The General Theory of Trump

Donald Trump's musings this week about how the rising US stock market is erasing the national debt "in a sense" has prompted widespread hilarity, at least if you're the kind of person who can find anything funny in either (a) Trump or (b) economics.  One the surface the hilarity is justified: stock market gains accrue to stock holders, not to the US Treasury, which is the issuer of the national debt.

And yet....we know that Donald Trump watches a lot of cable news TV, so all kinds of facts and ideas flow daily into the roiling nest of vipers inside his head. They then duly emerge in scrambled form in his stream-of-consciousness speeches.  But the facts are in there somewhere, with the result that, almost by accident, he's not always wrong.  Much of what he says about the NAFTA deal, for example, has some basis in fact.

With that in mind, can we piece together anything coherent about the national debt and the stock market?  Start with the proposition that the absolute size of the debt is not indicative of anything very much.  Consider Puerto Rico's debt, much in the news lately.  The widely-quoted figure of US$ 73 billion is an unbearable burden for the territory, but a debt of that size would be relatively trivial for the Federal government, or even for a richer state such as California.  It's the size of the debt in relation to the economy that really matters.

What this means is that if the economy is growing rapidly, the debt burden becomes less onerous over time.  This was well illustrated by the experience of Canada in the 1990s.  After two decades of  irresponsibility, the government finally started to get serious about its fiscal mess. However, although a degree of fiscal tightening was undertaken, what really allowed the debt burden to be brought down to size in well under a decade was a burst of growth in the economy, largely as a result of the loose monetary policy followed by the Greenspan Fed.  For now,  Canada's debt/GDP ratio is still the lowest among developed economies, though the Trudeau government seems determined to put an end to that.

OK, so a growing economy means that any given debt burden becomes less of a big deal over time.  Now, what about stock prices?  The value of any individual stock represents the market's assessment of the future income stream that will accrue to the stockholders, and the value of the entire stock market is investors' collective view of the outlook for corporate profits. 

It is reasonable to assume that profits will grow faster in a fast growing economy than in one that is growing slowly or in recession.  Thus we can suggest that if investors' views as reflected in current stock prices are accurate, the US economy can be expected to show steady growth in the foreseeable future -- which is, indeed, the most recent forecast from the IMF. So: rising US stock prices portend continuing growth for the US economy, and if that happens, the US national debt will shrink in relative importance, if not in actual size. 

That's almost certainly not the "in a sense" that Trump had in mind, and needless to say you can shoot all kinds of holes in it.  Heck, I can shoot holes in it myself, starting with the stock market's very checkered track record as a predictor of the real economy.  But there's the teensiest kernel of truth buried in what Trump said, even if he himself probably doesn't realize it.