As the US stock market continues to fall, many are pointing the blame to President Trump, whose recent economic reform may have over-stimulated the economy.
While some were quick to prophesize this economic turbulence as a huge market crash, other economists say this is more an example of a stock market “correction”, not a crash. Regardless, the causes and reasons of the sudden economic downturn, which came as a surprise to some, do implicate President Trump and his recent economic policies.
What happened to the market?
The Dow Jones Industrial Average plunged 1,600 points at one point, one of the highest drops in history. Although falls in the stock market are expected, a fall this sudden and this extreme has been attributed to the fact that the economy had been over-stimulated by the recent tax cuts for corporations. Even though economic growth sounds primarily like a good thing, a rise in markets that quick, is most commonly followed by a fall.
Further, over recent years, there’s been uncommonly low-interest rates thanks to central banks. With the economy on a steady rise, lower unemployment, higher wages, etc. things were starting to look too good to be true – and that’s because they were. Thanks to regulation from the central banks, inflation has not yet become a primary concern for economists and civilians alike. Therefore, many would argue that the current fall is, in fact, a positive thing, as it is a reminder to not be overconfident and neglect the possibilities of inflation. As Bruche McCain, chief investment strategist at Key Private Bank explained: “We have an infinite capacity for self-delusion as investors. When we feel good, we don’t want to be bothered by reality.”
How did Trump’s policies affect this?
Trump has been self-praising himself and his administration for their economic success significantly over the past few weeks. His State of the Union address focused significantly on it, as did his talks with international leaders in Davos earlier this month. It may appear that in the midst of this self-praise, Trump, the economic tycoon, overlooked the dangers of a quickly accelerating economy.
The recent economic reform brought forth by the Trump administration, particularly the tax cuts for corporations to encourage greater spending, brought a lot of economic growth to the U.S. economy. The Dow spiked 45% after the tax cut was enacted, so there was no doubt that it had stimulated economic growth. As Nicholas Colas, co-founder of DataTrek Research explains, “when you shovel stimulus in at the peak of the cycle, the market starts to worry about a sudden and unexpected rise in inflation”.
It is too early to determine confidently whether Trump’s economic reform was responsible for the market fall. Further, even though it is very likely that the market will recover from the current fall, it brings an important concern to light.
Is President Trump’s confidence in his policies and decisions overbearing to the point that he is neglectful of potential repercussions? It’s very likely that it is. The current situation is limited (primarily) to a market change that is not unprecedented or irrecoverable. However, what if the stakes are higher?
For instance, what happens when Trump’s confidence clouds his judgment when it comes to important foreign policy decisions? One would hope that Trump learns from his mistakes and takes more caution in making huge reform decisions in the future.