America’s ‘Free-Market’ Economy – Now Run by Political Dictates (#79)
Lately, as business and economic realities made their presence felt in falling financial markets, tech companies descending from their extraordinary peaks, retailer bankruptcies (like Sears), General Motors (GM) auto plant closures, steadily rising rates from their historic lows, and softening of the economic outlook, America that prided itself as the ‘free market’ champion of the world, once again became ‘Socialist/Communist’ and dictated a reversal to the downturn by political intervention and pressure. Exactly what America has long chided ‘Socialist’ countries in doing, running their economies for political expediency, rather than business efficiency, by command.
Earlier in the week, GM announced multiple plant closures in a number of States in the U.S., and in Canada’s Province of Ontario. According to GM, the closures were necessitated by falling sales of certain models of cars due to change in preference of buyers, and possibly other factors such as rise in costs (from Trump’s tariffs on aluminum and steel), drop in profitability from these plants, and competition. All of the above cited factors are normal business challenges faced by companies on a daily basis. The answers to some of these problems are adaptation to the changing business environment, if possible, subsidies and support from governments to keep the businesses going at tax payer’s expense (the socialist model), sale of assets, or closure. GM opted for closure of these plants.
The reaction from Trump was predictable and swift. He demanded that GM not take such action due to jobs loses under his watch, or else he would make them sorry for what they did. It was a classic socialist government dictatorial response to a corporation’s business problems. It is too early to say how much GM will try to comply with Trump’s dictates, but regardless, this is not how ‘free market’ systems are supposed to run, by dictate. GM’s business problems can only be solved by sound business strategies, innovation, freedom to act in its own interests and competitiveness.
Similarly, the U.S. Federal Reserve (the Fed) has kept the interest rates extraordinarily low for an incredibly long time to provide ‘stimulus’ to a faltering American economy after the near collapse in 2008. Now, a good decade later, with the job basically done, with the American economy at or near full capacity, the Fed, as is its responsibility, started raising interest rates to prevent the economy from overheating, and the rising inflation rate from becoming a problem in the near future.
Just a couple of months ago, the Fed Chairman, Jerome Powell, had indicated that the current level of interest rates were ‘a long way’ from being neutral (in other words the Fed was planning a series of interest raises in the coming months). That statement was considered ‘too hawkish’ by the financial markets and they fell, at times rather dramatically in anticipation of ‘a tightening phase’ from the Fed.
The falling stock markets (even after their record-setting longest bull run) did not sit well with Trump, who takes everything that casts him possibly in a bad light as a personal affront, and he indicated, none to subtly, and quite regularly, that he was ‘very unhappy’ with his selection of the current Fed Chairman. This type of public criticism is highly inappropriate of an institutional head who is supposed to be independent of political interference, so he can conduct sound policy.
But, as Trump is openly contemptuous of proper Presidential conduct and protocol, and the Republicans, who would have screamed bloody blue murder if a Democrat President had had the temerity to openly criticize a Fed Chairman for his own political gain, stayed silent, the Fed Chair must have felt enormous pressure to comply. This increasing and intense public pressure on the Fed Chair just had the desired effect, as today, Jerome Powell stated in his speech that the Fed, somehow, after less than two odd months, is all of sudden ‘just below’ its neutral funds rate.
This mysterious turn in the Fed’s sentiment, in such a short time, is largely, if not entirely due to the political pressure being applied by the Trump administration, to the Fed, to back-off its planned rate hikes and to take it much slower. Political intervention decided the actions of the Fed, when it’s supposed to be independent of the political machinations of the country, and is supposed to be only - economic ‘data dependent’. A Central Bank at the mercy of the political leadership is very much in the mold of a third world country.
The financial markets of course are euphoric and posting tremendous gains as Trump’s political needs subjugated sound economic fundamentals to his dictates, and met Wall Street needs for endless ‘market support’.
These shortsighted moves may relieve some present day pressures, but business cannot be conducted this way without a greater price being paid in the long run. American businesses have had an easy time lately, what with a decade of extraordinarily cheap money, recent Trump and GOP juicy tax cuts that boosted stock buy-backs and thus the stock prices (but no jobs), as have the financial markets, due to the extraordinary leverage of Trump politics, and the Fed’s historic easy money and cheap money policies. These good times are rolling once again, and in the face of changing global fundamentals which are being brushed aside to keep the party going, the players with the money are happy. The bill, as and when it comes and will have to be paid, will in all likelihood, be picked up by the beleaguered tax payers, just as in socialist countries.