This has not been case for a long time: by two and a half percent, American stock index Dow Jones broke into market on Friday. And also on European stock exchanges it lasted everything else as well.
This is remarkable in that world economy seems to be in a very good shape. It is going upwards, not only in USA and China, but finally also in Europe. The International Monetary Fund has just raised its forecast for global growth this year to 3.9 percent. So do stockbrokers again? Or is economic situation not as good as it seems at first sight?
The answer to se questions is a little complicated. It is actually going uphill, in large industrial nations new jobs are emerging and even wages are rising again. The problem is that re may be too fast uphill, especially in United States. That, in turn, has to do with Donald Trump, or his tax reform.
This reform is useful to all super-rich, and it is likely that American society will continue to split, but that is not issue here. From a macroeconomic perspective, it is crucial that state adds to economy and that this momentum is largely financed by new debt. The American government wants to borrow 955 billion dollars this year, almost twice as much as last year.
In principle, re is nothing wrong with higher government borrowing if economy needs this impetus – because it is so weak, for example, that it cannot get out of misery from its own power. Obama, too, has expanded public debt at height of financial crisis. This has helped US to overcome crisis more quickly than Europeans.
Trumps Tax gifts increase inflationTrump, however, distributes money from Treasury in a situation in which business of companies is already running well and many companies are increasingly struggling to occupy ir vacancies. This means that companies must pay higher wages and increased wage costs will be transferred to consumers in form of higher prices. So inflation is rising and central bank is likely to react with higher interest rates – and higher interest rates are poison for stock markets.
Five to 8:00 subscribe to morning column of Time online – from Monday to Friday by email. Sign up nowIf this process was in order, it would be unproblematic and even welcome. After all, re is no objection whatsoever if, for a change, not shareholders, but in form of higher wages, workers benefit from upturn. But Donald Trump's timed billion tax gift, which is extremely bad in terms of economic policy, increases risk of a disorderly rate correction. In or words, it cannot be ruled out that crash is coming. Maybe not yet this week or this month, but probably later this year.
For Trump, who likes to decorate himself with good figures from stock exchange, this would be politically a harsh setback, especially since in autumn elections are pending. But even on this side of Atlantic, a quake on American stock market was not without consequences. Finally, European Central Bank also wants to gradually raise interest rates. It would probably have to refrain from this if it goes downhill with American economy.
It's still open. For example, Trump would not be powerless if a crash actually looms. He has just occupied top post at American Central Bank with a confidant. The central bank could try to fire stock markets by lowering interest rates. But if investors come to conclusion that day of reckoning will only be postponed, that will not work.
Thus, 2018 could become year in which it is over with calm of financial markets. The first analyses have already pointed out that Dow Jones fell by exactly 666 points last Friday – in revelation of John in Bible, this figure stands for devilish powers that bring mischief over Earth at end of times.
Furr linksThe New York Times: Trump tax cuts and economy: time will tell, maybe Guardian: IMF chief warns Trump's tax cuts could destabilise global economy Los Angeles Times: Dow's 666-point plunge looks bad, but economy's fundamentals are still strong
Date Of Update: 06 February 2018, 12:02
