The economy does not make Trump invincible

Bill Clinton aide James Carville once famously remarked that when it came to winning elections, it’s “the economy, stupid.” 

This dictum has led many observers to surmise that the currently strong U.S. economy makes President Trump a shoo-in for re-election in 2020. But what these observers overlook is that between now and November 2020 there can be many an economic slip between cup and lip. This would seem to be especially the case at a time when the IMF estimates that 90 percent of the world’s economies are now already experiencing slowdowns.  

This was the lesson that John McCain (R-Ariz.) painfully learned as the U.S. and global economies took a nosedive on the eve of the November 2008 presidential election, after having started the year on a seemingly sound footing.

To be sure, if the election were held today, the strong U.S. economy would make Trump a formidable candidate for reelection.  

U.S. unemployment is now at a fifty-year low, the economy is growing at a satisfactory rate, wages are rising, and the U.S. stock market is beating record levels on an almost daily basis. While these achievements might have been made at the cost of incurring a large budget deficit and a ballooning public debt that might have mortgaged our economic future, such matters all too likely will be of little concern to the electorate.

Unfortunately for Trump, it is not today’s U.S. economy that is going to be the determining factor in the 2020 election. Rather, it is how the U.S. economy and financial markets perform in the months immediately running up to November 2020. In this context, it would seem that there are all too many reasons to think that in six months’ time the U.S. economy could be looking decidedly less rosy than it does today. 

Today, all too reminiscent of the start of 2008, a dark cloud hangs over the U.S. and global economies. That cloud is a global credit and asset price bubble of epic proportions that has been spawned by a decade of ultra-easy money by the world’s main central banks. 

One indication of this bubble is the fact that global debt to GDP levels today are significantly higher than they were at the start of 2008. Other indications are that U.S. and global equity valuations appear to be stretched, housing bubbles have re-appeared in a number of important economies and an alarming amount of credit has been extended to non-creditworthy borrowers around the globe at historically low interest rates.

Nobody can know when the global credit and asset market bubble will burst or what event will cause it to burst. But with the abrupt change in the global economy over the past year, it would be rash to dismiss totally out of hand the possibility that the global credit bubble could burst well before the November election. 

This especially seems to be the case at a time when the Chinese economy shows clear signs of losing momentum, the German, Italian, and U.K. economies all appear to be on the cusp of recessions and the Indian economic growth rate has halved in the context of increased domestic political strife. It also seems to be the case at a time when President Trump has a fragile truce in his trade war with China and at a time when he is threatening to impose additional import tariffs on an already weak European economy. 

Further heightening the risk that the global credit bubble might burst before November 2020 is a deteriorating global political landscape. It is not only the fact that geopolitical risks in North Korea and Iran have increased or that the Middle East is once again in turmoil. It is rather that social protests seem to be gaining momentum in countries as disparate as Chile, Colombia, France, Hong Kong, India, Iran and Venezuela. Worse yet, there is every indication that this social unrest is spreading from one country to another.

Past experience, including that in 2008, should inform us that when credit and asset price bubbles burst, the economic and financial market fallout could be disruptively large. The 2008 experience should also remind us as to how interconnected the world’s economic and financial system has become. This has to raise the possibility that much in the same way as in 2008 the Lehman bankruptcy spilled over from the United States to the rest of the global economy, a systemic crisis abroad in 2020 could very well spill back to our shores. 

Trump could very well be lucky in 2020 and have the global credit bubble burst after his reelection. But this is far from a certainty. It would seem to be equally possible that this time next year we will look back and ask ourselves how we could have missed so many early economic warning signs about real trouble ahead in the global economy. These signs might include the recent sovereign debt default in Argentina, the rising private credit defaults in China and Turkey, the We Work financial fiasco and the abrupt economic slowdown in China and Germany, the world’s second and third largest economies, respectively.

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.