lawtig02
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A massive recession. I don't know how likely that is, but I'm not ruling out any economic catastrophe at this point.
Who else just doesn't give a crap
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superrific
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The Fed will prevent deflation with quantitative easing if that were to arrive. I would consider deflation a very unlikely prospect.
lawtig02
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Fair enough. You know a lot more about this than I do. I don't have a ton of confidence in Trump's Fed, but I'm also not sure which chairs are up and when.
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Who could have seen that coming.
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superrific
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Thing about deflation is that it would normally require companies to prefer to sell at a loss than stack inventory. That isn't likely to happen, and it's voluntary. Inflation, to some degree, is not, right? If I run a business and my employees are demanding a 5% wage increase and my supplies cost me 5% more, I have to pass along at least some of those costs. My hand is forced. But nothing forces me to unload inventory at a loss.
With this insight, you can infer that deflation will happen under one of two conditions:
1. Actually deflationary monetary policy, like raising interest rates (i.e. contractionary policy) in a recession. That isn't going to happen. Even if Trump were to put a loyalist in charge the Fed, Trump himself loves low interest rates. In the Great Depression, this deflationary monetary policy was created automatically by the gold standard. And note that the Depression was the only period of anything approaching sustained deflation in the last hundred years, unless I'm forgetting about something.
2. Things that force the sale of inventory, like systemic liquidity constraints. That's why we flirted with deflation in '08 -- when the banks were calling in all their revolvers, companies were having trouble getting financing for stacking inventory. So they would have to sell at a loss, or go bankrupt (which would likely end up with selling at a loss).
Now I suppose it's possible that we could have a banking system collapse under horrible policies, but no vector for that comes to mind. Like, things would have to really, really go south and I think even Trump would have trouble causing that much damage in that short a time.
3. The other wild card would be if Trump wants to default on US debt. I would hope that everyone would be getting in his ear telling him not to do that. It wouldn't be in his financial interest to do so (he would probably lose all of his properties, unable to secure any financing). Maybe he really is the Joker and he affirmatively wants complete chaos, but otherwise . . . it's possible, I suppose. It does worry me.
So could deflation result from a US debt default? I have no idea. It's really hard to game out this scenario because there are multiple equilibria. It's possible that the default could create a financial panic, which usually results in a flight to safety, and historically that has meant a flight to the dollar. So it would be weird if the US defaults and then sees the price of its bonds increase, but that's a possible outcome if the market believes that the US would correct course. But it's not guaranteed. There could be a flight to safety to other currencies, especially Euro. This depends mostly on the market's perception of the Euro, which is hard to predict.
In either case, the market can create a temporary safe haven if all the money flows the same direction. So we'd get a lot of volatility and then maybe some new status quo would emerge. But that's by no means guaranteed. Meanwhile, it's hard to predict what would happen to the financial sectors round the world, and that could create a feedback loop.
I would even be possible for the market to shrug it off. I don't think this is likely, but the logic goes like this: securities are priced as the (risk free rate) + some spread measured in basis points. The spread can be credit quality, currency risk, counterparty risk, etc. Now, what happens if the risk free rate turns out to be not risk free? Yikes. Every security would be mispriced. It would be such a catastrophe that traders might go on as if nothing happened. Here's an analogy: suppose you were at work at an office in DC when you overhear someone saying that the Russians had just launched their nukes. What would you do? What I would do is to keep doing what I was doing. If the bombs are actually on their way, I'm dead regardless. And if the bombs aren't actually on their way (or they had been picked off by some defense system), then I should do what i want to be doing at that moment, which presumably would be what I was doing. The default on US debt could be a little bit like the Russians launching. It could wipe us all out, or it could be corrected.
I should add that I haven't followed finance theory for the past few years, so there might be recent work done on this topic that I'm not aware of. I mean, even a decade ago people modeled the scenario and produced estimates of what could happen, but I never saw any reason to prefer one model over the other. There's no historical guidance. And in multiple equilibria games, the game can tipped one way or another by really small factors. I wouldn't say it's chaotic in a chaos theory type of way (though I have seen that argued), but it would be hard to predict which of the thousands of possible variables might be determinative alone or in combination. Again, it would depend on market psychology. But it's possible that the models have improved.
For my part, I developed a system to prevent the US from defaulting on the debt. Politically unrealistic, but it would probably work. I was going to publish it in a law review, but I couldn't find a taker because it didn't have too much law in it. So I was going to revise and resubmit, but then Trump won in 2016 and I became depressed and then found myself increasingly unable to find any enthusiasm to teach law in a world less and less defined by law.
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You know, my daughter has us watching Christmas movies every day. It's interesting how dystopian many of them really are.
Batt Boy
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One of my recent favorites
You should go back and read the original Hans Christian Andersen and Grimm's Fairy Tales.
tarheelbillie
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With this I agree wholeheartedly. But I do care a lot that our nation is teetering on the edge of a dark ages abyss.
On the whole, they're such a venal group that it's hard to imagine them as true believers. Will the politicians stick it out if things get bad or will they stay bought? The rich probably will follow through but I'd think they'd need the politicians to control the elections.
Well, technically, Jerome Powell is Trump's Fed, as he appointed him in 2018. His chair term is up in 2026. Trump could try to fire him earlier than that, but Powell would likely not recognize the termination and would seek judicial relief, which would likely be granted.
Need your picks on the stocks / investing thread. ;-)
tarheelbillie
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"I used to concentrate my charitable giving to food banks with the idea that you can't fix anything on an empty stomach."
Actually, it was empty stomachs that ushered in FDR's progressive administration in '32. Got peoples attention.
Interestingly, this guy cared more than the GOP in 1930. He opened free soup kitchens.
tarheelbillie
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Most politicians are venal...IMO. They'll stay bought so long as that serves their agenda of staying in office... the good life. If things get really bad and we see trump and gang burning in effigy, think of rats abandoning a sinking ship. Even Miss Lindsey will revert to saying trump is a thug .
Yosef
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Trump Administration Accomplishments – The White House
CFordUNC
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What am I looking at? That doesn’t answer my question. I didn’t ask what the Trump administration says that it accomplished between 4-8 years ago. That’s ancient history. I asked you what you believe the second Trump administration is going to do over the next 1-4 years that is significantly different than what the Biden administration has done over the last 1-4 years. I’m open to learning and having my perspective changed.Trump Administration Accomplishments – The White House
trumpwhitehouse.archives.gov
I believe you’re an attorney. Maybe a good way to start would be to describe how you think Trump administration policies will make your line of work appreciably better? Then we can discuss how you think that Trump 2.0 policies will be able to appreciably improve upon an economy that’s already far and away the best in the world, a stock market that is at all time highs, crime rates that are at generational lows, etc. Look, if Trump can *improve* upon what it already objectively great, like I said, I’ll be rocking my MAGA hat with the best of ‘em.
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Yosef
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First of all I expect Trump to continue in his line of thinking during his first presidency. Other than when COVID hit his economic plan was superb. He left the inflation rate at about 1.9 percent.
I think he will concentrate on the border. This is the MAIN area that Biden totally failed at and cost them the Oval again. I think with Elon and Vivek they will cut waste out of the government spending and personal. This won't be an easy task and Trump will get hammered by the left for it but I don't think we can continue adding onto the national debt in the fashion we were doing. Trump's deportation measures will cost a bundle but in my opinion this is all on Biden's screw up.
I do think he'll do away with the federal department of education. He'll pass it down to the States where it should be.
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Maybe he'll pass slavery down to the states too. You know, where it should be...
Yosef
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Ask the African Americans that question. Record numbers voted for him.
Trolling question if I ever heard one...
CFordUNC
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Got it. Appreciate the substantive response. I guess my questions in response would be:
1. How can it be said that Trump’s economic plans were superb when the 2017 tax cuts added a massive amount to the national debt? The national debt grew by almost $8 trillion during the first Trump administration. That is more than twice the amount that Americans owe student loans, car loans, credit cards and every other type of debt other than mortgages, *combined*, according to data from the Federal Reserve Bank of New York. The growth in the annual deficit under Trump ranks as the third-biggest increase, relative to the size of the economy, of any U.S. presidential administration. I just don’t see how you can say on one hand that you are concerned about the national debt but on the other hand tout the very Trump 1.0 economic policies that directly caused it to skyrocket.
2. Besides a colossal failure in messaging, how was the Biden administration any more of a failure than Trump 1.0 on the issue of the border? Border apprehensions are at a five year low, directly as a result of the enormous influx of resources, funding, and border patrol personnel that were allocated in the FY22 and FY23 budgets. Where else besides in the upside down world of right wing media would it be considered a failure to have the same exact lower numbers of illegal border crossings from the previous presidential administration?
3. If you believe that the onus is on the individual states to run their respective educational systems instead of having a federal Department of Education, what do you propose we do to replace the Pell Grant program, which is arguably one of the single greatest policy implementations in American history, if certain states decide they don’t want to fund higher education for first generation, rural, and low and middle income students? And what do you do to provide funding and support for special needs children if certain states decide they don’t want to do it?
4. What cuts can Ramaswamy and Musk realistically make that would both move the needle and also prevent millions upon millions of senior citizens, veterans, disabled people, etc. from losing their benefits? Isn’t something like 75% of the federal budget comprised of debt servicing, Social Security, Medicare/Medicaid, the military, VA, and disability benefits, completely under the purview of the United States Congress and thus unable to be cut?
As I say, I am completely open to having my mind changed about Trump 2.0. I’d love for you to be right and for me to be wrong. I’m just having a hard time understanding how and why folks think that we can be appreciably better over the next four years than we were these last four years from an economic prosperity standpoint, from a reduced crime rate and reduced illegal immigration standpoint, etc. I’m not saying it’s impossible by any means, I’m just saying that I have yet to have anyone be able to explain to me how it is supposed to happen. And I just don’t buy that cutting taxes for bazillionaires and corporations, deporting millions of immigrants, and slashing Social Security and Medicare is going to accomplish that.