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Relatively strong US growth amid sluggishness elsewhere is not what economics expects. But persistently low interest rates and weak inflation brings multiple benefits to American firms and consumers

Relatively strong US growth amid sluggishness elsewhere is not what economics expects. But persistently low interest rates and weak inflation brings multiple benefits to American firms and consumers

There is a dirty little secret in economics today: the United States has benefited – and continues to benefit – from the global slump. The US economy is humming along, even while protesters in the United Kingdom hurl milkshakes at Brexiteers, French President Emmanuel Macron confronts nihilist yellow-vested marchers, and Chinese tech firms such as Huawei fear being frozen out of foreign markets.

Last year, the US economy grew by 2.9%, while the eurozone expanded by just 1.8%, giving President Donald Trump even more confidence in his confrontational style.

But relatively strong US growth amid sluggishness elsewhere is not what economics textbooks would predict. Whatever happened to the tightly integrated world economy that the International Monetary Fund and the World Bank have been advocating – and more recently extolling – since World War II?

The US economy is in a temporary but potent phase in which weakness abroad lifts spirits at home. But this economic euphoria has nothing to do with Trump-era spite and malice, and much to do with interest rates.

Borrowing costs are currently lower than at any time since the founding of the US Federal Reserve in 1913, or in the UK’s case since the Bank of England was established in 1694. The ten-year US Treasury bond is yielding about 2.123%, and in April, the streaming service Netflix issued junk bonds at a rate of just 5.4%.

If a Rip Van Winkle economist were to wake up today after a decades-long sleep and see only those numbers, he or she would assume that one-fifth of Americans were unemployed and standing in lines outside soup kitchens. Instead, the US jobless rate is at its lowest level since Neil Armstrong took his famous first step onto the Moon’s surface 50 years ago.

The idea that the US wins in a global slump might sound like the sardonic musing of some unreconstructed Marxist in the dingy corner of a faculty lounge. But such a view is not ideological. Rather, global interest rates are scraping the floor because GDP growth outside the US is so sluggish.

Persistently low interest rates and weak inflation bring multiple benefits to the US economy. For starters, American consumers, whose real (inflation-adjusted) wages are finally increasing after decades of stagnation, are seeing all sorts of bargains. When I visited an Apple store a few days ago, an employee at the repair counter told me that I could finance a new iPhone at 0% interest. Car dealers are offering zero-interest financing, too.

Moreover, the US stock market has soared because yields on bank certificates of deposit (CDs) look so puny. When I was a kid in the 1970s, my mother placed our family savings in a bank and received not only a 6% return, but also a blender. Today, a six-month bank CD might pay only one-third of a percentage point. And my mother can no longer expect a blender or even a lollipop from the bank in return for parking her money there.

Finally, low interest rates mean that US businesses can obtain nearly free financing when they purchase equipment. As a result of low borrowing costs and new tax write-offs, the US economy added 215,000 new machine manufacturing jobs in 2018. And foreign investors realise that new equipment will make US companies more competitive.

But surely, the textbooks insist, a hobbled global economy will squeeze US exports. That is true – especially when combined with China’s new tariffs on American goods and a strong dollar, which makes US exports more expensive internationally.

Still, exports make up only 12% of the US economy, and nearly one-third of them go to Canada and Mexico, whose economies have been doing okay. Moreover, many of the most valuable US exports are “must-have” items (or oligopolistic goods made by only a few companies), such as Boeing jets, Qualcomm chips, or Apple iPhones. It is hard even for dejected Frenchmen or angst-ridden Germans to do without these.

The buoyancy of the US economy worries policymakers in other countries. They would prefer if the US stumbled along beside them and was forced to concoct cooperative ways of boosting global growth. Instead, Trump needles rather than wheedles for trade deals, and happily pockets the benefits to the US economy that result from doldrums abroad.

No one knows when Trump’s trade needling will stop, of course. But as long as inflation remains a distant specter, America’s economy will continue to enjoy this unusual type of growth. 

Todd G. Buchholz has served as director of economic policy under President George H.W. Bush and as managing director of the Tiger hedge fund. He was awarded Harvard University’s Allyn Young Teaching Prize in economics and is the author of New Ideas from Dead Economists and The Price of Prosperity. Copyright 2019 Project Syndicate, here with permission.

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"low interest rates mean that US businesses can obtain nearly free financing when they purchase equipment".

Indeed, and that can carry over to local economies as well. I've seen HP contracts for $2-400K pieces of machinery, financed for 0.99% interest.

I struggle to see where the US economy's dirty secret lies. They have a strong, healthy economy, something that is surely praiseworthy. OK, threatening tariffs left, right and center is unattractive, but with the exception of Mexico, the recipients of the threats don't have clean hands either.

the petrodollar is the dirty secret

"The hypothesis
The United States dollar remains de facto world currency.[1] Accordingly, almost all oil sales throughout the world are denominated in United States dollars (USD).[2] Because most countries rely on oil imports, they are forced to maintain large stockpiles of dollars in order to continue imports. This creates a consistent demand for USDs and ostensibly supports the USD's value, regardless of economic conditions in the United States.

Reality check. The federal govt borrows $100 billion a month and debt levels are growing faster than the economy. Interest rate hikes have been abandoned and another round of qe being mooted. Whose funding this propaganda piece?

I was hoping someone else would ask!

If you count entropy into the equation (infrastructure decay, in plain terms) the US is going backwards. So you count repair as a positive, and your economy is booming even as you're sinking into the mud.

The bio says a lot.

On the macro level PDK I agree with you. But that is the Fed spending on stuff that props up the country as a whole, such as the military. What this article says is that at the surface the US economy is doing extremely well because of it's sheer size. Fundamentally it doesn't need the rest of the world.

At the macro level, if those who have ever bought those Government bonds (what level are they - in the Trillions?, Is there even a number beyond that?) ask for their money back things could get interesting. At what level could you say the US Government is bankrupt?

..doesn't need the rest of the world? So why are they borrowing so much?

Do not forget, around 70% of US debt is owned by US entities, and a significant majority of the remaining 30% is owned by ostensibly friendly nations, Japan, UK, etc.

Um, duh - that's what happens when you deficit spend rather than pursue austerity in an economy with spare capacity. You get growth. The Eurozone versus the US should clear that up. But of course mainstream macro remains wedded to the idea that deficits mean default, runaway inflation and currency depreciation. I'm not saying Trump has directed the deficit spending wisely to have maximum effect - but at least he gets that the US economy needs a sizeable ongoing government deficit spend in order to grow to offset leakages of demand to imports and saving. And that the bond vigilantes are essentially impotent with the central bank setting interest rates.

"the US economy needs a sizeable ongoing government deficit spend in order to grow"

Thanks for that. Either you mean that it needs Keynesian stimulus (not permanently possible on a finite planet) or you're advocating the socialising of debt to the advantage of a profiteering minority?

The US economy is a draw-down of low-entropy energy and resources, resulting in high-entropy wastes including plastic oceanic soups, CO2 and low-grade heat. It now has a never-bigger, never-older collection of infrastructure, and decay is outpacing capacity to repair. And every move is towards complexity (techno-fixes) rather than resilience-capacity. You call that 'growth'? Just ask'n.

The effect of deficit-spending on climate change depends on political choices about how the money is spent: tax cuts for the rich? or a Green New Deal? Getting the right kind of growth is a political choice about what we allow and don't allow. We have the power to regulate capitalism and direct growth if we choose to. Our destiny is in our hands. That's the stark reality. If we choose not to make good choices in terms of resource use, we will reap what we sow.

I'm not sure I agree. In terms of energy/entropy/depletion, the GND is potentially as detrimental as tax-cuts for the rich. A lot of wide-eyed altruists think you can solve 'child poverty' - indeed all poverty - while avoiding carbon-emitting. With our current valuations of goods (which are all processed resources), there isn't the planet to underwrite the current collective expectation.

But (or is that 'so'?) we are diverging into virtual trading (a category in which I include the long-term RE bubble). We've disconnected money from resource/energy availability - albeit temporarily. It's the divergence between future goods-purchasing expectations (like Kiwisaver) and the reducing future supply of goods, that I see imploding the financial system (through massed loss of belief).

Yes, we can 'regulate capitalism' - indeed we'll have to, what the neolibs told us was just wrong (Whether they knew that, is an interesting aside). We probably need to remove 'growth' from it, my guessing is that interest has to be outlawed. I just don't think we're going to be allowed to go there, so we will crash. The measuring of the 'US economy', is a classic example of not measuring the 'actual'.

Yes, our destiny is in our hands. And every day we grow more complex fossil-energy-dependent urban sprawl over productive food acreage, every day we tolerate population growth, is another day we're not making 'good choices'. Seems to me, sometimes, that we should have put more effore into education.

go well

Runaway inflation and currency depreciation is exactly where the US is heading. The trillions they borrow is having less and less effect.

Spot-on. The US is in a purple patch however it is entirely predicated on the 10 Year Note being <3%. At that level you see the stock market tantrums and consumer confidence falling. The US can keep financing it's deficit for a while yet, but there will be a day of reckoning.

And yet the day of reckoning stubbornly refuses to come .......

No, and it won't while Europe is a basket case and technology/China spread deflation. In Europe with negative rates, many countries literally get paid to run deficits and borrow money. . Swiss bond yields are -.52% for 10 years. You lend me 100m and then pay me 520k per annum for 10 years, then in 10 years I'll give you you're 100m back....

Theres a sentient lesson here and it requires us to cast our eyes back to the early 30s and remember what Adolf Hitler did with the German economy to bring it back to life, he used deficit spending, particularly on weaponry. Like it or not it worked brilliantly compared to how the rest of the western economies were moribund at the time. Is that where Trump is drawing his ideas from?

Of course it does! Why do people think this is rocket science? Keynes pointed it out in the 1930s in the General Theory. Nothing cures demand deficient economies with spare capacity like a big dollop of government spending. I do despair sometimes why people can't see the blindingly obvious. Now how you spend is where politics come in.

Well that was not Hitler, technically speaking that is, but the brilliant Schacht, of the extraordinary IQ. And in concert with you comment, it was all starting to run dry, desperately so in fact, that Hitler had to make his move in 1939, two years too early in fact, as the Germany could not finance any more production of weaponry. As. parting note, The Pact with Russia allowed a free flow of raw material from the east, that was eventually fired right back at them.

Didn't he end up having to invade somewhere to get gold as he hit limits?

Well you can certainly see his subsequent actions as such. All the resources the Nazis captured as they conquered sovereign states must have been welcomed if the bank account had run dry by 39!

Yeah dead right. Actually the move on all of Czechoslovakia 6 months earlier or so was the give away. A big strategic part of Hitler’s “gamble” on that, was the acquisition of the giant Skoda Works armaments production capability.

But as long as inflation remains a distant specter, America’s economy will continue to enjoy this unusual type of growth.

"Inflation is already here. If you are looking at an area with a 14% increase in the cost of goods year over year and your income isn’t rising, or it’s falling, we are already there. It’s not hyperinflation, but it is very significant inflation. It you look at the controls they have put on globally to fight inflation, they are quite significant. The U.S. debt went up 6% last year, and it’s estimated to go up 8% this year. God forbid we try to start any of the wars rattling around the world because the debt will skyrocket. We are in a spiral upward on the amount of debt. Next year, the social security fund will go negative cash flow. In other words, it’s going to stop being a net buyer of Treasuries and is going to be a net seller of Treasuries, which means if the foreigners are not buying, it’s down to the U.S. pension funds and the Fed.”


I find it interesting that no where in the article was it mentioned about the huge tax breaks for US companies trump introduced that are also propelling the growth. Any government can do this in an economy where GDP has been growing steadily for 9 years, with the infusion of what amounts to a fiscal stimulus. This stimulus should only be used in times of economic trouble. In times of good the debt should be paid down, not up. This is economics 101 that trump is either clueless about or simply does not care about .
My concern is the at what cost to the future and who is going to pay for the unprecedented increase in the national debt trump is causing via the tax cuts and out of control spending. One would expect to see an increase in other tax intakes through increased economic activity in theory, but this has not happened. Trump is running the country into the ground if you want to fast forward a couple years, just like he did with his own businesses and bankruptcies. Someone will have to pay for trumps egotistical thinking, taxes will have to be brought back in line to reduce the debt by a more responsible government, hopefully at the next election, but at what cost to correct his myopic policies? Only this time it will not just be private investors who in the past lost their money in his bankruptcies but all investors when the stock market has to deal with the repercussions and the American public who will have to eventually pay more taxes to repay the debt.
And that will effect the world economy, again.
And being the egomaniac ignoramus that he is, will blame the next govt. and say 'I was the greatest of all".