By Joe Montero
President Donald Trump has admitted that the United States faces the prospect of a recession, saying that this may be the short-term price of the trade war with China.
Governments and institutions officially define recession as a recession as a situation where an economy contracts for two consecutive months. There is a serious weakness in this definition, as it doesn’t consider longer-term trends that might be cover by short-term peaks.
Nevertheless, consecutive periods of contraction still suggest that there is something wrong, and this is what is being admitted – sort of.
Much of the commentary puts this on the trade war with China. It is a factor. But the fundamental problem is systemic. The trade war, building on other counterproductive policy in Washington, certainly does make an existing problem even worse.
Obviously, this is going to be of concern in the United States. The rest of us have reason for concern as well. A fall there, will have ramifications through the global economy. The Great Depression showed us this and it would not be any different this time.
Other national economies that are highly integrated into the American economy, and Australia is one of them, are particularly vulnerable to the fallout.
The fact that Trump has contradicted his own previous statements and admitted that all is not well, shows a realisation that sometimes inconvenient news cannot always remain hidden.
It appears that he has shifted towards a strategy of not only owning the economic difficulties that may occur. He is also casting them as the needed sacrifice to put down the bad guy.
This provides a means to position himself as the hero, encouraging Americans to join in the sacrifice for the greater good. This matches Trump’s other comment, when he presented himself as the new savior.
The logic in it is easy to see. Adverse reaction from Americans not happy with what is happening to them may be able to be lessened with appeals to patriotism, and Trump intends to stand for election again next year.
False theatrics this may be. But besides serving trump’s own need, it does the job of denying the fundamental cause of the economic problem. It is also dangerous. On the one hand, providing the incentive to quickly upscale the trade war against China. Onthe other, it brings the threat of more economic damage through the financial system, loss of markets, and a serious fall in the earnings of major investors.
Given the present mindset, this could act as a justification to lift the economic war with China to an even higher level, and this would cause a lot more harm to the American, Chinese, Australian and other economies.
Conflict on this scale always brings the possibility of military confrontation. It’s already here. Military installations surround a large part of China and are moving closer to this nation’s border. There is a standoff in the South China Sea and involvement in the events in Hong Kong. China is not flinching. A miscalculation could easily take this to a shooting war. Besides being a social catastrophe, it would mean worldwide economic collapse.
While this threat of the China factor is real, it remains that the driver of the American economy, like with all economies, is the real economic activity at home. This means what Americans produce and consume.
The numbers are showing that US manufacturing growth has slowed to the lowest level seen in almost 10 years and went over the line to negative growth. This has not happened since September 2009, with was driven by the Global Financial Crisis of 2008.
Part of it is the loss of exports. But it must be remembered, that manufacturing has been going backward for decades, and this is being driven by a structural change in the American economy, shifting form making things, towards increasing dependence on making a profit from the financial sector. This is turn, is the result of a declining rate of return on investment from the real economy.
Although bad news, this does not suggest that collapse is around the corner. Illness can continue for a long time, or it can bring about a sudden crisis. Anything is possible.
What can be said for now, is that unless the problems of the return on investment form the real economy and the shrinking domestic market are not resolved, the American economy will remain infirm and more vulnerable to shocks caused by something like the repercussions of trade war with China.