US Economics 101: A Tale of Two Economies
President TRUMP has touted the record high US stock market as evidence of the success of his Administration’s economic policies. Yet, most of the stock market gains are attributed to the technology sector led by Google, Facebook, Amazon, Netflix, and Tesla that have benefited from the “stay at home” policies of the COVID-19 pandemic ... Indeed, it is hard to justify current, inflated stock market valuations in comparison to one year ago when the US economy was clicking on all cylinders across the manufacturing, recreation/leisure, technology, education, financial sectors. How is it possible that individual stocks have higher valuations today with much lower net cash flow than one year ago? Furthermore, millions of small businesses and start-ups are no longer operating which are not reflected in these broad stock market indices.
The reality is that US Federal Reserve “stimulus” policies have greatly inflated stock market values with the cost of borrowing reduced to near ZERO for large corporations as well as nearly inexhaustible credit-line facilities from the US Treasury. As these policies have greatly enriched large corporations (even the NBA’s Los Angeles Lakers basketball corporation received a multimillion dollar PPP grant!), small “Main Street” businesses have been dismayed by the difficulties in obtaining government financial support.
Indeed, the recreation, leisure, services, restaurants, bars/nightclubs sectors have been decimated over the last 7 months due to restrictive COVID-19 policies. These sectors are leading the extraordinary surge in mounting corporate and consumer bankruptcies in the United States. In terms of the latter, there are nearly 4 million FEWER jobs in America, TODAY, than at the beginning of the Trump Administration.
For example, employment in the US manufacturing sector increased approximately 480,000 from early 2017 to early 2020 whereas it has lost a total of about 640,000 jobs since March. In addition, millions of US workers have suffered from reduced work weeks and salary reductions. Hence, the “buying power” or effective demand of the American middle and working classes has declined substantially over the last 7 months.
Today, the US economy has plateaued at about 80% of its pre-pandemic level. Until widespread COVID-19 vaccine programs are successfully implemented, US Federal Reserve Board Chairman Jerome Powell has strongly advocated for more economic stimulus aid from the US Treasury. With US Federal Reserve setting borrowing rates at ZERO percent (until at least 2023) for member banks, together with slumping job creation rates, Chairman Powell has emphasized that the stagnating US recovery is exacerbating previous socio-economic fault-lines in America—especially among racial-ethnic minorities, women headed-households, and low-income populations. Although Powell has emphasized ‘The US federal budget is on an unsustainable path… for some time…’ he cautions that ‘This is not the time to give priority to those [deficit spending] concerns.’ Even so, President Trump has emphatically declared that he will NOT support another large-scale, stimulus authorization legislation (currently passed by majority Democratic House of Representatives) until after the November 3rd election. Sadly, millions of Americans along with the global economy will suffer until this political impasse is resolved.