As we navigate the complexities of today’s economy, various narratives emerge. Some are hopeful, yet many paint a bleak picture. This article aims to illuminate the confusion surrounding our current economic climate.
Recent economic indicators suggest stability. The GDP for the third quarter surged at an annual rate of 3.5 percent, while the unemployment rate sits at a mere 3.7 percent—its lowest in nearly 50 years when excluding discouraged workers. By these benchmarks, the economy seems to be thriving.
However, a closer look reveals troubling signs beneath this seemingly positive surface. The cracks in the economy’s foundation are evolving from minor imperfections into significant fractures at an alarming rate—almost as quickly as the Imperial Valley’s mud volcanoes are damaging Union Pacific Railroad tracks. As these fractures multiply, the risk of a financial crisis looms ever closer.
Currently, the auto manufacturing and housing markets are showing signs of distress. Recently, General Motors declared plans to eliminate 14,000 jobs and shutter five factories. This raises a valid question: what is happening?
We suspect that General Motors’ challenges stem from a fundamental issue—the quality of their vehicles. Do you own a General Motors automobile? Do you know anyone who does? The answer may not be encouraging.
The housing market is also exhibiting signs of decline. Both existing and new home sales are decreasing, and home price growth has slowed for six consecutive months. It’s only a matter of time before actual home prices begin to drop as well.
Both the auto and housing sectors serve as early warning signs in this tumultuous economic environment. They are particularly sensitive to fluctuations in credit costs; a modest rise in interest rates could spell disaster. Many corporations weighed down by debt are just a few quarterly earnings reports away from significant downturns.
How Not to MAGA
After nearly a decade of the Federal Reserve’s artificially low interest rates, the economy has reorganized itself in ways that are less than conventional. As the Fed attempts to normalize interest rates, it faces the daunting task of doing so without sparking a widespread wave of debt defaults.
While further rate hikes could help purge the system of its inefficiencies, this remains politically unfeasible. President Trump has made it clear to Fed Chair Jay Powell that he seeks low interest rates and elevated asset prices, rather than the opposite.
Decades of aggressive Fed intervention in credit markets have contributed to today’s economic instabilities and wealth disparities. Does Trump recognize that his push for low rates and high asset prices contradicts his promise to Make America Great Again (MAGA)?
Moreover, the Fed’s extensive credit creation has played a significant role in accelerating globalization and facilitating China’s rise over recent decades. Where do American consumers find the endless lines of credit to purchase all those goods made in China?
Acknowledging the extent to which the Fed’s cheap credit has distorted the global economy requires genuine introspection. Moving beyond demands for more credit expansions necessitates sacrifice—something not typically associated with Trump.
Instead, he opts for straightforward solutions to complex issues, often surrounded by advisors like Peter Navarro, who extol the virtues of trade tariffs. Some might argue that severing oneself from challenges will magically resolve the troubling trade deficit with China.
Relying on trade tariffs is not the way to achieve MAGA. Perhaps Trump knows this, and perhaps he understands the broader implications. His history of bold claims and assertive behavior has served him well thus far. However, where this current bravado will lead is an uncertain territory, far removed from his usual domain.
Paper Lanterns
Recently, President Trump and his team attended a meeting with the Group of 20 nations in Buenos Aires, Argentina, which included a dinner with Chinese President Xi Jinping. The focus of their discussions was the escalating trade tensions between the two nations.
Regrettably, no joint agreement was announced following their dessert, leading to much speculation. Initially, news of a 90-day truce on new trade tariffs surfaced, followed by Trump tweeting about China’s commitment to purchase substantial amounts of American-made goods. Consequently, the stock market surged, with the Dow Jones Industrial Average rising by over 287 points on Monday.
Yet shortly thereafter, China seemingly contradicted the notion of a truce, leading to a dramatic drop of 799 points in the Dow Jones on Tuesday. From that point on, the exact nature of the discussions became increasingly murky and confusing.
What we can infer is that the dinner’s dialogue may not have delved into serious negotiations but could instead have been a lighthearted exchange of ideas—perhaps even targeting social credit scores or veering into banter.
Ultimately, no substantive progress towards a trade agreement seems to have occurred. It appears that reaching a genuine trade deal, beyond mere symbolic gestures, will remain elusive between China and the United States. The challenge lies in the fundamental differences in negotiating styles.
Negotiating with China is not akin to dealing with New York contractors or local officials; often, no compromise can be achieved because none exists. Trump’s approach may be at odds with the essence of these negotiations.
In essence, talking about paper lanterns—a symbol with roots in Chinese culture since the Han Dynasty— epitomizes the complexity of these negotiations. No one can pinpoint their origin or explain their significance, yet they continue to adorn markets and streets, seemingly without purpose.
Such ambiguous traditions have woven their way into the fabric of Chinese society for millennia, mirroring the challenges Trump faces when negotiating with Xi Jinping.
Thus, we might conclude that Trump’s trade negotiations may yield only superficial results, akin to decorative paper lanterns—providing momentary relief to the market but ultimately paving the way for a potential technology cold war or more significant upheaval in the global landscape.
In this light, let’s hope for bright paper lanterns and proceed cautiously in all other areas.
Sincerely,
MN Gordon
for Economic Prism
