This past Monday morning, an Amazon employee experienced a turn of events that few could imagine. While some Mondays are merely mundane, this individual’s experience was nothing short of tragic.
Upon arriving at Amazon’s Seattle headquarters, he made a fateful decision that propelled him into a state of despair. He sent an email to countless coworkers, including CEO Jeff Bezos, expressing his concerns about his ‘Performance Improvement Plan.’ Following this, he took a dramatic plunge from the twelfth floor of the Apollo building, seemingly choosing to end it all.
Miraculously, he survived the fall. Now, the question arises: what happens next?
While the connection to the broader economy may not be immediately evident, there is a troubling undercurrent that suggests it holds significant relevance. This scenario could reflect an economic landscape spiraling toward self-destruction, where each action leads to increasingly dire consequences.
Trump!
The name of President-elect Donald Trump certainly carries weight, almost resembling an onomatopoeia. Synonyms for “trump” include winner, victor, and surpass—a fitting description for someone who has consistently made headlines.
Throughout his life, Trump has indeed lived up to his name. As a reality television star, he shocked audiences and amassed wealth by telling contestants, “You’re fired!” His brash persona captivated viewers, who couldn’t get enough of his over-the-top antics.
However, as he steps into the role of President, Trump inherits a daunting legacy from his predecessors. Following nearly two decades under George W. Bush and Barack Obama, the U.S. National Debt surged from about $5.5 trillion to nearly $20 trillion, reflecting an increase of 363 percent.
In stark contrast, during this same period, U.S. GDP has only risen approximately 77 percent, from around $10.5 trillion to $18.6 trillion. This means that debt is growing 4.7 times faster than the economy itself. The ratio of debt to GDP has also more than doubled, increasing from about 52 percent to over 107 percent.
Part of Trump’s stated vision is to foster an expansive economy that creates 25 million jobs over the next decade. To achieve this, he plans to enact significant deficits. Treasury Secretary nominee Steven Mnuchin may even consider issuing 100-Year Treasury notes to finance these deficits.
But what if these actions merely accelerate the current trend of rapid debt accumulation alongside sluggish GDP growth? Could this not, in essence, amount to a policy of economic self-destruction?
Attaining Self-Destruct Velocity
Recently, a popular trend among headline creators has been to pair Trump’s name with other buzzwords. For example, we’ve seen Bernie Sanders discussed as an expert on Trumpism. There are also discussions around how Trump’s influence could manifest as Trumpflation or Trumpnado in the financial markets.
Forbes provides a clear overview of the implications:
“Trumpflation is on the horizon. The consensus is evident. This means higher U.S. interest rates, a potential end to quantitative easing, and the rise of tariffs that could inflate the cost of imported goods. If President-elect Donald Trump succeeds in passing his fiscal stimulus, it could lead to wage inflation—a welcome outcome for American workers.
“However, what should fixed income investors do now, particularly those who have held low-yielding U.S. Treasury bonds for years? Consider those in Europe, grappling with negative yields. How can they offload such assets?”
In the aftermath of the election, the strategy for selling Treasuries has become straightforward: sell. Consequently, yields have risen, and prices have declined. The yield on the 10-Year Treasury note, for instance, has increased from 1.86 percent to 2.44 percent since the election.
Rising interest rates will inevitably make financing the national debt more burdensome. As deficit spending potentially escalates—possibly reaching $2 trillion annually—the costs of servicing this debt will compound significantly.
Economists frequently argue that deficit spending can stimulate the economy enough to achieve “escape velocity,” allowing economic growth to outpace debt accumulation. The hope is that this will lead to a reduction in the debt-to-GDP ratio.
However, over the last sixteen years, more so in the last eight, attempts to achieve this escape velocity have proven elusive. Instead, debt levels have climbed while GDP growth stagnates. Regrettably, the anticipated impacts of Trumpflation and Trumpnado are likely to exacerbate the existing trends.
As a result, rather than achieving escape velocity, the economy may find itself on a trajectory toward self-destruct velocity. This calls for careful preparation for the significant challenges that lie ahead.
Sincerely,
MN Gordon
for Economic Prism
Return from Attaining Self-Destruct Velocity to Economic Prism
