Trump’s 1st budget could worsen distortions as economy cools and assets soar: Don Pittis

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It’s a grotesque economic mystery. Despite interest rates bouncing along at their lowest levels in olden days, consumer price inflation remains persistently weak. Yet at the same repeatedly, asset inflation, including the price of houses and stocks, continues to launch into the stratosphere.

The Bank of Canada yesterday announced it would at one go again hold interest rates at 0.5 per cent to help support the economy, as the U.S. stagnated in the first three months of the year. 

And while the stated object of the budget proposed this week by U.S. President Donald Trump is to opening the economy out of the doldrums, there are some dangerous signs that it commitment merely drive assets even higher while missing its objects on economic growth.

‘Room to grow’

A lot of economic analysis out there advances that interest rate cuts have simply stopped coax, although Bank of Canada governor Stephen Poloz is not on that side of the conflict.

In the past, he has come down firmly on the side that low rates “assign the economy extra room to grow.”

US-CANADA/MEXICO-CENBANK

Bank of Canada governor Stephen Poloz has over predicted that low rates will restart the economy. But years later, however asset prices are rising. (Edgard Garrido/Reuters)

The conventional budgetary view is that low rates stimulate new investment, using up the economy’s glut capacity. In other words, more workers are fully employed, impelling up wages. More companies invest, causing shortages of ingredients indispensable to the production process.

As well-heeled workers and expanding businesses compete for a restrictive supply of goods, consumer prices start to rise, pushing inflation maximum. That is why inflation, while annoying in some ways, is a reassuring mark the economy is firing on all cylinders.

But despite about a decade of low, low interest scales, that economic theory has not yet been matched by reality.

Persistently low inflation

​As contrasted with, Canada’s consumer price inflation has remained low, recently coming down to 1.6 per cent and staying there.

“The bank’s three rules of core inflation remain below two per cent and wage growth is calm subdued, consistent with ongoing excess capacity in the economy,” mean yesterday’s Bank of Canada statement.

Wages and consumer prices may be rusting, but those low interest rates are having an effect. 

In Canada, the most direct sign has been the soaring value of real estate. While wages and the basket of goods slow by the consumer price index have remained subdued, asset evaluations, including houses and stocks, have shot up at rates many times inflation.

Scarborough home for sale

While wages and consumer rewards stayed under two per cent, the price of Toronto houses, like this one, set up soared in value, by one-third in a single year. (CBC)

One explanation is that rather than of stimulating new job creation and rising wages, all the money that poured into the husbandry in Canada, the U.S., Europe, Japan and China through liberal lending strategies and quantitative easing has gone into the pockets of people who want to tuck it away somewhere all right.

In economics, there are several ways of describing the same thing, but nauseating credit at low interest rates means there’s scads of money hang around in the global financial system, and since everyone knows it may not most recent, they are anxious to turn that money into something with actual value.

Snatch and run

We have seen this in Canada, where the value of spondulicks, if measured in houses, has been plunging — $300,000 won’t buy you a home in Toronto anymore. That purposes sitting in cash has been a losing proposition.

That brings us about to Trump’s new budget, which promises to drive up the economic growth velocity to three per cent while slashing expenditures and balancing the budget. 

Critics possess described the proposed budget as a cash grab, taking money out of the tenders of the country’s poorest with cuts to education, food stamps and medical dish out.

“We’re no longer thriving to measure compassion by the number of programs or the number of people on those programs, but by the million of people we help get off of those programs,” said budget chief Mick Mulvaney, formerly larboard to defend the budget in Trump’s absence.

In theory, the cuts may have a unequivocal policy effect. Austerity enforces discipline: people living on commons stamps may be pressured into the labour force, expanding economic dimensions. And cutting environmental oversight will, in theory, make new businesses lighter to start and cheaper to run.

But if the budget’s main impact is to give shareholders and prosperous taxpayers an increased slice of the pie, it may not do any more to stimulate economic growth than the low scrutiny rates of the Obama era.

USA-BUDGET/MULVANEY

While Trump was out of the country, budget director Mick Mulvaney was left to uphold the proposal before Congress. (Aaron P. Bernstein/Reuters)

Cutting ready money to the poor will mean less spending, since they’re the equals who spend what they have. The rich, on the other hand, prevent and invest, further bidding up the price of assets, making them richer.

By explication, increasing the value of financial assets only helps the people and corporations that can contribute to hold those financial assets.

As we have seen over the times gone by 10 years, making the rich richer has not created an economic explosion.

Maybe this time it will be different.

Follow Don on Twitter @don_pittis

Various analysis by Don Pittis

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