The famed economist and former Treasury secretary who recently called for scrapping the $100 bill has now come out swinging against Republican presidential contender Donald Trump.
In an opinion piece in Londons Financial Times, Harvard economist Larry Summers lamented that the economist risks associated with the upcoming June 23 Brexit vote are being taken seriously, whereas the purported dangers of a Trump presidency have not been taken into account by financial markets.
As great as the risks of Brexit are to the British economy, I believe the risks to the US and global economies of Mr. Trump’s election as president are far greater. If he is elected, I would expect a protracted recession to begin within 18 months. The damage would be felt far beyond the United States, Summers wrote, predicting that if Trump does even half of what he has promised, he would surely set off the worst trade war since the Great Depression. He concluded: In no election in my lifetime has a major party candidate for president been so dangerous for the economy.
Uncertainty hurting growth: Here’s a newsflash for Summers, however: The economy likely is headed into recession regardless of who wins the presidency, whether Trump, Hillary Clinton, or some other candidate. The disastrous May jobs report issued Friday underscores that likelihood.
It’s certainly true that the uncertainty over the outcome of the presidential elections have some investors and businesses in cautious mode. A new survey by the National Association for Business Economics found that 60% of business economists say concerns over the November vote is hurting U.S. growth prospects.
The survey downgraded its U.S. GDP forecast for 2016 to just 1.8%, from a target of 2.2% in March and a 2.6% prediction in December. The NABE sees slowdowns in everything from business investment and consumer spending to industrial production and corporate profits.
If I’m an owner of a medium-sized business and I’m hearing very rattling news about the election, on the margin I’ll be a little more cautious about hiring or making an investment, NABE President Lisa Emsbo-Mattingly told Bloomberg.
Deutsche Bank sees recession this year: Thus, the seeds for a new recession have already been sown. Several economists from major firms are now saying so. The risks to the outlook remain skewed towards the downside, Morgan Stanley analysts wrote. Global growth will likely remain below trend for a while longer and recession risks will likely remain a more topical subject than overheating risks.
Deutsche Bank sees the risk of a recession coming as soon as the next quarter. Noting that corporate profit margins historically peak several quarters before a recession, the firm warned that the economy could enter recession as soon as the second half of this year.
And the May jobs data also got the attention of Gluskin Sheff economist David Rosenberg, who found similarities in the payrolls report with previous recessionary periods. I don’t want to alarm anyone but the facts are the facts, and the fact here is simply that this is precisely the sort of rundown we saw in November 1969, May 1974, December 1979, October 1989, November 2000 and May 2007.
Each one of these periods presaged a recession just a few months later the average being five months.
For more signs that a recession could be starting to unfold, see Financial Senses April 26 article titled 15 Warning Signs of Possible Market Top, Recession Next Year.
Recession will keep Fed printing: Why is a potential recession on the horizon important to gold prices? Because the Federal Reserve won’t be raising interest rates with any degree of intensity with an economic slowdown taking shape, and gold tends to perform better during low-rate environments because it pays no interest.
And even if the Fed does launch one or two rate hikes this year, it likely is doing so because it needs the ability to cut rates, which are still already near zero, once the existence of a recession becomes undeniable.
Though Summers and his ilk are keen to make Trump the fall guy for the next recession, the truth is that this is the weakest economic recovery in U.S. history and its already long in the tooth. Regardless of who wins the presidency in November, loose Fed monetary policy and overall economic uncertainty will continue to bolster gold as a go-to safe-haven asset.