US market tumble ominous for Trump’s policies

By Li Hong Source:Global Times Published: 2018/2/7 22:48:41

Illustration: Peter C. Espina/GT

The US stock market rout has triggered fears that the bull run that followed the 2008-09 financial meltdown will be derailed. Affected by the US tumble, global markets fell, with the Shanghai Composite Index declining more than 1.8 percent on Wednesday.

Although the White House tried to assuage investors' deepening worries by highlighting the "strong fundamentals" of the US economy, many market analysts remained jittery.

Interviewed by CNBC, Tony James, chief operating officer at private equity giant Blackstone, forecast that the US stock market could fall as much as 20 percent in 2018. This pessimism was in contrast to earlier market euphoria that the Dow Jones might easily hit 30,000 points.

The massive market fall was sparked by US wage data unveiled on Friday that pointed to quickening inflation, which would cause the Federal Reserve to raise interest rates at a hastening pace.

The ferocious stock selloff also injected a new degree of fear into the market, analysts said. The biggest worry for investors seems to be US government policy on fiscal, monetary and trade issues.

To add to inflationary pressure, the Trump administration's welding of punitive trade practices against major US trade partners - including very high tariffs imposed on raw materials and finished products - are certain to raise producer and consumer prices in US.

If the US engages in even fiercer trade protectionism by terminating the NAFTA pact with Mexico and Canada, or shutting more inexpensive Chinese goods out of its markets, there is no way that the Trump administration can put a lid on price hikes.

To make things worse, if the Trump administration's trade penalties against China trigger a full-blown trade war between the two largest economies in the world, the result could send US inflation skyrocketing, experts said.

The White House's claim that US economic fundamentals are strong is questionable, as more economists believe US President Donald Trump's signature tax reduction reform is actually a fiscal policy fiasco.

Economists and money managers fear that the tax cut, which took effect last month, will deplete federal revenue and add to the national debt, which has swelled to more than $20 trillion. The tax cut will force Uncle Sam to borrow more from foreign countries, and that extra debt is unnerving investors.

Analysts say this problem is accompanied by fear of the looming battle over the debt ceiling. The Trump administration will need to raise its borrowing limit soon and there is no deal in sight between the Democrats and Republicans in Congress. Because a deal will require 60 votes to pass in the Senate, investors are worried that the federal government could shut down amid the market meltdown.

The market tumble coincided with the swearing-in on Monday of Jerome Powell, who was hand-picked by Trump to succeed Janet Yellen as chairman of the Federal Reserve. Unlike many of his predecessors, Powell does not hold an economics degree, which worries some investors.

Historically, the Federal Reserve has had more influence over the US economy than any president. With Trump sitting in the White House, the independence of the Powell-led central bank in steering US economic operations is to be tested, experts said.

Trump has previously taken credit for stock rises. But the prospects are increasingly looking murky for him, as this market meltdown foreshadows the trouble he has to face later in his term.

The author is an editor with the Global Times.


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