Playing the thorny game of consequences

Trump’s policies may make the US debt burden far worse, writes Sheldon Slabbert of CMC Markets.

Since the financial crisis, central banks around the world have been printing money via quantitative easing, embarking on a programme of mass stimulus never before seen in economic history.

The Federal Reserve took the lead under the premise that the increase in financial asset prices would make the wealthy feel more confident again, this was known as ‘‘the wealth effect’’.

In turn, they would spend more, and create a trickle down effect to help stimulate the economy.

It operated under the assumption that corporations would use the increase in stock prices to expand operations, and apply the injections for research and development.

Nearly 10 years on, Wall Street is enjoying the third largest expansion since World War II, but the recovery on Main Street is the weakest since the days of the depression.

The Bank of International Settlements recently commented in a report that these central bank policies didn’t work. These policies have fuelled the greatest wealth inequalities since the 1930s and many argue contributed to social changes being brought about by Brexit and President Trump’s shock US election win.

It will seem that central banks are having some success in creating inflation and we have seen an uptrend in inflation data released across most industrialised nations, including New Zealand and Australia. This may signal the end of the ultralow interest rate environment and a path to normalised rates. These likely increases in the price of debt, have many concerned over the ability of borrowers to service their debts.

It took the US approximately 225 years to accumulate USD $5 trillion dollars of debt. President Bush racked up USD $5 trillion dollars under his watch alone, followed by the Obama administration doubling the national debt under his two terms adding about another USD $10 trillion dollars and Congress raising the debt ceiling constantly.

Clearly, this is an unsustainable trend which requires drastic action. While President Trump’s proposed cuts in personal and corporate tax cuts is partially aimed at growing the US economy out of its slow spiral, many are concerned these policies may have unintended consequences and exacerbate the US debt problems.

It will not seem as if the masses of debts have been put to productive use and Trump may have been passed a poisoned chalice.