Promises of Slop

 

“We have assembled a best-in-class team of policy advisors to drive President Trump’s bold plan for job creation and economic growth.”

– Gary Cohn, Chief Economic Advisor to President Trump

 

The art and science of spending other people’s money is not an occupation suited to just anyone.  Rather, it’s a skill reserved for the professional world-improver.  To be successful, one must act with a zealous devotion to uplifting the down and out, no matter the cost.

 

Donald Trump’s chief economic advisor Gary Cohn – as some observers have noted, he represents one of the factions in the wider circle of economic advisors (there are many advisors who are not members of an official body such as the Council of Economic Advisors, but reportedly have the president’s ear). This is considered problematic, or rather confusing, on the grounds that in some cases the views of these advisors appear to be diametrically opposed. The question is whose views will eventually prevail.

Photo credit: Kena Betancur / AFP / APA

 

Lawyers, bankers, economists, and government philosophers with fancy resumes, who attended fancy schools.  These are the devoted fellows who comprise President Trump’s team of economic policy advisors.  Moreover, these are the chosen associates who are charged with bringing Trump’s economic vision to fruition.  Are they up to the task?

Only time will tell.  But, already, it is quite evident that Trump’s economic policy advisors have their work cut out for them.  During Trump’s speech to Congress on Tuesday night, he called for more jobs, more education, more military, and more affordable health insurance.

By all accounts the speech sounded delightful.  Promises were made to spread the government’s slop far and wide.  Trump pledged offerings that just about anyone and everyone – with the exception of grumpy face Bernie Sanders – could stand behind and applaud.

Indeed, articulating these plans is one thing.  Using the force of government to execute them is another.  This is where the advisors come in.

 

When government gets busy with infrastructure spending… this is without a doubt the best cartoon on the topic we have come across so far. We like its focus on the two essential problems of such spending: 1. the projects chosen by bureaucracies will often be unneeded and a self-evident waste of resources, and 2. bureaucracies are necessarily oblivious to the opportunity costs their spending incurs.

 

From Icarus to Humpty Dumpty

According to Wall Street, President Trump said all the right things.  On Wednesday the Dow jumped up over 300 points to over 21,100.  And despite Thursday’s pullback, the Dow  ended the day above 21,000.  What’s going on?

New York Fed President William Dudley says the market’s “animal spirits have been unleashed.”  He also says “the case for monetary policy tightening has become a lot more compelling.”  The case being, as noted by Dudley, “sturdy” jobs gains, inflation increases, and rising optimism for both consumers and business owners.

Hence, Dudley and the Fed may increase the price of credit at the next FOMC meeting later this month.  In fact, as of yesterday, CME Group puts the odds of a pending Fed rate hike at over 75 percent.  Bloomberg puts the odds at 90 percent.

 

This chart simply depicts the effective federal funds rate minus CPI. As such, it is not an ideal depiction of the “real FF rate”, since it shows the situation as is and doesn’t incorporate expectations. Inflation expectations have increased considerably in recent months though. Moreover, the chart demonstrates that the federal funds rate exceeded CPI from the early 1980s until 2000 (with the exception of a brief dip in the early 1990s) and has spent a lot of time below the zero line ever since. Currently is stands 189 basis points below CPI; if the Fed hikes by 25 bps in March, it will stand at minus 164 bps, ceteris paribus. If CPI continues to rise, this small change may soon be erased again, as has happened after the last two hikes – click to enlarge.

 

In other words, unless the stock market crashes before March 15, it is highly likely the Fed will raise the federal funds rate. Maybe the market will crash before March 15.  Maybe it will crash after.  Maybe it won’t crash at all.  Who knows?

One analyst at Bank of America, with a creative metaphorical mind, has somehow penciled out a market path leading to a great fall in the second half of 2017.  But first, says Michael Hartnett, investors must finish climbing the “wall of worry.”  At that point, his “Icarus Trade” will turn into the “Humpty Dumpty Trade.”  Thus, the great fall.

 

A Mess 30 Years in the Making

No doubt, Trump’s economic advisors are facing a tall order.  Stocks are extremely overvalued.  The Fed’s unwittingly jawboned itself into a March rate increase.  Yet GDP, as reported for the fourth quarter 2016, slouches along at just 1.9 percent.

At the same time, it is projected the government will hit the debt ceiling on March 16.  After that, Treasury Secretary Steve Mnuchin will have to take “extraordinary measures” – shuffle money around – to keep the lights on.  By October, if Congress doesn’t raise the debt limit, the lights fade to black.

 

Discretionary spending in 2015 – in theory, this is the only part of government spending that can be cut. If you wonder about the “in theory” qualification, consider Greece. Of course a central bank printing press obviates the need to repudiate non-discretionary spending if push comes to shove – but only in nominal terms. Such a  “solution” would still amount to a repudiation in real terms, and as such could hardly be considered to be in keeping with the “spirit of the contract”.  Perhaps a stateless society would have different problems, but it wouldn’t have this problem – click to enlarge.

 

Somehow Trump’s advisors have to figure out how to boost the economy without boosting spending.  So far their plan only accounts for half of the equation. That is, to boost the economy by pumping money into defense and infrastructure.  But if spending isn’t going to also increase, where is the money going to come from?

Earlier this week it was reported that Trump wants to increase military spending by $54 billion without increasing the deficit. The $54 billion increase would be offset by cuts to other government departments and agencies. While this proposal doesn’t increase the $500 billion deficit, it doesn’t decrease it either.  In short, half a trillion dollars will still be added to the debt.

 

A comparison of the world’s largest defense budgets. US defense spending is actually down by around $100 bn. since 2011 – but that is solely due to the wind-down of the Iraq and Afghanistan engagements. If one looks at the core defense budget exclusive of these war-related items, it turns out that it is only a smidgen below the all time high set in 2010 in real terms. It has essentially gone sideways since 2012 though. Increasing it by almost 9% will certainly make it difficult to cut total discretionary spending. Note that veteran’s benefits are not counted as part of the defense bill (and the plan seems to be to increase them as well). The two items together represent a 60% chunk of government’s discretionary spending. Given that trillions of dollars have “disappeared” without a trace at the Pentagon in recent years, it may be a good idea to focus on plugging the holes first. Just saying – click to enlarge.

 

In the meantime, in just under two weeks there will be an abundance of excitement emanating from Washington DC.  Specifically, a rousing Congressional debt ceiling standoff will commence. Reagan era Budget Director, David Stockman is calling it a fiscal bloodbath:

 

“I think we are likely to have more of a fiscal bloodbath rather than fiscal stimulus.  Unfortunately for Donald Trump, not only did the public vote the establishment out, they left on his doorstep the inheritance of 30 years of debt build-up and a fiscal policy that’s been really reckless in the extreme.

“People would like to think he’s the second coming of Ronald Reagan and we are going to have morning in America.  Unfortunately, I don’t think it looks that promising because Trump is inheriting a mess that pales into insignificance what we had to deal with in January of 1981 when I joined the Reagan White House as Budget Director.”

 

Charts by: St. Louis Federal Reserve Research, National Priorities.org, SIPRI / Business Insider

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 
 

 
 

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: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “A Mess 30 Years in the Making”

  • wmbean:

    From the man who gave us the “Trickle Down Theory” I can’t say I place much trust in his prognostications. Will there be a financial bloodbath in the future? Most likely since the conditions have largely been met. Baring some miraculous debt reduction, interest rate increase to say 4%, and general fiscally responsible behavior by government and corporations, I don’t see how the melt down can be avoided. Of course like magic beans the question is not whether they will work and grow what even it is that they grow, it is one of when. If I knew that I could make a killing on the markets and become relative wealthy rolling in fiat money.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Can Germany Be Made Great Again?
      When Germany Was Great! Ever since the start of the deliberately conceived “migrant crisis,” orchestrated by NWO elites, the news out of Germany has been, to say the least, horrific. Right before the eyes of the world, a country is being demographically destroyed through a coercive plan of mass migration.  The intended consequences of this – financial strain, widespread crime and property destruction, the breakdown of German culture – will continue to worsen if things are not...
  • Yanking the Bank of Japan’s Chain
      Mathematical Certainties Based on the simple reflection that arithmetic is more than just an abstraction, we offer a modest observation.  The social safety nets of industrialized economies, including the United States, have frayed at the edges.  Soon the safety net’s fabric will snap. This recognition is not an opinion.  Rather, it’s a matter of basic arithmetic.  The economy cannot sustain the government obligations that have been piled up upon it over the last 70...
  • Views From the Top of the Skyscraper Index
      Views From the Top of the Skyscraper Index On a warm Friday Los Angeles morning in spring of 2016, we found ourselves standing at the busy corner of Wilshire Boulevard and South Figueroa Street.  We were walking back to our office following a client wire brushing for events beyond our control.  But we had other thoughts on our mind.   Iron workers (the non-distraught variety) atop the 10 ton spire of the Wilshire Grand Center in Lost Angeles. This image is vaguely...
  • Prepare for Another Market Face Pounding
      “Better than Goldilocks” “Markets make opinions,” goes the old Wall Street adage.  Indeed, this sounds like a nifty thing to say.  But what does it really mean?   The bears discover Mrs. Locks in their bed and it seems they are less than happy. [PT]   Perhaps this means that after a long period of rising stocks prices otherwise intelligent people conceive of clever explanations for why the good times will carry on.  Moreover, if the market goes up for...
  • Bitcoin, Gold and Silver
      Precious Metals Supply and Demand Report That’s it. It’s the final straw. One of the alternative investing newsletters had a headline that screamed, “Bitcoin Is About to Soar, But You Must Act by August 1 to Get In". It was missing only the call to action “call 1-800-BIT-COIN now! That number again is 800 B.I.T..C.O.I.N.”   Bitcoin, daily. In terms of the gains recorded between the lows of 2009 and the recent highs (from less eight hundredths of a US cent per...
  • Seasonality: Will Patterns that Worked in the Past Also Work in the Future?
      Historians of the Future Every investor makes trading decisions based on what happened in the past – there is no other way. What really interests us is the future though. After all, what happens in the future ultimately determines investment success.   When in doubt, you can always try to reach the pasture...  In Human Action, Ludwig von Mises described stock market speculators as akin to “historians of the future”. This is without a doubt the most trenchant definition of...
  • Bitcoin Forked – Precious Metals Supply and Demand Report
      A Fork in the Cryptographic Road So bitcoin forked. You did not know this. Well, if you’re saving in gold perhaps not. If you’re betting in the crypto-coin casino, you knew it, bet on it, and now we assume are happily diving into your greater quantity of dollars after the fork.   Bitcoin, daily – adding the current price of BCH (the new type of Bitcoin all holders of BTC can claim at a 1:1 ratio), the gain since the “fork” amounts to roughly $1,000 at the time we...
  • What Went Wrong With the 21st Century?
      Fools and Rascals   And it’s time, time, time And it’s time, time, time It’s time, time, time that you love And it’s time, time, time… - Tom  Waits   Tom Waits rasps about time   POITOU, FRANCE – “So how much did you make last night?” “We made about $15,000,” came the reply from our eldest son, a keen cryptocurrency investor. “Bitcoin briefly pierced the $3,500 mark – an all-time high. The market cap of the...
  • Czar vs. Pope
      Vladimir the Great Sums Up Pope Francis the Fake Vladimir Putin has once again demonstrated why he is the most perceptive, farsighted, and for a politician, the most honest world leader to come around in quite a while.  If it had not been for his patient and wise statesmanship, the world may have already been embroiled in an all-encompassing global conflagration with the possibility of thermonuclear destruction.   Vladimir Putin is sizing up Pope Francis with his “good...
  • Bitcoin Has No Yield, but Gold Does – Precious Metals Supply and Demand Report
      Bitcoin and Credit Transactions Last week, we said:   It is commonly accepted to say the dollar is “printed”, but we can see from this line of thinking it is really borrowed. There is a real borrower on the other side of the transaction, and that borrower has powerful motivations to keep paying to service the debt. Bitcoin has no backing. Bitcoin is created out of thin air, the way people say of the dollar. The quantity of bitcoins created may be strictly limited by...
  • Is Historically Low Volatility About to Expand?
      Suspicion Asleep You have probably noticed it already: stock market volatility has recently all but disappeared. This raises an important question for every investor: Has the market established a permanent plateau of low volatility, or is the current period of low volatility just the calm before the storm?   All quiet on the VIX front... what can possibly happen? [PT] - click to enlarge.   When such questions regarding future market trends arise, it is often...
  • Will They Haul Off Trump’s Statue, Too?
      Confused by Shadows POITOU, FRANCE – This week, we are talking about theperishable nature of gods. Yesterday, the city fathers of our hometown of Baltimore let it be known that it was time to toss out the old deities.   The Robert E. Lee and Thomas. J. “Stonewall” Jackson Monument in Baltimore, which the mayor inter alia wants to remove. Suddenly it has become fashionable to erase the memory of an important part of US history all over the country. By experience, this...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

350x200

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]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com