lies behind this revolution in the performance of the Dow Jones Industrial Average compared to the U.S. industrial economy will be the subject of next month’s post.
The Federal Reserve System in December 2015, after eight years of super-easy monetary policy, which did so much to raise stock market prices but were so ineffectual in reviving the U.S. industrial economy—in December 2015 finally raised the federal funds rate from between 0 to 0.25 percent to 0.25 to 0.50 percent. Finally, a normal fed tightening cycle was underway that would be expected to continue until the next recession arrived.
The gold-dollar market, which sits at the center of the money market, much as the sun is at the center of the solar system, was anticipating tighter money and rising interest rates in 2016. Rising interest rates—everything else remaining equal—raises the “opportunity cost” of holding gold bullion, which as money—M—yields its owner no surplus value—M’. Therefore, as a rule, rising interest rates are highly bearish for the dollar price of gold. And so it was this time. On Friday, December 28, 2015, the dollar price of gold closed at $1,060.50 a troy ounce. Indeed, it was widely expected that the dollar price would soon fall below $1,000 a troy ounce for the first time since 2009 as the Fed continued to nudge the fed funds rate higher in the course of 2016.
True, rising interest rates indicate that recession is approaching. If interest rates had kept rising as expected in the course of 2016, there was a real chance that the slow 2 percent rate of growth would have fallen to a negative rate—the official definition of “recession”—before the presidential and congressional elections on November 8, 2016. But with the conservative pro-Wall Street Democrat Hillary Clinton expected to run against a conservative pro-Wall Street Republican such as Jeb Bush—both reliable stalwarts of the Party of Order—there was nothing to worry about. It was assumed the Party of Order would run against itself, so how could it lose?
If a recession did begin in 2016, it would simply increase the chances of Jeb Bush or some other conservative leader of the Republican wing of the Party of Order beating the conservative Party of Order Democrat Hillary Clinton. In general, the U.S. capitalist ruling class prefers Republicans anyway—though it also wins when the Democrats prevail—so why worry about a recession beginning in 2016 as opposed to 2017 or 2018?
From the Federal Reserve’s point of view, shared by chairperson Janet Yellen—herself a supporter of the Democratic wing of the Party of Order, after years of quantitative easing and ultra-low interest rates, safeguarding of the dollar system on which the entire “world order” rests was far more important than staving off the inevitable next recession to some date beyond November 8, 2016.
But that was before Bernie Sanders, who had been considered a fringe candidate at best, began scoring unexpected victories in Democratic primaries against Party of Order stalwart Hillary Clinton. As Sanders was scoring his unexpected successes, Trump was dominating the Republican primaries, forcing one Party of Order Republican after another to withdraw from the presidential race. This was not supposed to happen!
Pressured by Sanders’ unexpected strength, the Clinton campaign used every trick in the book to deny Sanders the Democratic nomination. Indeed, many of tricks that the Clinton wing of the Democrats used to suppress the Sanders vote were straight out of the playbook used by Republicans to suppress Democratic voters in the general elections. What was left of formal bourgeois democracy in the U.S. was melting away like the snow in an early spring heat wave.
The Republican wing of the U.S. Party of Order lacks the built-in safeguard of “super-delegates,” designed to prevent the nomination of a “radical” candidate, because they deemed it not necessary in light of the Republican Party’s conservative voter base.
As Trump’s nomination moved from a real possibility to probable and then inevitable, the need to stave off a recession through 2016 suddenly became an important Fed goal. If this meant postponing a drop in the dollar price of gold below $1,000 an ounce, which would announce the relative stabilization of the dollar system for a number of years, it was a price that now had to be paid.
The Fed didn’t resume quantitative easing—after all, members of the Open Market Committee watch the performance of the stock market—convinced that the U.S. economy was doing “quite well,” certainly well enough to ensure that the unpopular Hillary Clinton would be able to defeat the even more unpopular Donald Trump.
The figures on the monetary base released biweekly by the Federal Reserve Bank of St. Louis indicate the Fed withdrew only a small portion of the dollars they had created during quantitative easing. But as an electoral insurance policy against a 2016 recession turning the election to Trump, they kept the Fed Funds rate in the range of 0.25 to 0.50 percent right through the November 8 election.
As expectations for further increases in the fed funds rate during 2016 faded, the dollar price of gold began to rise once again. Then came the unexpected victory of “Brexit” (despite reassuring polls that indicated it would be defeated) in the British referendum. This was a strong indication that a Trump victory was not as unlikely as many had assumed.
Reflecting this, the rate of interest on 10-year U.S. government bonds fell to 1.336 percent on July 8, just about the lowest on record. This was remarkable nine years after the outbreak of the last crisis. As would be expected, the falling interest rate pushed up the dollar price of gold. On Friday, July 5, a troy ounce of gold was quoted at $1,367.40. The dollar price of gold instead of falling back below a triple-digit figure, as had been largely expected at the beginning of 2016, was instead $367 above the $1,000-an-ounce mark.
But as often happens in unusual market situations, cooler heads soon prevailed. With almost the entire media—with the exception of Fox News and far-right talk radio stations—and with much of the Republican leadership in Clinton’s corner, either openly or thinly disguised, how could Trump possibly win? All the more so in light of Wall Street’s stellar performance. Come on! We are talking about the USA, not some Latin American “banana republic”!
However, enough unease remained to keep the dollar price of gold above $1,300 an ounce until October. The problem was that while most polls showed Clinton in the lead, she led Trump only in the low single digits. This was a remarkably low lead considering that Trump was the most distrusted major presidential candidate in the history of modern polling. I can imagine Janet Yellen from her marbled Fed offices muttering to herself: “Come on Hillary, what’s wrong with you? How can I raise the fed funds rate if you can’t do better than that!”
Then in the wake of revelations of tapes that showed Trump actually boasting about sexually assaulting women—women being about half the electorate—Hillary Clinton finally opened up a double-digit lead against Donald Trump. A Hillary Clinton victory was secured at last! With the election behind it, the Fed would be free to push up the fed funds rate in December and gradually tighten the money market until the next recession arrived probably sometime during Hillary’s first and perhaps only term in office. By then, Donald Trump would be only a bad memory. And the Republican Party leaders would be expected to install a system of super-delegates to prevent another Trump from being nominated in the future.
Reflecting this consensus on October 21, the dollar price of gold had dropped back to $1,266.70 an ounce—while the rate on 10-year government bonds rose to 1.74 percent. All was well with the world.
But then with the election only days away came the announcement by FBI Director James Comey announcing that the criminal investigation against Clinton over the so-called “mailgate” scandal was not over after all. The overwhelmingly favored candidate to be the next U.S. president could, in theory, be facing prison time. Why did that policeman Comey have to open his big fat mouth!
Again, the rate of interest on the long-term government bond that had been rising in expectation of a resumed “tightening cycle” by the Fed dipped—though it was beyond the power of the Fed to whip up a boom that would convince enough voters to vote for Clinton over a period of a few days. The dollar price of gold again faithfully followed the rate of interest on the 10-year U.S. bond and rose to $1,305.20 on October 31.
Janet wakes up to a ‘whole new world’
On November 9, 2016, Janet Yellen woke up to a “whole new world,” one she almost certainly does not like. Could that adventurer Donald J. Trump soon to be the president of the United States and the leader of the free world actually start to tear up the web of institutions and trade agreements that constitute the world order so dear to Ms Yellen? How does Trump in the White House endanger the dollar system that it is Yellen’s responsibility to defend? Will there perhaps need to be far higher interest rates than would have been necessary if Clinton had won?
As news spread around the globe on November 8 that Trump was actually going to be the next U.S. president, financial markets briefly panicked, with stock prices plunging and gold soaring. After being caught flat-footed by the unexpected victory of Brexit, the central banks had made contingency plans to intervene in the markets if the unthinkable actually happened on November 8.
As a result, the mini-panic ended within hours rather than lasting days as was the case after the victory of Brexit. But some investors saw a bright side of Trump’s victory. These stock-market investors, counting on huge attacks against the U.S. working class by the “authoritarian”—that is, Bonapartist—government of Trump now began to salivate at the prospect of a huge increase in an already extremely high rate of surplus value, both within the U.S. and around world. They are enthusiastic about Trump’s promises to remove the cautious increases in bank regulations such as increased capital requirements that had been put in place after the 2008 panic.
With virtually all regulations removed—this is what Trump promised—bank profits should soar. More than ever, bank managers will be under shareholder pressure to do virtually anything to increase their profits. They will, the Wall Street “bulls” are speculating, increase lending radically, the increased risk be damned. Won’t that finally unleash the economic boom that refused to materialize despite unprecedented quantitative easing and low interest rates under Obama? The coming boom should greatly raise profits and dividends. The result, they are betting, will be radically higher stock-market prices.
True, the chances of a new and perhaps much greater crash in the relatively near future—as opposed to many years from now—are also radically increased. But stock-market traders always think in the short term, not the long or even medium term. Every speculator is sure that he or she will be smart enough to get out before the crash arrives! (4)
Short-term economic prospects under Trump
Vulgar Keynesianism sees any type of government spending—particularly deficit spending—increasing the rate of economic growth up to “full employment.” Beyond that, any increase in effective demand at current prices will simply push up prices, because production can only be raised gradually once workers and existing machines are “fully employed.”
Keynes himself, however, had a far more sophisticated view of the effects of increased deficit spending than many of his vulgar followers have. Keynes knew that if increased government borrowing raised the rate of interest substantially, the stimulative effective of the deficit spending would be negated. If the government suddenly increases its borrowing, everything else remaining unchanged, the demand for loan money will exceed the supply at prevailing interest rates—the very definition of “tight money.”
Keynes correctly realized that industrial capitalists will only step up their investments—necessary for any lasting increase in economic growth—if the industrial capitalists believe that the investments will yield a rate of return in excess of the increased rate of interest. It is not the rate of profit but the profit of enterprise—the difference between the overall profit minus the rate of interest—that drives capitalist investment, what Marx called expanded capitalist reproduction. If increased government borrowing raises interest rates faster than the rate of profit rises, the outlets for investment can actually contract. Under these conditions, Keynes knew that deficit spending could be highly recessionary.
The failure of George W. Bush’s 2008 stimulus plan
The truth of Keynes’s views on this question is illustrated by the failure of George W. Bush’s stimulative program in 2008. Early that year, the Bush administration, supported by both Democrats and Republicans, convinced Congress to pass a stimulus program that largely through tax rebates aimed to pump in about $152 billion of extra purchasing power into the U.S. economy. The idea was that as the rebated tax money was spent and the multiplier and accelerator effects kicked in, the recession then just beginning in early 2008 would be halted in its tracks. The majority of bourgeois economists predicted the U.S. economy would escape with only a “mild recession” in the first half of 2008, thanks to the timely Bush stimulus plan.
If the money market had been flush with loanable money, this would have worked and there would have only been a mild recession as the economists predicted. But in reality, as we now know, the money market was on the brink of collapse. Under these conditions, the expanded government borrowing only worsened the pressure on the money market. The collapse in the money marked that began in the third quarter of 2008 led to a dramatic collapse in borrowing and spending. Far from ending, the “mild recession” that occurred in the first half of 2008 was converted into the Great Recession, which didn’t bottom out until the middle of 2009.
Indeed, Bush had throughout his two terms in office followed policies of massive regressive tax cuts while increasing war spending, which involved fighting actual shooting wars. Yet economic growth remained mediocre and then turned disastrous when the Great Recession hit with full force.
Could Trump’s attempt to accelerate the rate of U.S. economic growth partly through increased borrowing and spending by the U.S. federal government meet a similar fate, either immediately or within a few years? A big problem that Trump faces is that he will be assuming office near the peak of the economic cycle. This makes it far less likely that he will be able to present a purely cyclical improvement in the economy as the result of his “Make America Great Again” policies.
Far more importantly, it increases the chances that an expansionary fiscal policy—a combination of tax cuts, war spending, and perhaps some public works spending—will collide with a tightening money market presided over by the Federal Reserve System.
Keynes’s cure for a situation where the money market is lacking loanable funds at prevailing interest rates was for the central banks to print more money and thus flood the money market with loanable funds. Many left-wing Keynesians—and Keynesian Marxists of the Monthly Review school—tend to emphasize fiscal policy as the cure for economic stagnation as opposed to monetary policy. Keynes, however, believed that fiscal and monetary policy must work together to pull the economy out of stagnation. Since Keynes believed that paper money was backed by commodities, the central bank—or monetary authority—could always increase the quantity of loanable money by simply printing more of it right up to a reasonable approximation of full employment of both workers and machines.
Keynes realized, as does every child, that money cannot buy what is not produced. What Keynes failed to realize was that paper currency must be backed by real money material that itself must be a commodity—gold bullion—and not just by commodities in general. This fact is not immediately obvious, contradicts “common sense,” and so is denied by the economists. However, Marx’s law of value and the form of value shows that this is indeed the case for a capitalist economy, and concrete economic history—repeated crises of overproduction—provides the empirical proof.
Especially the decade of the 1970s and early 1980s showed that if an insufficient quantity of real money material is available, printing money will cause disastrous depreciation of a paper currency, inflation, and soaring interest rates that completely destroy the profit of enterprise. Without a positive profit of enterprise—the rate of interest must be less than the rate of profit defined in terms of money material—capitalist production heads for collapse.
In 2008, fearing a repeat of 1970s-style “stagflation” and the disastrous explosion of interest rates that followed—which would have far graver consequences today because of the much higher level of debt, both public and especially private—the Federal Reserve System did not move to actually increase the dollar-denominated monetary base in the early stages of the crisis. Without an expansion of the monetary base, and the quantity of loan money, the bi-partisan Bush stimulus program of 2008 not only failed to prevent the Great Recession, it actually worsened it. And so did the deficit and war spending of the Bush years in general.
What worked to some extent for Ronald Reagan in the 1980s, when there was a vast amount of potentially loanable money capital frozen in the form of hoarded gold bullion, failed miserably in the Bush years. (5) If Trump actually does attempt to boost the U.S. growth rate from 2 to 4.5 percent through “Keynesian” policies, he will be playing with fire even if he has some short-term success.
Yellen’s term as chairperson of the Board of Governors of the Federal Reserve System runs until January 2018. At that point, Trump and the Republican Senate will be able to dump Yellen and appoint a successor more to their liking. Will Trump appoint a new Fed chief who will run the printing presses in an attempt to make Trump’s ambitious economic policies work, or will he be reined in by pressure from the Party of Order and the markets?
The Fed’s “tightening” policy is also creating a potential headache for the Trump administration on the exchange-rate front. As would be expected, rising interest rates have caused the exchange rate of the dollar against other currencies to increase. Ironically, this has the effect of making imports relatively cheaper while making U.S. exports relatively more expensive in the short run. If these market trends persist—and remember Trump has not even assumed office, let alone presented an actual budget proposal to Congress—the U.S. trade deficit could actually move sharply higher over the next few years. This is the exact opposite of what the Trump administration is promising with its America First policies. Again, this points to a conflict between the Yellen Fed and the Trump administration during the first year of Trump’s term.
Is Trump simply another Bush or Reagan?
In many ways, the policies that Trump advocates resemble the policies associated with Ronald Reagan and George W. Bush. Do everything to increase the rate of surplus value within the U.S. by attacking unions and social programs such as Social Security, Medicare, and Medicaid while gutting regulations that in any way interfere with profit making. All indications are that Trump will be Reagan or Bush on steroids. However, as we know, these policies did not prevent the rate of economic growth from slowing down. This was especially evident under George W. Bush, even before the economic crisis now known as the Great Recession began in August 2007.
But Trump’s program has crucial elements that Reagan’s and Bush’s policies lacked. One is the promise already referred to above of launching a massive program to rebuild the infrastructure. But there is another crucial plank in Trump’s program that was missing in the Reagan and George W. Bush programs. Trump is promising a return to American protectionism under the slogan of America First. Indeed, no U.S. administration has used this kind of language since 1945.
During the campaign, Trump promised to impose 35 percent tariffs on Mexican imports and a 45 percent tariff on Chinese imports. This has such important economic, political and ultimately military implications that I will deal with it separately next month.
Trump saves some manufacturing jobs and attacks a union president
On November 29, Trump announced he had convinced the Carrier Air Conditioning Company, which is owned by United Technologies—a leading war contractor—to keep 1,200 jobs in the United States at an Indiana furnace-making plant that had been scheduled to be moved to Mexico. Even if taken at face value, 1,200 jobs would be a small number of manufacturing jobs even compared to the 4,000 manufacturing jobs that were lost throughout the U.S. in November 2016 alone.
But if you are an unemployed or underemployed worker or simply a job-threatened resident of the “rust belt,” it seems better than nothing. This is especially true if you are among those whose jobs are saved. You would tend to think that “the Donald” is producing results even before he moves into the White House on January 20.
But as more details leaked out, the less impressive and the fewer the number of U.S. jobs Trump saved turned out to be. United Technologies received major tax breaks from the state of Indiana—in effect, a subsidy—in return for maintaining the jobs in Indiana. In addition, about 350 of these “saved” jobs are non-union engineering jobs that Carrier had never planned to move to Mexico in the first place. It seems that only 730 manufacturing jobs were actually “saved.”
All the same, neoliberal economists expressed outrage. How dare a president—really only president-elect—tell a profit-making industrial corporation like United Technologies where to locate its plants or whether or where to hire workers or lay them off. According to these learned economists, these types of decisions should be determined only by profit considerations. Anything else amounts to inefficient socialism!
While the concerns about the “socialist” threat to economic “efficiency” of Trump’s intervention are probably not high on the minds of the workers whose jobs Trump saved, the way Trump intervened in the Carrier case does have ominous implications for the U.S. trade union movement.
When local United Steel Workers President Chuck Jones criticized Trump for exaggerating the number of U.S. jobs saved, the billionaire president-elect went on Twitter to blast Jones, who unlike Trump is the elected representative of the Carrier workers. Trump claimed that Jones was doing a bad job of representing the interests of the workers, implying that workers should put their confidence in the billionaire in the White House and not in their union.
Then unnamed callers began to threaten Jones and his family for daring to criticize the “job-saving,” soon to be President, Donald J. Trump. Whether Trump is directly involved in these threats is unknown, but it is in line with the “Bonapartist” spirit of Trumpism. Is this the beginning of attacks by fascist-minded terrorists against trade union leaders who have the nerve to criticize Trump? Every worker must defend Chuck Jones and his family against these terrorist threats by anti-union organizations and individuals.
But there is another very negative side of Trump’s “job saving” that has been largely ignored by progressives and even many socialists. The whole premise of Trump’s “job saving” intervention in the Carrier case is that jobs saved in the U.S. at the expense of Mexican workers somehow represent a victory for U.S. workers. In this way, the workers of Mexico and the U.S. are encouraged to compete with one another over who can produce more surplus value for the bosses.
This type of nationalist thinking we have all grown up with and is rarely if ever challenged within the U.S. trade union movement. Indeed, the last time this nationalist thinking was widely challenged in workers’ organizations was right after the October Revolution, which occurred a hundred years ago this coming October.
In reality, it is the capitalist class that is preventing full employment of workers in both the United States and Mexico. If the U.S. working class is to fight against Trumpism and the even worse horrors to come—perhaps in the form of a full-scale fascist movement, which may follow the failure of Trumpism—the lesson must be learned that “foreign workers” are not competitors but class brothers and sisters! Trump’s attacks on Social Security, Medicare, Medicaid, and most of all on unions is as we have seen considered highly bullish on Wall Street. But Trump’s policies are highly encouraging to Wall Street “bulls” for other reasons as well.
‘God bless Standard Oil’
Things are looking up on the fossil fuel front these days—that is if you are a stock market “bull” in carbon stocks. And so is the outlook for higher global temperatures—which is a good thing if you plan on opening plantations to grow tropical fruits like mangoes and breadfruits in Minnesota or the Dakotas in coming decades.
During the campaign, Trump had claimed that global warming was a hoax invented by the Chinese to undermine the U.S. economy. Then came the news that Trump planned to appoint the retiring head of ExxonMobil—the current official name of Standard Oil (6)—Rex Tillerson as U.S. secretary of state. There was some criticism of Trump’s choice on the grounds that Mr. Tillerson has no “diplomatic experience.” What is being overlooked by these critics is that Standard Oil/ExxonMobil has always had its own diplomatic policy. No, Mr. Tillerson has plenty of diplomatic experience.
Imagine if old John D. Rockefeller himself, the founder of Standard Oil—who also had plenty of diplomatic experience—after he retired from Standard Oil had been appointed secretary of state by President Grover Cleveland, or perhaps his successor William McKinley. As Old John D. Rockefeller liked to say, “God bless Standard Oil.” This should be kept in mind in trying to figure out what Trump’s foreign policy is likely to look like, especially as regards the Middle East and especially Iran. Stay tuned on this one.
Next month, I will examine the implications of Trump’s promised return to economic nationalism. The Trump team does not believe that “Keynesian” fiscal and monetary policies alone can raise U.S. economic growth sufficiently to achieve its hopes of re-industrializing the U.S. The Trump team believes that industry producing in the U.S. must radically increase its share of the world market, including but not limited to the U.S. home market. This brings us to the question of the rate of surplus value and its relationship to the rate of profit.
After the post that will follow this one, circumstances allowing, I will return to my critical review of Anwar Shaikh’s book by examining his chapter on the rate of profit and his critique of the Okishio theorem. This theorem holds that an industrial capitalist will never adopt a method of production that would lower the rate of profit. Therefore, Okishio claimed that Ricardo was right against Marx when Ricardo held that only a rise in (real) wages lowers the rate of profit. This question is important in examining whether Trump’s administration can succeed in its attempts to re-industrialize the U.S.
1 The Federal Reserve System manipulates the federal funds rate by buying and selling short-term government securities. This is the normal way the Fed carries out monetary policy. Under the extraordinary conditions that began in August 2007, when the market for mortgage-backed securities suddenly froze, the Fed began to buy long-term government bonds and mortgage-backed securities in order to pump huge amounts of money into the banking system. This aimed to drive down long-term interest rates directly instead of indirectly through the manipulation of the federal funds rate. The Fed is now attempting to return to its normal pre-crisis policy of manipulating the fed funds rate as its primary tool to guide the money market through the various phases of the industrial cycle. (back)
2 As a result of the Fed’s reckless financial policies during the 1970s, which were part of a vain attempt to keep the post-World War II expansion alive, the relative levels of debts of all types, both public and especially private, are much higher than they were then. Therefore, any attempt to repeat the policies of the 1970s under today’s conditions would lead to a far worse crisis/depression than the crisis/depression of the early 1980s. (back)
3 In 1972, as revulsion against the Vietnam War radicalized U.S. politics, Senator George McGovern (1922-2012) of South Dakota, a left-wing Democrat, swept the Democratic primaries, much to the horror of the conservative Democratic machine, which included the reactionary leadership of the AFL-CIO. In the 1972 presidential election cycle, the AFL-CIO refused to endorse the Democratic candidate giving backhanded support to the Republican incumbent Richard Nixon. Nixon won an easy victory over McGovern because by 1972 he had withdrawn most—though not all—U.S. ground troops while escalating the air and naval war in a last-ditch effort to beat the Vietnamese and other peoples of Indochina into submission.
In addition, a combination of short-lived wage and price controls combined with the ultra-easy monetary policies of the Federal Reserve System under Arthur Burns (1904-1987), who was a friend of Nixon, led to a strong though short-lived economic boom that greatly aided Nixon’s re-election campaign. In order to ensure that the Democrats would never nominate a candidate as “far to the left” as George McGovern, the system of “super-delegates” was put in place in the Democratic Party.
It was judged unnecessary to put in place a super-delegate system in the Republican Party, however, because of that party’s extremely reactionary base. It was believed that anybody who voted Republican would always support the candidates big business favored. In 2016, the super-delegates that overwhelmingly supported Hillary Clinton played a key role in denying Bernie Sanders the nomination. (back)
4 The stock market has missed every real important historical turning point since the end of World War I. Everybody knows how bullish the stock market speculators were in the summer of 1929 as they continued to drive the stock markets quotes ever higher even as interest rates soared and the recession that was to turn into the Great Depression was already beginning. Despite the highly bearish factors such as soaring interest rates and developing recession, the stock speculators of those days were convinced that the “old rules no longer applied,” because we were in a “new era.” Later, in the late 1940s, the stock market was very bearish even as the post-war boom was already underway, which would eventually lift stock quotations to levels far beyond anything in 1929. Instead, the speculators remembered what happened in 1929 and feared a new crash would occur in the near future.
Most recently, in September and early October 2007, immediately after the credit markets had frozen in August—an extremely ominous development—speculators pushed stocks to all-time highs because they were convinced the Fed would “never allow” a recession to occur. Instead, they bet on a successful “Fed rescue” and continued boom. (back)
5 I will examine this closely in my critical review of Anwar Shaikh’s book “Capitalism” later this year. (back)
6 Standard Oil of New Jersey, later called ExxonMobil, was the main holding company that owned the stock of the Standard Oil Companies. In 1911, Standard Oil of New Jersey was forced to sell its shares in the other Standard Oil Companies when it was found in violation of the Sherman Anti-Trust Act. Among the newly independent, or baby “Standards,” was Standard Oil of New York. New York Standard evolved into the Mobil Oil Company. In 1999, Exxon merged with the former Standard Oil Company of New York to form today’s ExxonMobil. The creation of Exxon-Mobil goes a long way to restoring the old Standard Oil “trust” that existed in the days of John D. Rockefeller. Now, under Trump, the U.S. State Department itself is part of the present-day Standard Oil empire. (back)