America’s rising credit costs have overpowered growing employment and significant real disposable income gains to cause slumping housing demand. That always leads to declining sales of consumer durable goods and a depressive impact on three-quarters of the economy.
On top of that, a strong import penetration, helped by the rising value of the dollar — which is equivalent to an import subsidy and an export tariff — kills the incentive of American companies to invest in expanding their production capacities.
That’s how rising interest rates begin eroding 90 percent of America’s aggregate demand.
The Fed should show an accelerating inflation as a rationale for rising credit costs. Also, an excess world demand for the dollar indicates its scarcity. Does it make sense, then, to increase the dollar shortage, and its relative price, by further restricting the dollar supply?
Trade deficits are also a powerful drag on U.S. economy. For quick results, Trump should make a deal with Germans, the chiefs of their EU realm.
And while he’s at it, Trump should tell the Germans to lay off Italy’s 2019 budget and work, instead, on a fiscal stimulus of their own to rescue their faltering economy. Berlin should do that through stronger domestic demand rather than taking purchasing power out of Italy, and the rest of Europe, with huge trade surpluses.
More generally, Washington should make sure that Germany stops messing up the European economy. Europe takes a quarter of U.S. exports, which are currently growing four times faster than U.S. sales to China.
Once he settles trade issues with Europeans, Trump can go toe-to-toe with China. That of course is not the optimal way to proceed. It would be much better to hold China to its standing offer of a “win-win cooperation.” Sadly, however, acute problems with Beijing seem to have gone well beyond the explosive and unsustainable bilateral trade imbalances.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.