News Release

Another Great Crash?

 

JAMES K. GALBRAITH, galbraith at mail.utexas.edu
Galbraith holds the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin where he founded the University of Texas Inequality Project.

His most recent books include Inequality: What Everyone Needs to Know (Oxford, 2016), Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe (Yale, 2016) and The End of Normal: The Great Crisis and the Future of Growth (Free Press, 2014).

He said today: “Once again we hear that the ‘fundamentals are strong.’ This is irrelevant. What matters for the economy going forward is not past performance but the balance of confidence and fear.

“The stock boom was driven by low interest rates, share buy-backs and a falling dollar. Now, with the tax cuts in place and the latest wage report, it became clear that there were no obstacles to further increases in interest rates, flattening the yield curve. In this situation, equity investors fear losses and a flight to safety follows. This is now happening worldwide.

“If the Federal Reserve continues to raise interest rates, and even more so if it picks up the pace, the dollar will stop falling, and perhaps again start to rise. A funding crisis in the rest of the world (hinted at by some analysts) would produce yet another flight to safety and increase these effects. A financial crisis, exposing the weak position of some of the world’s largest banks, would likely end growth altogether, and not merely in the U.S. And yet, on the other hand, a reversal-of-course at this stage would reveal the fecklessness of the decision to start raising rates in the first place. In this situation, based on the record, expect the Fed to stay on course until disaster really strikes — and then to claim that ‘no one could have foreseen it.’

“As for the fundamentals, they aren’t sound. The expansion has gone on for a long time, the stock market remains overvalued, and household debts were piling up. Many provisions in the recent tax law will reduce middle class purchasing power and home values and economic security, and the ability of state and local governments to maintain tax effort and public services. These will tend to discourage the growth of business investment, despite greater corporate cash flow and despite the near-term boost to incomes from the tax cuts.

“The stated economic policy objective of the Trump administration has been to raise the rate of economic growth on a sustained basis, from the 2 percent or so characteristic of the post-crisis expansion to at least 3 percent and if possible beyond. The stock break does not by itself derail this goal for 2018, at least, not yet. But it makes clear that financial and economic risks, instabilities and crises have not gone away — and that a growth strategy rooted in the stock market is necessarily doomed to collapse at some point.”