Donald Trump has suspended US tariffs exceeding 10% on imports from different countries in China. Investors let out a collective sigh of relief. Even so, the events of the last weeks show that the president is serious when promoting the interests of his political base at the expense of Wall Street. Its administration also promises to reduce the commercial and fiscal deficits of the United States. Trump’s policies are an existential threat to the American bubble economy. As Japan discovered three decades ago, there is no easy way out.
A bubble economy is one in which the financial sector displaces the real economy. Assets prices are greatly infected and disconnected from their underlying foundations. Companies are managed to maximize financial performance instead of the market share. As asset prices raise, surplus value replace real savings. A bubble economy is based on the continuous increase in debt, which is used mainly for financial purposes and not investment. Credit growth also promotes business benefits.
The United States meets 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 quoted at almost record levels. At the end of last year, the aggregate wealth of households was located 5.7 times the GDP, well above its long -term average. Savings is approximately 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 firms spend billions of dollars in rebuilding shares and purchases, but business investment has been relatively weak.
Capital tickets in the United States have contributed to support the economic bubble. Foreigners currently have 57 billion dollars in US financial assets, according to Federal Reserve data. Their purchases of US financial values have kept the yields of the bonds and have raised the prices of the shares. Capital tickets have helped finance the enormous fiscal deficits of the US government. In turn, these deficits have promoted aggregate demand, directly and indirectly contributing to the record benefits of US companies, according to John Hussman, of Hussman Funds.
The United States bubble economy has political problems. Its financial benefits have been distributed unequally. The wealth of households can be close to a historical maximum, but, as the Treasury Secretary, Scott Besent, has pointed out, 10% of the richest Americans have 88% of the actions in the United States, while 50% of the poorest are mired in the debt. In addition, what the former coverage fund manager calls “highly financed economy” has not led to strong salary growth. The relocation of the manufacturing industry was good for the benefit margins of the companies, but harmed the workers.
The bubble economy is intrinsically fragile. Debt cannot continue to increase indefinitely faster than income. Sooner or later, there will be necessary to stop tax deficits or the country will break. In Besent’s opinion, the United States has become addicted to public spending. A “detoxification period is necessary,” he says. Stephen Miran, president of the Council of Economic Advisors, believes that large capital tickets in EU have given rise to a continuously overrated dollar, which has harmed competitiveness and is responsible for its large commercial deficits. Tariffs intend to reverse these pressures.
Neither Trump nor his economic advisors explicitly recognize that they are trying to explode the economic bubble. But that is what their actions are equivalent. As Julien Garran points out, by Macrostrategy Partnership, in his last note, if Trump takes the idea of ending the prolonged pressure on workers seriously, this means ending decades of policies that have been very favorable to financial capital.
The participation of work in national income will have to increase at the expense of business benefits. Reducing the fiscal deficit would also harm business benefits. Imposing import tariffs and forcing more companies to manufacture in the US increases pressure on the results. If the benefits of companies decrease, the stock market, which continues to quote at a historically high level, could fall much more. Once the capital gains are replaced by losses, households will have to save more, even more depressing aggregate demand. A vicious circle could replace the virtuoso that kept the bubble economy afloat.
Richard Duncan, from Macrowatch, fears that the reduction of foreign demand for American values will raise long -term interest rates in the United States. He is also worried about a possible run against the dollar as foreigners reduce their US financial securities.
A unique advantage of issuing the world reserve currency is that the United States has long been able to incur huge commercial and fiscal deficits without losing market confidence. However, earlier this week, the yields of the United States Treasury bonds shot up. The bond market drop aroused the concern that the Trump administration could be facing its own “Truss Moment”, referring to the ephemeral administration of the British Prime Main Street to the detriment of Wall Street. Recent market turbulence suggest otherwise. In addition, Japan’s experience suggests that restructuring a bubble economy is a difficult process.
During the second half of the 1980s, the real estate sector and Japanese actions reached extreme assessments. The debt shot and financial engineering increased business benefits. Towards the end of the decade, Tokyo’s political leaders decided to change course. The Bank of Japan raised interest rates with the intention of puncturing the bubble. A senior official declared Washington Post that “the real productive economy will not be harmed. Earth and wealth will not disappear, but false wealth does.” This was an illusion. The collapse of Japan’s bubble economy was followed by several banking crises and two “lost decades” of economic growth. Earlier this year, the American stock market represented 64.4% of the total world value, according to the UBS Global Returns Yearbook. Coincidentally, the Japanese stock market represented in 1988 the same share of the MSCI EAFE index, which follows the evolution of the actions of the developed countries of Europe, the Middle East and the Asia-Pacific region. 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 columnists of Reuters Breakingviews. Opinions are yours. The translation, by Pierre Lomba Leblanc, is the responsibility of Fifodies.
