Daniel McLaughlin | On November 26, 2019

Donald Trump has demonstrated many times over his incredible game-playing ability, getting his opponents to overplay their hands and to shoot themselves in the foot, and it is fun to see. He knows how to get things done, and he has a powerful influence on people. Unfortunately for those who find the progressivism and socialism embraced by the American left abhorrent, Trump seems to be laying a trap for himself.

It has nothing to do with impeachment, collusion, or even the deep state. His problem is more basic. It is the economy. He has staked so much of his credibility on his ability to grow the economy, to lower unemployment, and to improve opportunity for middle and lower classes, that, if things fall apart before the next election, he is going to have a difficult time staying in office, even against whichever crazy, radical, so-called-progressive socialist the democrats select, and that is not a good thing.

When Trump first stepped into office, I wrote that there was a bubble and that a recession was imminent over the next few years. It would be better for him to get it over with early in his term. Instead, and in spite of some of his rhetoric about cutting back the size of government, he has engaged in the same massive Keynesian expansionist nonsense as his predecessors.

It is true that huge federal deficit spending can goose gross domestic product, since government spending itself is a component of GDP, but the government competes for its resources with the private economy, mitigating positive effects. The economic progress of the last few years has more to do with eliminating the anti-business climate and at least some of the regulatory burden that was such a drag on business and investment.

It is also true that infusions of new money by the central bank can pump up prices in the stock market, making it appear that everything is rosy, like it did before the crash in 2007. Those sky-high prices, though, don’t reflect the actual productive activity of the economy.

President Trump has recently been promoting lower interest rates by the Federal Reserve Bank, even to the point of negative rates. It is, again, based on the absurd Keynesian notion that demand is too low, so savers must be punished and spenders rewarded, giving a jolt to aggregate demand. If, however, the economy was indeed so healthy, there would be no need for such stimulus, monetary or fiscal, even for a Keynesian.

By buying government bonds from bond dealers in the private financial markets, the Fed indirectly influences interest rates. The more they buy, the higher the demand and the higher the price. Since interest on such bonds is the difference between the purchase price and the value at maturity, the more the Fed purchases, the lower the interest rates.

The Fed creates new money out of thin air primarily by using accounting entries for its purchases rather than money already in circulation, and increasing the money supply pushes up prices. The perverse effect is that, because savings interest is so artificially low, people put their money where it will earn more, into financial markets, such as stocks. Massive inflation occurs not in consumer prices, but rather in financial markets, and this is the trap. The markets can only go so high before they become so detached from reality that nobody can ignore it.

Some strange things are happening at the Fed lately, which seems to indicate that all is not well. Nobody can predict the future, but things tend to follow patterns, and if this trap slams shut, it is going to create difficulty for the American people, and thus, for Trumps reelection campaign.

Originally published on Townhall Finance.

Daniel McLaughlin

Daniel J. McLaughlin is the author of “Compassion and Truth-Why Good Intentions Don’t Equal Good Results.” Formerly a finance executive, he is now focused primarily on writing on economics, business, and politics. You can find him at daniel-mclaughlin.com.