In the run up to the 2018 midterm congressional election, President TrumpDonald John TrumpTucker Carlson: ‘Bolton would love to have a war with Iran’ Poll: Majority says Trump is a successful businessman Warren releases plan to tackle climate change threats to military MORE made the crucial mistake of not making the strong U.S. economy the central theme of that election campaign. That mistake cost him the loss of Republican-control of the House of Representatives.
Now, in the run up to the 2020 elections, he seems to be making the opposite mistake. He is putting the U.S. economy at the center of his reelection campaign at a time that the world economy is beset by an unusual constellation of risks in a number of systemically important economies.
That mistake could very well cost him his presidency if any of those risks were to materialize before November 2020.
Among the more immediate risks to the global economy is one of President Trump’s making. It is that his very hardline stance on the China trade issue could lead to a slowing in the world’s second-largest economy. China is particularly vulnerable given that it’s trying to rebalance its economy and wean itself off excessive credit growth.
Any marked slowing in the Chinese economy is bound to have spillover effects on those economies with strong trade links to that country. It also could contribute to global financial market instability.
Another global economic risk of President Trump’s making is his proposed 25-percent import tariff on European automobiles. The imposition of such a tariff would seriously cloud the economic prospects of Germany, Europe’s largest economy.
This is especially the case considering that exports comprise 50 percent of the German economy and that Germany is already on the cusp of an economic recession.
As if a potential German economic recession were not sufficiently bad news for the European economy, we now have the increased likelihood that the United Kingdom will crash out of Europe without a deal in a manner that could disrupt its economy.
Underlining that risk is the meteoric rise of Nigel Farage’s Brexit Party ahead of European parliamentary elections later this month and the corresponding implosion of the Conservative Party. That implosion will likely hasten Prime Minister Theresa MayTheresa Mary MayTrump’s global economic miscalculation may cost him in 2020 London mayor on state visit: UK ‘shouldn’t be rolling out the red carpet’ for Trump Twitter suspended more than 160,000 accounts over terrorism in second half of 2018 MORE’s replacement by a Tory PM in favor of a hard Brexit.
Any stumbling of the German and United Kingdom economies could very well trigger another and more-dangerous round of the European sovereign debt crisis. This would especially seem to be the case considering that the Italian economy, which is some 10 times the size of the Greek economy, is already in recession, struggling under a public debt mountain and has a very weak banking system.
It hardly provides comfort to think that Italy now has a populist government that would have difficulty in dealing with a real economic crisis or that Italy might be too large an economy to be bailed out by Europe.
Sadly, the risks to the global economy are not limited to China and Western Europe. The Argentine, Turkish and Venezuelan economies are all now in the grips of accelerating currency crises, while the new Brazilian government is showing increasing signs of being unable or unwilling to address that country’s serious public finance problem.
Also casting a dark cloud over the global economy are the rising geopolitical risks from countries like Iran and North Korea.
Seemingly oblivious to the lessons from the 2008 Lehman Brothers crisis, President Trump appears to be making the basic mistake of thinking that the United States economy is insulated from the rest of the world economy and is immune from a global financial market meltdown.
This seeming indifference is all the more difficult to understand considering that years of ultra-unorthodox monetary policy by the world’s major central banks has created global asset price bubbles and led to the major mispricing of global credit risk.
Democratic campaign strategist James Carville coined the phrase, “It’s the economy, stupid.” Before crafting their electoral campaigns for the 2020 election, the presidential candidates might want to reflect on how rapidly economic conditions changed for the worse ahead of the 2008 election.
They also might want to consider that the 18 months between now and the November 2020 election is a long time for any of multiple major global economic risks to be triggered.
These considerations might give them pause about premising their election campaigns on the presumption that today’s strength in the U.S. economy will persist into 2020.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.