I’ve blogged about this struggling young couple many times. She (I’ll call her Susan) was an escrow assistant, he (I’ll call him Mike) worked for the city, and their combined income was $165,000 per year in the early 2000s.
They, however, lived in an affluent area (Danville, CA) and they very much wanted to “keep up with the Joneses.” So, they borrowed $50,000 to $75,000 more than they earned every single year.
This was surprisingly common in that era, as so many people had learned that they could repeatedly get cash-out mortgages to pay off their consumer debts.
In light of that, the “Susan-and-Mike-micro-economy” appeared to be very robust, as they bought new SUVs and boats, wore very nice clothes, and went on wonderful vacations.
But, in 2008, when they could no longer borrow against their home to pay off consumer debt and/or access more cash, the “Susan-and-Mike-micro-economy” collapsed into bankruptcy, as that economy did not come close to generating enough income to service its debt without additional borrowing.
I might add that it was millions of those cash-out mortgages that were propping up the U.S. economy in the years leading up to the 2008 crash.
In any case, the bankrupt “Susan-and-Mike-micro-economy” is exactly analogous to the United States economy over the last 5 years (yes, “5 years,” as it started under Mr. Trump).
I will expand on this, but I want to discuss Mr. Trump and inflation first.
Sorry, MAGA, but Trump Did Not Tame Inflation 😊
Comically, the Democrats thought they had the perfect issue to hit Trump with: high prices! And the Republicans kept screaming, “dude, there’s no way Trump can be blamed for high prices this soon into his term..” (and they were right).
But then more comically, interest rates, oil prices, egg prices, and the CPI fell, making inflation the wrong issue for the Democrats to focus on.
But it gets more ridiculous as the same Republicans who were screaming that it was Biden’s inflation suddenly started to celebrate Trump’s inflation-taming.
Sorry, Republicans, you can’t have it both ways. I did not see Mr. Trump drilling for more oil, laying more eggs or building more apartments (to bring down rents), so Mr. Trump had nothing to do with any inflation taming at this point.
Most of the inflation we are seeing now (whether the rate is increasing or decreasing) was baked into the cake months or even years ago, as Steve Hanke reminds us over and over and over.
In an economy the size of ours, there is almost always a 12 to 18-month lag before we see the impact of economic policy – a point I make repeatedly in my blogs.
Mr. Biden’s Strong Economy = Mr. Biden’s Record Borrowing
In 2020, under Mr. Trump, we saw a peacetime record government deficit of 15% of GDP (ostensibly justified by COVID). It fell to 12% in 2021 under Mr. Biden, and it remained above 5% of GDP ever since – while actual GDP growth averaged only 2.5% (and much of that growth was just government spending that created no actual real wealth).
The deficit as a percentage of GDP averaged about 1.75% from 1990 – 2007 – when GDP grew at an average rate of 3.0%.
Long story short: Mr. Biden’s economy is not even close to sustainable.
When deficits exceed growth repeatedly, it fuels inflation. This benefits the wealthy, as they hold assets and earn interest income, while it decimates the poor and the middle class as they lose purchasing power, see their real wages fall, and struggle to make ends meet.
So, yes, Mr. Trump could continue Mr. Biden’s spending to keep the economy artificially propped up, but we’d likely see a revolution at some point.
But, Jay, What About the Stock Market?
Mr. Trump’s rhetoric and tariffs may in fact be impacting the stock market, but as Jeff Snider and George Gammon remind us over and over: THE STOCK MARKET IS NOT THE ECONOMY.
The economy is tens of millions of contractors, carpenters, backhoe operators, factory workers, retailers, real estate agents, plumbers, electricians, firefighters, insurance agents, actuaries, loan officers, underwriters, and you-name-it other roles providing actual goods and services that people need and demand.
SUMMARY: Susan and Mike proved that you can’t fake prosperity with borrowing forever, and the lag effect is real (it’s far too soon to attribute good or bad news to Mr. Trump).
