(What’s Left of) Our Economy: Big New Signs of Re-Bubble-Ization

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2016 elections, Allison Schrager, auto loans, balance sheets, Ben Bernanke, Bloomberg, bubbles, bubbles Federal Reserve, credit, credit cards, debt, Financial Crisis, Fox Business Debate, Goldman Sachs, housing, interest rates, leverage, loans, Matt Phillips, mortgages, quantitative easing, Quartz, revolving credit, Tracy Alloway, zero interest rate policy, ZIRP, {What's Left of) Our Economy

One of the more praiseworthy features of the Fox Business Republican debate was the discussion of the last mega-financial crisis and how to prevent a repeat. Although at their debate on CNN the Democratic presidential candidates were quizzed on the bubble and its bursting and possible remedies, the Milwaukee event marked the first time these subjects came up for the Republicans.

Better late than never, but that’s pretty strange given that the last bubbles inflated and the crisis broke out on the GOP’s watch. In fact, it’s downright disturbing. For a new meltdown remains by far the greatest economic threat to America’s future due to the Federal Reserve’s overly easy money policies – despite the latest reassurances from former Fed Chair Ben Bernanke that such warnings are ludicrous. Maybe not so coincidentally, two important new signs of re-bubble-ization have just appeared.

The first was reported by Quartz’s Matt Phillips, who pointed out that the Federal Reserve’s latest figures on Americans’ borrowing behavior showed that consumers in September took out an all-time record $28.9 billion in new loans in September. In the process, they broke a record set 14 years ago, and increased their credit outstanding by the greatest percentage since 1943 – when these records started to be kept. And even if you adjust for inflation, household borrowing is at lofty levels historically.

Many economists view such increases as a bullish economic sign – signaling that Americans are so confident about their future prospects (and repayment potential) that they’re willing to take on more debt. That may be true, but the data on wages and incomes strongly indicate that this confidence is really overconfidence. And if interest rates really are going to be raised by the Federal Reserve, even gradually, this overconfidence may be tomfoolery.

Also not so bullish – the makeup of these new loans. As economist Allison Schrager has sagely pointed out, not all borrowing decisions are created equal, even for individuals with comparable incomes. Some, like student loans, are arguably sensible investments in one’s own human capital and potential (though signs of diminished returns from a college education seem to be popping up everywhere). Others, like mortgages, are arguably sensible investments in an asset that could well appreciate in value (though the inflation and bursting of the housing bubble should have taught everyone that real estate is no longer a sure thing). And still other loans simply finance consumption – which lacks any capacity to increase one’s wealth.

Unfortunately, much of the September surge in consumer borrowing was in auto and credit card debt – which won’t bring any financial benefits.

The second sign of reb-bubble-ization was reported by Bloomberg News’ Tracy Alloway, who covered a Goldman Sachs study showing that leverage levels in Corporate America are at their highest levels in a decade – during the bubble years. In other words, thanks largely to the super-easy monetary policy pursued by the Federal Reserve since the crisis peaked, even though corporate profits have surged to new records, American business has gone on such a frantic shopping spree that its debt load has grown much faster. Indeed, according to Goldman Sachs, these debts are now at twice the levels they hit in the pre-crisis era.

Just as with consumers, rising interest rates could wreak havoc with the balance sheets of U.S. companies. And just as with consumers, relatively little of this borrowing is being devoted to strengthening these firms in what might be called the old-fashioned way – i.e., through the development of new products and services. Instead, much of this new debt has been used to fund mergers and acquisitions, and stock buybacks.

The Fox Business debate, however, does deserve criticism in one sense. It followed an entirely conventional course in focusing on crisis-proofing American finance by improving Wall Street regulation. Certainly such improvement has been warranted. But the financial crisis was rooted in weaknesses in the real economy. Until presidential candidates start presenting realistic plans for fostering more good jobs and the incomes they generate, and for spurring more production and the earnings they generate – which would reduce the need for binge borrowing in the first place – a new financial crisis looks much more like a matter of “when,” not “if.”

Following Up: Trump Hit .500 on Trade at the Debate – Which Isn’t Nearly Good Enough

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Asia-Pacific, Associated Press, China, Donald Trump, Fox Business Debate, Japan, Mainstream Media, minimum wage, multinational companies, Obama, punditocracy, rules of origin, sourcing, TPP, Trade, Trans-Pacific Partnership, wages, {What's Left of) Our Economy

If you think a .500 batting average represents as good a performance in presidential debates as in baseball, then you’re going to be pretty pleased with Republican candidate Donald Trump’s performance on trade-related issues in the GOP Milwaukee main event last night. If you’re wondering how the Republican front-runner (co-front-runner?) could have gotten one answer so mind-bogglingly wrong, and one just as completely on target, chances are you’re more downbeat.

Of course, it also needs to be noted that apparently no one in the Mainstream Media knows enough about trade, and specifically about President Obama’s Pacific Rim trade deal, to have recognized the accuracy of Trump’s answer about China’s relation to the agreement. But in defense of the scribblers, they’re not competing for the authority to press policy buttons.

Trump’s wrong answer was his first (here’s a debate transcript), and although it came on a question concerning the minimum wage, not trade, it bears directly on America’s approach to the global economy. Explaining why he opposed government-mandated hikes in pay floors, Trump told the audience that with U.S. “taxes too high, wages too high, we’re not going to be able to compete against the world. I hate to say it, but we have to leave it the way it is. People have to go out, they have to work really hard and have to get into that upper stratum. But we can not do this if we are going to compete with the rest of the world. We just can’t do it.”

What was completely weird about this response was that, as with other critics, a main reason for Trump’s opposition to current U.S. trade policies is that they benefit offshoring interests at the expense of American workers by forcing the latter into a no-win competition with much more poorly paid foreign counterparts. Indeed, although Trump never mentioned “wages” explicitly in his new China trade paper, he did charge that the status quo approach exclusively serves the interests of “Wall Street insiders that want to move U.S. manufacturing and investment offshore.” And he asked how “American manufacturers, who must meet very high standards, [can] possibly compete with Chinese companies that care nothing about their workers or the environment?”

So Trump’s position that the minimum wage can’t be raised because of this (presumably unacceptable) low-wage foreign competition amounts to a version of blaming the victim.

And it would have been so easy for Trump to have had his policy cake and eaten it, too, on this front. He could have expressed sympathy with the idea of raising minimum wages – especially because of penny-wage foreign competition. And he could have gone on to insist that a better way to raise living standards was to fix the trade policies largely responsible. Trump did suggest that his tax policy reforms would get the job done by super-charging America’s growth and job-creation. But if so, why put so much emphasis on the need to overhaul trade policy?

By contrast, Trump’s critique of the Trans-Pacific Partnership (TPP) revealed genuine mastery of typical and major U.S. trade policy failings. As he contended (inter alia), “The TPP is horrible deal. It is a deal that is going to lead to nothing but trouble. It’s a deal that was designed for China to come in, as they always do, through the back door and totally take advantage of everyone.”

The commentariat seemed to agree that Trump had displayed his ignorance by claiming that China is one of the TPP signatories. That’s what one of Trump’s rivals, Kentucky Senator Rand Paul, claimed. So did the Associated Press.

But of course, that’s not what the candidate said. He said it was designed for China to participate covertly, not that China is one of the members. And anyone who’s read the TPP’s rule of origin provisions (here, here, and here) knows that this is exactly the case. The deal would extend duty-free treatment within the new integrated market to a long list of products that could be made largely outside the TPP zone. Indeed, many goods with levels of content from TPP signatories well under 50 percent would be so favored.

Nor did these TPP features appear in the deal by accident. They reflect the clear desire of U.S., Japanese, and other multinational companies from TPP signatory countries to enjoy maximum flexibility in sourcing their production, in order to secure the lowest cost levels. Not only does such sourcing leeway greatly water down the TPP’s potential benefits for the domestic economies of the signatory countries. But it flies completely in the face of promises by Mr. Obama and other backers of the deal that it would both contain the rise of Chinese economic power and influence globally and in the Asia-Pacific region specifically, and that it would create powerful incentives for China to clean up its economic act and become eligible for membership.

Trump remains the only Republican candidate to mount a serious and sustained challenge to today’s American trade policies. And as his China paper made clear, his diagnoses and prescriptions are every bit as substantive as those embodied in numerous bills introduced to overhaul Washington’s longstanding approach. But Trump’s crusade faces obstacles aplenty already – including the establishment-coddling media’s determination to keep branding him an ignoramus even when this accusation is wildly off base. He can’t afford to give them any real ammunition.