Permanently Skewed

TRUMP HOTEL, New York – Trump’s rambling army – professionals, amateurs, camp followers, and profiteers – is marching south, down the I-95 corridor. There, on the banks of the Potomac, it will fight its next big battle.

 

team-aLieutenants in Trump’s army: Bannon, Flynn & Sessions

Photo credit: Drew Angerer / AFP

 

Here at the Diary, we do not like to get involved in politics. But this is a special time in the history of our planet – a time when politics will decide what kind of disaster we face.

Simplifying, if Congress holds the line against Trump, we will have a deflationary disaster. If it goes along with him, the disaster will be more of the inflationary variety.   We are here at the Trump Hotel in SoHo to try to figure out which way it will go.

Until now, the feds used only one weapon in their fight to prevent a correction – monetary policy. They used it until the barrel melted and they ran out of ammunition.   That leaves fiscal policy – old-fashioned deficit spending.

According to standard Keynesian theory, the feds should run a “counter-cyclical” economic policy. When the economy runs hot, the feds should lean towards tight money (high-ish interest rates) and budget surpluses (tax more than they spend).

When the economy cools, or goes into recession, the feds should favor loose money (low to ultra-low interest rates) and generous deficits (spend more than they tax).

Over time, the interference should be neutral, merely flattening out the business cycle – economic expansions and recessions – but not altering the character of the economy nor its average growth rate.

In practice, the feds’ battalions are too slow to be helpful. They arrive after the battle is over, and their tendency to err on the side of loose money and deficit spending nullifies the whole theory anyway.

But with credit-based money to work with (Mr. Keynes theorized in a world of real money backed by gold), they’ve permanently skewed the entire economy toward debt and deficits.

 

economic-stimulus-comicThis cartoon shows the basic problem with the superficially so attractive notions pushed by Keynesianism. The government has no resources of its own – there is no Santa Claus. It just shuffles resources around. Every cent the government spends has to be taken from the private sector, whether by taxation, borrowing, or even worse, inflation. And every cent government takes from the private sector to fund its spending can no longer be allocated by the latter. In order to believe that this is somehow good, you have to subscribe to the idea that government bureaucrats are better at allocating scarce resources than the market. You might as well advocate for communism then.

Cartoon by Red Panels

 

Greatness, Redux

And now cometh to Washington Mr. Donald J. Trump. He has promised to “Make America Great Again,” with an annual GDP growth rate of 4% a major part of the greatness, redux. All across the heartland, people are counting on it.

But an economic growth rate of 4% is nearly four times the rate during the first half of the year. So, Trump’s team is going to have to get to work, blasting their way to a future that hasn’t been seen since the last century.

Field Marshal Trump is shuffling his generals, replacing his lieutenants, and dragging his disloyal captains behind the tent for execution. He knows he will need every man’s cooperation to face the enemy ahead. For in front of him are formidable foes: fiscally responsible Republicans on the right… bond market vigilantes on the left wing… and a mountain of debt in the center.

 

vigilantesLately the bond market vigilantes have actually come off the fence they have been sitting on – but it is still too early to tell if they really mean it.

Cartoon by Chad Crowe

 

Our friend David Stockman, who served as President Reagan’s budget adviser and whom we are going to discuss this matter with today, believes Mr. Trump will lose this battle. But we’re not so sure.

Behind his angry skirmishers in red caps, his big-spending Democrat allies and his precision-media artillery, President-elect Trump keeps his secret weapon. It is such a secret that not even he is aware of it. But it is the one thing that could bring him a sure victory – before, of course, the inevitable catastrophe.

 

Shovels and Pumps

After his victory over the forces of Hillary Clinton and the Establishment,  he has turned his face towards the nation’s capital. With nothing in his way, he will seize it in a matter of weeks.

Mr. Trump has surprised the nation twice. First, the amateur politician trounced Jeb Bush on the sand flats of Florida. Then, he outflanked Ms. Clinton in the upper Midwest.

Clinton was the odds-on favorite. But she fought an unimaginative battle with mercenary troops who had no stomach for real fighting. Mr. Trump called up citizen soldiers out of the hollows of West Virginia and the old industrial suburbs of Gary, Indiana.

They appeared on the battlefield as if out of nowhere, attacking the former secretary of state on her exposed flanks. They were “deplorables,” she had said, but they fought well. And now, with Washington’s two protective armies swept from the field, Mr. Trump advances.

 

koOops! The undisputed favorite is knocked out by her opponent and his army of “deplorables”.  A case of getting unexpectedly unfriended by American voters.

 

“I will drain the swamp,” he has promised. Yesterday, we spent much of the day with someone who knows the swamp well.  David Stockman was a very young congressman from Michigan when Ronald Reagan called on him to dig drainage ditches as his chief budget engineer.

Reagan was an “outsider,” an actor from California, not a lifelong politician. He, too, had beaten the insiders’ man – President Carter. And he, too, brought shovels and pumps with him when he arrived in Washington.

“Yes, the parallels are certainly there,” Stockman told us.

“I’ve been in touch with the Trump team. I’ve even written a book about Trump. [Find it here.] But those guys are going to be surprised. They just have no idea what they’re up against.”

 

Dependent on Debt

But to back up a bit… we have an economy that depends on debt. Banks loan new money into the system ex nihilo – out of thin air. Without those new loans, the money supply falls as old debts are settled. Without more money, the economy stiffens.

Our friend and economist Richard Duncan estimates that credit (debt) must increase by at least 2% a year or the economy will fall into recession. For the last 35 years, interest rates have been coming down, to make borrowing easier. Now, there is plenty of debt in the system – $63 trillion in the U.S. alone – but not much room left for interest rates to go down.

 

debt-rates-and-gdpAn explosion in debt, an unprecedented decline in interest rates and very little economic output growth to show for it. This is a nigh intractable problem and governments definitely lack the competence to deal with it successfully. In fact, their policies have produced this boondoggle in the first place – click to enlarge.

 

“Monetary policy is exhausted,” says David. “Everybody knows that. What they don’t know is that fiscal policy is exhausted too.” [Note: Monetary policy attempts to stimulate the economy by setting the price of credit. Fiscal policy attempts to stimulate growth by increasing government spending.]

Donald J. Trump has promised to get the economy growing at a 4% annual pace. To do so, he will have to stimulate it somehow. The experts will tell him he has only two tools: monetary or fiscal stimulus. (He hasn’t asked us; we’d advise him to stay in New York.)

The “reflation trade” – betting on rising stock and commodities prices and falling bond prices – is a gamble on inflation; it is a bet that Mr. Trump will rotate from monetary stimulus to fiscal stimulus. Long term, we think it’s a good bet.

Inflation is what “The Donald” is promising. But fiscal stimulus requires congressional approval. He may not get it. That may be Mr. Trump’s biggest surprise of all. He may not drain the swamp. He may sink in it.

 

Swamp Gators

As noted above: Either Congress goes along with Mr. Trump and the credit bubble ends in an inflationary blow-up, or it holds the line – refusing further fiscal stimulus – and the result will be a deflationary disaster.

There are, of course, more twists, turns, and nuances in this plot. But that is the basic storyline. Stockman believes the swamp will swallow up Mr. Trump, his army, and his big budget plans.

 

hair-force-oneWill the new owner of Hair Force One succeed where all others before him have failed? It is highly doubtful, but what is certain is that an era of great entertainment lies directly ahead. We’ll take it – it is all we can realistically ask of politics.

Cartoon by Mark Knight

 

“I’ve seen it happen. There are alligators in that swamp,” says David, showing his scars. Each gator will fight for his own subsidy, his spending, his budget, his tax break, his job, his power, his agency, his pet project.

There will be splashing around… tails swinging wildly… body parts chewed off… and blood in the water up and down the Potomac.

Republicans will want cuts to social programs if they are going to approve more spending on infrastructure and the military. Democrats will refuse to go along with Trump’s spending unless social programs are preserved.

Every step the new president takes will bring him deeper into the swamp. The bottom line, says Stockman: “Ronald Reagan’s program didn’t survive. Neither will Mr. Trump’s.”

 

Chart by: St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

The above articles originally appeared as “Trump’s Next Battle – in Washington” and “Will the Swamp Swallow Trump?at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 


 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Sovereign Bonds – Stretched to the Limit
    Anti-Vigilantes We dimly remember when Japanese government debt traded at a negative yield to maturity for the very first time. This happened at some point in the late 1990s or early 2000ds in secondary market trading (it was probably a shorter maturity than the 10-year JGB) and was considered quite a curiosity. If memory serves, it happened on just one brief occasion and it was widely held at the time that the absurd situation of a bond buyer accepting a certain loss if the bonds were...
  • Writing on the Wall
    Not Adding Up One of the more disagreeable discrepancies of American life in the 21st century is the world according to Washington’s economic bureaus and the world as it actually is.  In short, things don’t add up.  What’s more, the propaganda is so far off the mark, it is downright insulting.   Coming down from the mountain with the latest data tablet... [PT]   The Bureau of Labor Statistics (BLS) reports an unemployment rate of just 3.7 percent.  The BLS also...
  • Global Stock Markets: Danger Lies Directly Ahead
      A Global Pattern You are no doubt aware of the saying “sell in May and go away”. It is one of the best-known and oldest stock market truisms.   Mark Twain's famous saying about stock market speculation (the other one was “There are two times in a man's life when he should not speculate – when he cannot afford it, and when he can”).  From a seasonal perspective he was definitely right about September and October. [PT]   The saying is in fact justified...
  • Bond Yields in the Netherworld - Precious Metals Supply and Demand
      A Record Amount of Bonds with Negative Yields to Maturity Last week the price of gold went up $22, while the price of silver dropped ¢17. The big news last week was that the yield on all German government bond maturities is now negative. They are also all negative in Switzerland. And in Denmark, all maturities out to 20 years are negative. Interest rates are dropping rapidly in the US as well.   More than $14 trillion in bonds now trade at negative yields to maturity –...
  • Rising Stock Market Volatility – Another Warning Sign
      Bad Hair Days Are Back We recently discussed the many divergences between major US indexes, which led us to expect that a downturn in the stock market was close (see The Calm Before the Storm for details). Here is an update of the comparison chart we showed at the time:   The divergences between various indexes seem to be resolving as expected.   The next chart shows analogous divergences between the S&P 500 Index and two major foreign stock markets:   US...
  • Retail Holders Sell Their Gold - Precious Metals Supply and Demand
      A Myriad of Reasons to Buy Gold – But Small Holders are Selling Big moves occurred in the prices of the metals last week, with that of gold up $57 and silver $0.77. We have now reached a price of gold (if not silver) not seen since 2013, when it was on the way down. What is causing this sudden spike in price and renewed interest in gold?   A well-known depiction of investor emotions over a complete market cycle. Interestingly, it appears as though many retail gold holders...
  • Bitcoin – From Greed to Fear
      A Noteworthy Sentiment Change Bitcoin and other cryptocurrencies have declined quite sharply in recent days. Here is an overnight snapshot of the daily chart:   Bitcoin corrects again...   It is difficult to gauge sentiment on BTC objectively, but there is a service that tries to do just that. According to its greed & fear barometer, the recent decline seems to have triggered quite a bit of apprehension:   The BTC sentiment measure of alternative.me has...
  • Interest Rate Watch and Bond Market Curiosities
    Things To Keep An Eye On Below is an overview of important US interest rates and yield curve spreads. In view of the sharp increase in stock market volatility, yields on government debt have continued to decline in a hurry. However, the flat to inverted yield curve has not yet begun to steep – which usually happens shortly before recessions and the associated bear markets begin.   2-year note yield, 3-month t-bill yield, 10-year note yield, 10-year/2-year yield spread,...
  • Getting to a Special State of Ugly
    Suspicious Phrases There are certain phrases – like “trust me” or “I got this” – that should immediately provoke one’s suspicion.  When your slippery contractor tells you, “trust me, your kitchen renovation will be done before Christmas,” you should be wary.  There is no way it will be done before late spring.   USD-CNH (offshore yuan) exchange rate – the support/resistance level at 7 finally breaks amid escalating trade war rhetoric. [PT]   Or...
  • Tumbling Interest Rates - Precious Metals Supply and Demand
      An Era of Low Time Preference Last week the price of gold moved up another $16, and the price of silver was up $0.14.   10-year treasury note yield since 1999 – it is almost back at the multi-decade low of 2016. The only other time in history when US treasury yields were this low was in 1944-1945, when the Fed was actively suppressing yields in order to provide cheap financing for the war effort. One year later (from mid 1946 to mid 1947) the CPI jumped to more than 17%...
  • A Bubble in Complacency - Incrementum Advisory Board Discussion
      Incrementum Advisory Board Meeting of 31 July 2019 At the end of July the Advisory Board of the Incrementum Fund held its quarterly meeting (a full transcript is available for download at the end of this post). The board was joined by special guest Simon Mikhailovich, a financial market veteran who inter alia co-founded the Toqueville Bullion Reserve. The title of the transcript and this post was inspired by his remarks.   Special guest Simon Mikhailovich   We...
  • Dead Meat in Jackson Hole
      The Pointlessness of Negative Yields If there are any virtues of debt instruments with negative yields we have yet to realize them. Certainly, we understand that as bond yields fall, bond prices rise, and bond investors are rewarded with capital appreciation. But when capital is appreciating as a consequence of negative yields, we suspect there is something fundamentally wrong with the capital itself.   Not only is the stock of negative-yielding debt at a new record high...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!