Today's Opinions, Tomorrow's Reality 

Nearing the End

By David G. Young

Washington, DC, December 10, 2019 --  

America's decade-long expansion owes its longevity to federal borrowing. It can't keep the party going forever.

With the U.S. economy continuing to add jobs1 despite an unemployment rate at a 50-year low2, all indications are that the longest economic expansion in America's history will continue into the new year. But how much longer? How long can it really last?

Bullish investors like to remind us that the fact that the business cycle has never before gone so long without a recession is no guarantee that a recession will start soon. But anybody who has watched the economy over past decades should be wary. Bullish investors have a way of losing their way during extended market rallies -- giving in to "irrational exuberance" as Fed Chariman Alan Greenspan so famously said in 1996.

Past arguments that "this time is different" have always proved wrong. In late 1999, three years after Greenspan's warning and near the peak of the Dot Com boom, economist James Glassman published "Dow 36,000" arguing that stocks are historically undervalued and they should continue to go up beyond where they are even today. One year later they crashed and a recession soon started.

Similarly, just before the Great Recession hit in 2007, the stock market was riding high. The S&P 500 was still climbing to its peak June of that year, even after several months of regular news report about the flagging housing market and shaky mortgage securities. It wasn't until that fall that the steep declines in the stock market set in.

Armed with the benefit of hindsight, it is now obvious that warning signs were quite apparent in 1999 and early 2007. Are we seeing similar warning signs now? Are provincial bond defaults in China the signal? Maybe it is America's consumer credit overreach? Or perhaps America's skyrocketing federal debt has finally become unmanageable?

Investors who missed or ignored the warning signs 12 years ago took huge hits. The Great Recession's saw the S&P 500 lose half its value and all its gains made during the expansion. Since it hit bottom in March of 2009, the S&P 500 has gone up 350 percent, nearly matching the 380 percent increase seen during the Dot Com boom.

Can this really keep going?

History says no. But the very fact that it has gone on so long has inspired a new generation of theories about why this times are now different.

The simplest answer? The Trump administration's tax cuts. These tax changes returned a large amount of money to high-income taxpayers starting two years ago. What do rich folks -- people who aren't exactly living paycheck to paycheck -- do with newfound money? They save it. And in an era where savings accounts earn less than one percent interest, much of that money finds its way into the market, helping drive up demand for stocks.

But because there was no cut in government spending to offset these tax cuts, federal borrowing has had to go up as well. In a way, the stock market has been ginned up by irresponsible federal borrowing. This is scheduled to continue for at least a year -- those tax cuts aren't going away. In the absence of an external shock, that might turn a record 10 year expansion into a record 11 or 12 year expansion.

On the other hand, for all we know that external shock has already come, obvious to those not blinded by market gains and have the benefit of hindsight. Only our future selves know how wrong we really are and why.


1. Forbes, Jobs Growth Surges In November, Beating Wall Street Expectations, December 6, 2019

2. Washington Post, U.S. Unemployment Fell to 3.6 Percent, Lowest Since 1969, May 5, 2019