The next president of the United states faces a lengthy list of problems, both global and domestic.
John Mauldin of Mauldin Economics warns in his open letter below to the hopefuls from both political parties: "My suspicion is that six months into your presidency you will begin to wonder why you ever wanted this job, as the gulf deepens and widens between what you wanted to do and what you can do without unintended consequences."
Dear Presidential Candidates:
In 10 months and four days, one of you will wake up as Mr. or Mrs. President. After the fabulous fun of post-inaugural balls, you will walk into the Oval Office on Saturday, January 22 and launch into your first 90 days in office.
During these days, you will want to deliver on as many of your promises as possible. But instead of shadowboxing with hypothetical futures on a debate stage, you’re going to be up against cold, hard reality.
My suspicion is that six months into your presidency you will begin to wonder why you ever wanted this job, as the gulf deepens and widens between what you wanted to do and what you can do without unintended consequences.
To make your job just a little more manageable, what I would like to do is take you around the world and review some of the economic realities faced by our global partners.
For many of them, those realities are not pretty. They may be far more limited in what they can do to respond to your proposed agenda than either they or you would like.
First, let’s do a quick overflight of the economic problems you will have to deal with in various regions the world.
Problem 1: Japan
Japan has run up a debt
of almost 250% of GDP, and that monumental debt is growing every year. Japan’s deficit stands at nearly 8% of GDP, the equivalent of a $1.2 trillion deficit in the US.
The country’s nominal rate of GDP growth has remained almost flat for 25 years, the result of unrelenting deflation. The Japanese 10-year bond market used to be one of the most liquid in the world.
Now, if the Bank of Japan is not in the market, there is literally no trading. If the Bank of Japan were not buying bonds, interest rates would rise precipitously; and the government of Japan would be bankrupt in short order.
In order to avoid a deflationary depression, Japan is monetizing not only its deficit, but a great deal of its outstanding debt. This move has of course pushed the Japanese yen down against the dollar—by some 40% in the past few years.
The problem is that Japan has no choice but to continue down that path.
As an aside, most mainstream US economists (the very economists you will likely turn to for advice) are telling Japan that it needs to do more quantitative easing, not less. The yen is likely to become markedly weaker on your watch; and, frankly, there is very little you can do about it without sending Japan even further into recession/depression.
Such an event in Japan would have serious impacts on global growth and trade. (We’ll get into some details below as to what your options are.)
Problem 2: China
Like Japan, China has a massive debt problem.
But unlike the people of Japan, the majority of China’s citizens still live in abject poverty.
In a distortion of capitalism, China has built massive excess capacity in a number of manufacturing industries and will now be forced to lay off millions of people or plunge even deeper into the debt abyss.
There are significant outflows of Chinese currency as wealthier citizens look to get out of a currency they are worried about.
China is at the point in its evolution where it must shift to a consumer-driven economy, though that transition is nearly always tumultuous. In short, Chinese leaders have much less room to maneuver than everyone might wish.
Problem 3: Australia
As China changes course from a manufacturing powerhouse to a consumer-oriented nation, Australia is seeing its commodities industries suffer. Plus, Australia’s housing market is priced very high by global standards, and people have a large amount of debt attached to their homes.
While there are not many direct economic consequences for the United States, Australia has been a reliable ally, and the Aussie economy is going to come under pressure.
Problem 4: The Middle East
The Middle East is always a nightmare for US presidents, but you are going to inherit some especially nasty problems. The low price of oil is putting immense pressure on national budgets. Some experts expect Saudi Arabia to literally run out of money by the end of your term (read Mauldin Economics’ report
on the Saudi Arabian crisis).
Yes, Saudi leaders can and probably will make adjustments, but the new economic restrictions are going to impair their ability to be part of any coalition to bring stability to the region. And the same problem affects most of our smaller but still important allies in the Muslim world.
Problem 5: Russia
is not as important as Japan, China, or Europe; but geopolitically it certainly is. Russia simply cannot afford to let the oil price remain below $40 or even $50. Any further downturns in the price of oil will put enormous pressure on President Putin. Russia’s developing financial crisis will continue to make that nation ever less predictable.
Problem 6: Europe
Outside of domestic concerns, Europe is going to demand your greatest focus. During your first term, it is likely that Europe will descend into a crisis that will force the EU either to break up or to mutualize and then monetize its debts—which would then trigger enormous volatility in the currency markets.
The topic of massive nonperforming loans at Italian banks (~20% of loans) will move to the forefront at the very beginning of your term if not before. This will be a debt crisis much worse than we saw in Greece.
Many small and medium-sized German banks also have severe problems. And let’s not forget France and Spain, which are teetering economically and politically. Europe’s economic problems are only going to make the fallout from its immigration crisis worse and severely limit the ability of our allies to join us in a coalition to resolve crises elsewhere in the world.
Be thankful Great Britain is not in as dire a shape as Europe is; you may well need the Brits on your side.
Problem 7: The Americas
It is distinctly possible that Canada could roll over into recession during your first term, and low-priced oil is certainly not helping Mexico, either. The peso is down 50% since the middle of 2013. Brazil is a mess. Its currency is also down 50% in less than four years, and there is no reason it couldn’t fall further. Brazil is likely heading into its deepest recession in over 100 years, which will drag down its neighbors.
Problem 8: The United States
The U.S. economy is growing by less than 2%
annually, and there are reasons to think the economy is slowing further—into the 1% range. We have already waded through the third-longest recovery period in history without a recession; and if by chance you manage to avoid a recession during your first term, the current recovery will become the longest recession-free period in American history.
A Recession is Inevitable
Given the worries I have already mentioned concerning the rest of the world and its impact on us, it is likely that you will have to deal with a recession. As part of your transition process you might want to think about what a stimulus package would look like during a recession. Monetary policy is clearly not going to be enough this time, but you can count on this Fed to give you even more monetary stimulus.
A recession will mean that the U.S. fiscal deficit blows out, and deficit hawks are going to be very wary of fiscal stimulus after the last attempt in 2009–2010, which produced very little in the way of measurable results. You will have anti-recession options, but they are limited.
By the end of your first term, it is very possible that tax revenues will cover only entitlement spending, the defense budget, and net interest—meaning that any other parts of the budget will have to be borrowed.
To avoid that crisis, you will have to implement significant entitlement reforms or a major tax increase. Either option will be painful, needless to say; and unfortunately, the politicians who governed before you generally put off the serious issues that are going to come to the fore on your watch.
The possibility of growing our way out of the budgetary problem, which is the usual political answer, is not going to be realistic without significant tax, entitlement, and regulatory reforms, all of which are controversial.
Oh, and income inequality and the pressure on jobs will likely worsen without a serious change in course.
And you want this job why
is the chairman of Mauldin Economics
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