The United States economy isn’t as tough as Donald Trump thinks
[url]https://www.theglobeandmail.com/investing/markets/inside-the-market/article-the-united-states-economy-isnt-as-tough-as-donald-trump-thinks/[/url]
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Ian McGugan ([url]https://www.theglobeandmail.com/authors/ian-mcgugan/)?[/url]
Donald Trump bears a remarkable resemblance to a villain in an action film, particularly in the way he likes to boast about his plan for world domination. Judging from his social-media rants, his plan starts with him taking over Canada, Greenland and Panama in what would amount to a grand rebirth of 19th-century imperialism.
This strikes many of us as ridiculous. Yet even if his expansionist talk is just bluster, it’s difficult to miss the arrogance that underlies it. Mr. Trump appears to believe the United States has the power and the wealth to do whatever it wants.
Is that true? A good way to begin dealing with Mr. Trump’s Bond-villain tendencies is by probing some of the weaker undergirdings of the U.S. economy. If nothing else, this can help us decide how seriously to take his threats.
Spoiler alert: It turns out that the U.S. economic juggernaut may not be quite as intimidating as you think. In fact, in some ways, it looks nearly fragile.
Its most obvious weakness is that Americans refuse to pay taxes that come anywhere close to covering the value of the benefits they receive from the government. As a result, the combined deficit for federal, state and local governments in the U.S. will top 7 per cent of economic output this year, according to International Monetary Fund projections.
That is a stunningly large deficit for a country that is not at war or devastated by natural disaster. The U.S. budget gap is by far the largest among the Group of Seven advanced economies. It puts serious limits on Mr. Trump’s ambitions because conquests are expensive things. So are mass deportations. So are the tax cuts that the new President has promised his followers.
Markets are already growing jittery. Since September, the yield on the benchmark 10-year U.S. Treasury bond has jumped by nearly a percentage point to around 4.7 per cent. Those rising yields boost the cost of carrying the rapidly growing national debt, something that may also help to rein in Mr. Trump’s woollier notions.
Yet the budget deficit and rising interest rates are only the start of Mr. Trump’s problems. There is also another deficit – this one in the country’s current account.
The current account measures a country’s transactions with the rest of the world. It essentially counts up the value of all the goods and services a country sells to the rest of the world then subtracts the value of all the goods and services it buys from the rest of the world. (It also adjusts for things such as dividends, interest payments and remittances, but trade is by far the biggest part of the current account.)
The U.S. current account balance has been negative for years and is growing even more so. To put that in plain English, the U.S. is consuming more than it is producing.
A lot more. In the third quarter of 2024, the U.S. current account deficit ballooned to 4.2 per cent of the country’s gross domestic product, the biggest deficit (aside from a pandemic-era blip) since 2006.
Just to be clear: This does not spell immediate disaster. The U.S. may not be carrying its own weight, but it is still a big, rich country and foreigners are eager to sell its goods and services in exchange for greenbacks and other U.S. financial assets.
That said, the growing size of foreign claims on the U.S. economy is remarkable. According to Thomas Ryan, North American economist at Capital Economics, foreigners now have net claims on the U.S. worth 80 per cent of U.S. GDP, up from 35 per cent a decade ago and just 15 per cent in 2006.
Why have foreigners been so willing to accumulate U.S. assets? In broad strokes, it’s because they perceive those assets to be safe.
Imagine, though, if that were to change because of Mr. Trump’s erratic ways. Foreigners might not be so willing to underwrite U.S. consumption. And that could mean a painful adjustment for U.S. consumers.
This leads us to a final constraint on Mr. Trump’s behaviour: His need to create good times for his supporters.
Despite what you may think, the U.S. is not exactly brimming with wealth for a typical family. While it’s true that the average American is richer than the average Canadian, that is because of a small tier of extremely rich individuals in the U.S. Their wealth pulls the average higher, but it is not really indicative of the situation for a middle-class wage earner.
A better measure of a typical person’s experience is median wealth. As you will recall, the median person is the one at the midway point in the population – in this case, poorer than half the population but richer than the other half.
If you look at medians, as calculated by the Swiss bank UBS in its Global Wealth Report 2024, you discover something surprising: The median Canadian is richer than the median U.S. American – not exactly what you would conclude from Mr. Trump’s triumphalist rantings.
It’s not clear how taking over Canada, Greenland or Panama would immediately boost median U.S. wealth. Just the opposite seems likely, given the costs of consolidating new territories. With the next round of congressional elections less than two years away, Mr. Trump may have to turn his eyes away from expansionary dreams and focus instead on the nitty-gritty matter of keeping the U.S. economy humming.
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[url]https://www.theglobeandmail.com/investing/markets/inside-the-market/article-the-united-states-economy-isnt-as-tough-as-donald-trump-thinks/[/url]
?
Ian McGugan ([url]https://www.theglobeandmail.com/authors/ian-mcgugan/)?[/url]
Donald Trump bears a remarkable resemblance to a villain in an action film, particularly in the way he likes to boast about his plan for world domination. Judging from his social-media rants, his plan starts with him taking over Canada, Greenland and Panama in what would amount to a grand rebirth of 19th-century imperialism.
This strikes many of us as ridiculous. Yet even if his expansionist talk is just bluster, it’s difficult to miss the arrogance that underlies it. Mr. Trump appears to believe the United States has the power and the wealth to do whatever it wants.
Is that true? A good way to begin dealing with Mr. Trump’s Bond-villain tendencies is by probing some of the weaker undergirdings of the U.S. economy. If nothing else, this can help us decide how seriously to take his threats.
Spoiler alert: It turns out that the U.S. economic juggernaut may not be quite as intimidating as you think. In fact, in some ways, it looks nearly fragile.
Its most obvious weakness is that Americans refuse to pay taxes that come anywhere close to covering the value of the benefits they receive from the government. As a result, the combined deficit for federal, state and local governments in the U.S. will top 7 per cent of economic output this year, according to International Monetary Fund projections.
That is a stunningly large deficit for a country that is not at war or devastated by natural disaster. The U.S. budget gap is by far the largest among the Group of Seven advanced economies. It puts serious limits on Mr. Trump’s ambitions because conquests are expensive things. So are mass deportations. So are the tax cuts that the new President has promised his followers.
Markets are already growing jittery. Since September, the yield on the benchmark 10-year U.S. Treasury bond has jumped by nearly a percentage point to around 4.7 per cent. Those rising yields boost the cost of carrying the rapidly growing national debt, something that may also help to rein in Mr. Trump’s woollier notions.
Yet the budget deficit and rising interest rates are only the start of Mr. Trump’s problems. There is also another deficit – this one in the country’s current account.
The current account measures a country’s transactions with the rest of the world. It essentially counts up the value of all the goods and services a country sells to the rest of the world then subtracts the value of all the goods and services it buys from the rest of the world. (It also adjusts for things such as dividends, interest payments and remittances, but trade is by far the biggest part of the current account.)
The U.S. current account balance has been negative for years and is growing even more so. To put that in plain English, the U.S. is consuming more than it is producing.
A lot more. In the third quarter of 2024, the U.S. current account deficit ballooned to 4.2 per cent of the country’s gross domestic product, the biggest deficit (aside from a pandemic-era blip) since 2006.
Just to be clear: This does not spell immediate disaster. The U.S. may not be carrying its own weight, but it is still a big, rich country and foreigners are eager to sell its goods and services in exchange for greenbacks and other U.S. financial assets.
That said, the growing size of foreign claims on the U.S. economy is remarkable. According to Thomas Ryan, North American economist at Capital Economics, foreigners now have net claims on the U.S. worth 80 per cent of U.S. GDP, up from 35 per cent a decade ago and just 15 per cent in 2006.
Why have foreigners been so willing to accumulate U.S. assets? In broad strokes, it’s because they perceive those assets to be safe.
Imagine, though, if that were to change because of Mr. Trump’s erratic ways. Foreigners might not be so willing to underwrite U.S. consumption. And that could mean a painful adjustment for U.S. consumers.
This leads us to a final constraint on Mr. Trump’s behaviour: His need to create good times for his supporters.
Despite what you may think, the U.S. is not exactly brimming with wealth for a typical family. While it’s true that the average American is richer than the average Canadian, that is because of a small tier of extremely rich individuals in the U.S. Their wealth pulls the average higher, but it is not really indicative of the situation for a middle-class wage earner.
A better measure of a typical person’s experience is median wealth. As you will recall, the median person is the one at the midway point in the population – in this case, poorer than half the population but richer than the other half.
If you look at medians, as calculated by the Swiss bank UBS in its Global Wealth Report 2024, you discover something surprising: The median Canadian is richer than the median U.S. American – not exactly what you would conclude from Mr. Trump’s triumphalist rantings.
It’s not clear how taking over Canada, Greenland or Panama would immediately boost median U.S. wealth. Just the opposite seems likely, given the costs of consolidating new territories. With the next round of congressional elections less than two years away, Mr. Trump may have to turn his eyes away from expansionary dreams and focus instead on the nitty-gritty matter of keeping the U.S. economy humming.
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