Some may wonder why Donald Trump is so fixated on the Fed and interest rates. The simple answer is that Donald Trump needs a fake economy to win the 2020 elections. Trump’s beef with the Fed are the interest rates. The higher the interest rates the Fed sets, the worst the economy seems to Americans.
The U.S. economy is driven by debt. Trump’s whole business model is driven by debt. Without debt, the U.S. economy would fizzle. The more debt an American holds, the better the economy does. U.S. voters vote on fake perceptions. The better the economy feels the more likely the incumbent is elected. For the U.S. economy to feel good, U.S. consumers must feel like they can buy what their hearts’ content.
A new house. A new car. That luxury watch or flat LED humongous television charged to credit cards makes the economy seem like it is bursting at the seams. Americans make financial decisions on the monthly bills they pay each month.
This is why car salespeople always steer you towards the monthly fees when looking at a car. It’s only two hundred bucks a month, sounds much better than the $30,000 price tag. It’s only three dollars more a month for the warranty that no one needs sounds so much better than the fifteen hundred dollars that does nothing for the car owner.
The lower the monthly fee, the higher the consumer is willing to spend on an item.
Very few Americans understand the interest rate cost and the price of what they buy. They look at the $200 a month car payment and purchase an overpriced new car to feel good.
Each purchase starts the much maligned “trickle down” economy. Trickle down economics is not about paychecks, but rather about buying power. Can the U.S. consumer buy a car every three years? That is the fundamental driving force behind the U.S. economy.
The trickle-down economy begins with the purchase of the car, the house, or the electronics like the new iPhone. Each sale adds to the flow of money. The car manufacturer or other manufacturer, whether American, Mexican or Chinese starts the trickle-down economy. Each of the manufacturers pays wages to managers, salespeople, warehouse people and sometimes U.S.-based laborers building stuff.
Those wages are then trickled down through the economy in the purchases of goods or services. Among them are grocery stores, restaurants and even governments via taxes and service fees. Each of those take the original wages and use it to create new wages for their workers. These new workers than use their wages for the same things – cars, houses, services and taxes. The insidious thing here is that it doesn’t matter where the products are made, China, México or the United States because each sale pays wages to a U.S. voter. The wages are used to buy the same thing that the original wage earners built for their wages – the cars, the houses, the electronics and so on.
Trickle-down economics are really a circular economy where the original manufactured product generates the money used to buy that product as it trickles down the economy. But here’s the dirty part of the whole scheme. There is no new money created.
Instead credit is used to recirculate the same money around and around creating a fake economy.
Without credit consumers wouldn’t buy new cars every three to five years. Smart phones would be purchased once every five years or so. Buying a house would then be a once-in-a-lifetime purchase instead of the three to four houses a typical consumer buys today.
When the Fed raises interest rates it causes consumer credit costs to go up.
But here’s the problem, the typical U.S. voters doesn’t know how much interest they pay each month. They just know that they can afford $200 a month for the car they want. When interest goes up, the monthly cost of the car goes up as well. Instead of $200 a month, it might now be $210 or $220 a month.
Many U.S. voters live month-to-month from their monthly paychecks. Even ten or twenty dollars increase in a car payment is enough to push the consumer out of purchasing the new car. When sales drop on consumer goods because of the rising costs in interest rates, workers are the first to be laid off to keep the manufacturers in business. As they lose their jobs, the voters buy less, further exasperating the trickle-down economic engine.
To keep the “feeling” that the economy is strong requires purchasing power. For U.S. voters that means affordable monthly payments from low interest rates.
Therein lies the fake economy that Donald Trump needs for voters to give him another term in 2020.
