Visitors Now:
Total Visits:
Total Stories:
Profile image
By The Daily Reckoning (Reporter)
Contributor profile | More stories
Story Views

Now:
Last Hour:
Last 24 Hours:
Total:

Comparing Trump to Reagan

Tuesday, November 22, 2016 16:04
% of readers think this story is Fact. Add your two cents.

(Before It's News)

This post Comparing Trump to Reagan appeared first on Daily Reckoning.

The election of Donald Trump can be compared in some ways to the election of Ronald Reagan in 1980. There are similarities, but some important differences, which you’ll see in a moment.

First, the main similarity: Ronald Reagan was considered a buffoon, a dope, an actor unfit for the presidency. Many feared he’d also push the nuclear button and start World War III. So many of the things you’ve heard about Trump are exactly what they said about Reagan at the time.

But Reagan came in with a team of advisors and did a lot of things right. He had a lot of help from Paul Volcker, who headed the Fed at the time. That’s something important to bear in mind. It wasn’t just Reagan. It was Reagan and the Fed working together to turn the U.S. economy around. Reagan entered office when the economy was sunk in one of the worst recessions since World War II.

Reagan had his recession in 1981 going into 1982. I always thought it was genius of Ronald Reagan to his recession over early. Most presidents do not make it through their terms without a recession. If they succeed in delaying it initially, they usually end up having it late in their terms at the worst possible time. Once Reagan’s early recession was over, the economy grew for seven straight years.

For over three years, from 1983 to 1986, growth in the United States was 16%. That’s real growth, not nominal growth. There wasn’t any inflation to dilute that number. In contrast, average annual growth in the United States has been barely 2% since 2009. That’s almost eight years. Yet for three years in the early stage of the Reagan administration, growth averaged over 5%.

2% versus 5% might not sound dramatic. But over time it is a dramatic difference of orders of magnitude. An economy growing at 5%, or even 4%, if compounded, will be twice as rich in 20 years as the economy growing at 2%. It’s a major difference.

Now, let’s step back and talk a little bit about something you’re not going to hear anywhere else. They speak to some important differences between the economy of Ronald Reagan and the economy Donald Trump will inherit.

When Ronald Reagan was sworn in, interest rates were 20%. They were as high as they could possibly be. They had nowhere to go but down. They weren’t going to go to 30%. The country would have gone belly up and declared bankruptcy.

Now, as we prepare for 2017, Trump will be entering the White House under very different circumstances. Interest rates are close to zero. They have nowhere to go but up.

Reagan had a major tailwind in the form of potentially lower interest rates. Trump is going to have a major headwind in terms of potentially higher interest rates. The inflation picture is also quite different.

When Reagan entered office, inflation was running at 13%. By 1984, Volcker had reduced it to around 4%. That was a massive disinflation

Stocks and bonds both went up. Stocks were going up because of real growth. Bonds were going up because interest rates were coming down and inflation was coming down. Now, Trump could have the opposite situation. Trump could have a collapsing bond market and stocks could run out of steam.

The other major difference between then and now, and this is one that I haven’t heard anyone mention, is that when Reagan was sworn in, the U.S. debt-to-GDP ratio was 35%, close to the lowest it had been since the end of World War II. At the end of World War II, the U.S. debt-to-GDP ratio was 100%. By the ‘70s, it had come down to around 30%. It had gone up slightly to 34% when Reagan was sworn in.

Reagan therefore had enormous fiscal space. He had enormous headroom to increase the debt-to-GDP ratio without threatening the financial solvency of the United States, which he took advantage of. When Reagan left office, the debt-to-GDP ratio was 50%. So he added 15 percentage points to the debt-to-GDP ratio. If you take 15, divide it by 35, you can see that he increased the debt-to-GDP ratio by 40%.

Now, what did Reagan spend the money on? Winning the Cold War. Reagan basically outspent the Russians because they couldn’t match us. By the end of the decade, the Cold War was over. Reagan also instituted massive tax cuts. That was the other contributor to deficits. Paul Krugman and others to this day criticize Reagan for running up the debt.

Now, here’s the problem:

The debt-to-GDP ratio today is 100%, back to where we were at the end of World War II. When Obama entered office, the national debt was about 10 trillion. Today, it’s about 20 trillion, and growing. Obama piled 10 trillion of new debt on top of the old, so the debt-to-GDP ratio is back up to 100%.

What is Trump going to do? He wants to be a big spender. He wants tax cuts, more spending on defense, spending on the wall, infrastructure spending, airports, roads, bridges, tunnels, railroads, et cetera, and less regulation. He wants to be Ronald Reagan. But unfortunately for Trump, Obama has tied his hands.

Trump will not have the fiscal space Reagan had. The U.S. is getting uncomfortably close to where Italy, Spain, and Greece, and Japan and some of these other potentially bankrupt countries are. The point being that Trump faces enormous constraints that Ronald Reagan did not have.

Trump won’t have falling interest rates like Reagan had. He’s going to face increasing interest rates instead. Inflation won’t be falling dramatically. He’s facing the possibility of increasing inflation, which means higher food prices and higher prices at the pump. He doesn’t have a low debt-to-GDP ratio like the 34% Reagan inherited. He’s actually inheriting a high debt-to-GDP ratio of 100%.

Trump is going to try to run the Reagan playbook in a non-Reagan environment. That plan could immediately hit a wall. It could result in something like stagflation, where we get the inflation from spending and deficits, but you don’t get the growth. That’s because after eight years and $10 trillion, we’re facing the reality of diminishing marginal returns. That’s when each new dollar of stimulus fails to produce as much growth as the dollar before. Basically, the first dollar you spend in an expansion is a lot more powerful than the ten-trillionth dollar you spend.

The low-hanging fruit is gone. Now, it’s like a giraffe trying to climb a tree. By the way, I think tax cuts are a good thing. I’m not saying that Trump’s policies are bad. I think a lot of them are positive, but I don’t believe they’re going to work out the way his advisors expect. Someone may have to sit him down and say, “Mr. President, you may want to do all this, but honestly, we’re out of room. We’re out of headroom. We don’t have the ability to expand the debt.”

There is a good chance that cutting taxes right now will help the economy, but not enough to produce the growth required to make up the difference. That means larger deficits. Add all that new spending on top of it and the debt-to-GDP ratio is going to increase.

Where are we going to get the borrowing capacity unless the Fed accommodates it?

If the Fed accommodates it, it’ll produce inflation. If the Fed doesn’t accommodate it, we’re going to hit the wall and enter recession. That’s two possible outcomes, recession or inflation. Neither one is good. We can even get the worst of both worlds, and that’s the stagflation I mentioned. We’ll be writing and speaking a lot more about this.

The Reagan/Trump analogies are interesting. But there are major differences that people are not focusing on and a lot of reason to be concerned.

Right now, I would say that if things get really bad and we have a financial crisis, you’re going to want gold. If the economy grows, but we get inflation, you’re going to want gold.

All signs point to gold as a safe haven asset in this environment.

Regards,

Jim Rickards
for The Daily Reckoning

The post Comparing Trump to Reagan appeared first on Daily Reckoning.

This story originally appeared in the Daily Reckoning . The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.

Report abuse

Comments

Your Comments
Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

Top Stories
Recent Stories

Register

Newsletter

Email this story
Email this story

If you really want to ban this commenter, please write down the reason:

If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.