US bubble is about to pop and give Americans a taste of austerity
Re: “What is happening with Wall Street?” Have Your Say, December 13.
The letter outlines what the writer believes has caused the wild fluctuations of the US stock market, but the factors he mentioned – like the Federal Reserve’s interest rate hike, the Trump-Russia collusion probe, etc – are just pretexts for the volatility.
The truth is that the US economy is not doing well, as President Trump and Wall Street claim. The economy is a bubble and the stock market is an imploding casino that rises and falls according to good or bad news. The manufacturing sector, by which Trump wants to rejuvenate and strengthen the economy, may take years to build if it can be built at all.
Since the 2008 financial crisis, the US Central Bank has introduced several rounds of quantitative easing (QE), supplying cheap money to the global markets that saw the Fed’s balance sheet balloon from $900 billion to $4.5 trillion between 2008 and 2015. When President Trump cut the corporate tax to stimulate the economy, the Federal Reserve took the opportunity to shrink its balance sheet by hiking the interest rate, believing that the economy was going well. Any attempt to halt the rate hike or to reverse course would suggest another round of QE was necessary because either the economy was not doing well or a recession was arriving.
The underlying problem in the US economy is its massive debt. As of October that debt had reached $21.8 trillion. Each day the US government is liable to pay interest of $2 billion, hence increasing the interest rate makes servicing the government debt more difficult and expensive.
Trump is in a dilemma: he has to increase military spending to maintain American exceptionalism and back up the dollar as an international reserve currency. But at the same time he is finding it difficult to borrow money by issuing more low-interest treasury bonds! The income from increasingly frequent sanctions and fines imposed on other countries and corporations cannot solve America’s long-term financial shortage. Both the Republican and Democrat parties are already negotiating to avoid a partial government shutdown due to lack of funding.
Trump can only kick the can down the road. The free-style printing of banknotes will end when the dollar finally loses its steam as an international reserve currency. Americans, who were once comfortably ensconced in a high standard of living, will wake up to learn about austerity, just like the Greeks did a few years ago.
Yingwai Suchaovanich
