It's been a strange few days on the Donald Trump front: He said something about himself that I really believe, and something about the economy that's mostly true.
Personally, Trump has lately been a lot like Adolf Hitler; I'm not referring to his general tone, but to his claim that immigrants are “poisoning the blood of our country,” echoing almost verbatim what Hitler wrote in Mein Kampf. But Trump claims he has never read My Struggle, and I believe him, just as I believe he barely glanced at the Bible or any of the great books or, I suspect, The Art of the Deal has. It's clear that reading isn't his thing. What probably happens is that Trump speaks with admiration to people who have read Hitler, and so Nazi language creeps into his speeches. Do you feel calmer?
Economically, the stock market has recently approached historic highs, but Trump has belittled those gains because he believes they only make “the rich richer.” It's hard to imagine a worse person to convey this message, because when Trump was president, he constantly bragged about the stock market and predicted that the election of Joe Biden in 2020 would lead to a stock market crash. As an aside, one thing I didn't see emphasized by “vibes” in the debate over vibracession or recession – why are Americans so pessimistic about an economy that appears to be very strong? – is the fact that Trump himself keeps saying things about the economy that are completely false, including his claim that the price of bacon has “quintupled” under Biden. In reality, it's up 18%.
However, Trump is right when he suggests that most people won't see much personal benefit from rising stocks. A slim majority of Americans have some level of exposure to the stock market, mostly indirectly through retirement accounts. But for almost everyone, these holdings are small, while the richest 10% of families, on average, own millions of dollars in stocks.
Although most people don't deal directly with stock prices, do you know what they do? Bond prices, which represent the flip side of interest rates. (Higher bond prices correspond to lower interest rates, and vice versa.) Interest rates rose sharply through much of 2023; The 10-year bond yield reached nearly 5% in October, up from about 2% before the pandemic. Since then, however, yields have lost a significant portion of that increase, falling by more than a percentage point. Because? As I'll explain shortly, no one really knows. However, rising interest rates threatened to have a negative impact, so if they fall even slightly, it is good news.
Why are high interest rates a problem? Firstly, because they discourage investment. When interest costs are high, companies are less willing to invest. For example, high interest rates have been a factor in the delay or cancellation of several offshore wind projects. Mortgage interest is a significant expense for home buyers, so high interest rates are bad for the real estate market and home construction.
High interest rates also bring other problems. In the American system, high mortgage rates tend to lock people in and hold them back from selling because it would mean foregoing fixed-rate mortgages at lower interest rates. And the decline in the value of banks' bond portfolios triggered a brief bank run in March. This panic appears to have been contained for now, but the fall in interest rates significantly reduces the risk of a second round.
Oh, and the cost of borrowing by the U.S. government is having a big impact on the federal budget outlook, which isn't very promising but looks less bleak than it did two months ago. Therefore, the rise in bond prices is good news for everyone. What's going well?
Basically nobody knows. If an individual stock rises or falls, it could be due to the trader's particular information or experience. But bond traders work with the same macroeconomic data available to anyone with internet access.
Analysts have offered various explanations for the rise in interest rates this year: it was the federal budget deficit ballooning due to declining revenues; It was the boost that the Biden administration's industrial policy gave to business investment; was optimism about future economic growth powered by artificial intelligence. But to my knowledge there is no solid evidence for any of these hypotheses.
And there was not enough information to justify a comprehensive revision of these accounts. We've had some good news on inflation, pointing to significant reductions in short-term interest rates (controlled by the Federal Reserve) over the next year or two. However, this should not have a major impact on long-term interest rates, which are intended to reflect expected Fed policy for many years to come; However, even 30-year interest rates have fallen by around one percentage point.
I suspect this is essentially market psychology rather than deep economic forces. Whatever happens, it's good news. The rise in the bond market is a Christmas present for us and a reason to be more optimistic about 2024.
Paul Krugman is a Nobel Prize winner in economics. © The New York Times, 2023. Translation news clips
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