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.

 

 

 

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: 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:

  • Japan: It isn’t What the Media Tell You
      Known for Being Terrible For the past few decades, Japan has been known for its stagnant economy, falling stock market, and most importantly its terrible demographics.     A chart of Japan's much-bewailed demographic horror-show. Most people consider a declining population to be a bad thing due to the implications for assorted state-run pay-as-you-go Ponzi schemes, primarily those related to retirement. It is hard to be sympathetic, since it would have been possible to...
  • Bitcoin Facts
      A Useful Infographic When we last wrote more extensively about Bitcoin (see Parabolic Coin – evidently, it has become a lot more “parabolic” since then), we said we would soon return to the subject of Bitcoin and monetary theory in these pages. This long planned article was delayed for a number of reasons, one of which was that we realized that Keith Weiner's series on the topic would give us a good opportunity to address some of the objections to Bitcoin's fitness as a medium of...
  • Inflation and Gold - Precious Metals Supply and Demand
      Reasons to Buy Gold The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.   File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the...
  • An Update on Polly: She May be Coming Back to Life
      A Twitch of a Toe In our recent update on credit spreads we proposed to use the seemingly deceased  Monty Python parrot Polly as a stand-in for the suspicion of creditors in today's markets.  The question was whether Polly was indeed dead or merely in a deep coma. Depending on this, one should be able to gauge how powerful a miracle will be required to resurrect her.   Meet Polly. Is she alive?   In the first half of November there was actually a small sign that...
  • The Complete Idiot’s Guide to Being an Idiot
      Style Over Substance There are many things that could be said about the GOP tax bill.  But one thing is certain.  It has been a great show. Obviously, the time for real solutions to the debt problem that’s ailing the United States came and went many decades ago.  Instead of addressing the Country’s mounting insolvency, lawmakers chose expediency without exception.  They kicked the can from yesterday to today.   The empty chairs meeting – this is slightly...
  • Lessons from Squanto
      Standing In Your Way Governments across the planet will go to any length to meddle in the lives and private affairs of their citizens.  This is what our experiences and observations have shown.  What gives? For one, politicians have an aversion to freedom and liberty.  They want to control your behavior, choices, and decisions.  What’s more, they want to use your money to do so.   As this by now famous cartoon implies, the State is essentially a gang of criminals...
  • Precious Metals Supply and Demand – Thanksgiving Week
      Grain of Salt Required The price of gold fell $7, and that of silver 24 cents. This was a holiday shortened week, due to Thanksgiving on Thursday in the US (and likely thin trading and poor liquidity on Wednesday and Friday). So take the numbers this week, including the basis, with a grain of that once-monetary commodity, salt. We will keep the market action commentary brief.   Relatively modern examples of salt money which was widely used in African countries until the...
  • The Precious Metals Bears' Fear of Fridays
      Peculiar Behavior In the last issue of Seasonal Insights I have shown that the gold price behaves quite peculiarly in the course of the trading week. On average, prices rise almost exclusively on Friday. It is as though investors in this market were mired in deep sleep for most of the week.   The title of this blog post is a play of words on the title of an early Wim Wender movie, The Goalkeeper's Fear of the Penalty, which in turn is based on a famous novel by Peter Handke...
  • What’s the Point? Precious Metals Supply and Demand Report
      Questions and Answers A reader emailed us, to ask a few pointed questions. Paraphrasing, they are:   Who cares if dollars are calculated in gold or gold is calculated in dollars? People care only if their purchasing power has grown. What is the basis good for? Is it just mathematical play for gold theorists? How does knowing the basis help your readers? Is it just a theoretical explanation of what has already happened? Prove that if someone has known the basis...
  • The Zealous Pursuit of State-Sponsored Collapse
      When Bakers Go Fishing Government intervention into a nation’s economy is as foolish as attempting to control the sun’s rise and fall by law or force.  But that doesn’t mean governments don’t meddle each and every day with the best – and worst – of intentions.  The United States government is no exception.   From the “When the government helps the economy” collection: Breaking a few eggs while baking the bridge to nowhere omelet. [PT]   Over the...
  • The Party of Spend More vs. the Party of Tax Less
      Eternal Spendathon The Senate just passed a 500-page tax reform bill. Assuming it lives up to its promise, it will cut taxes on corporations and individuals. Predictably, the Left hates it and the Right loves it. I am writing to argue why the Right should hate it (no, not for the reason the Left does, a desire to get the rich).   The Federal debtberg has grown beyond all measure since Nixon's gold default. So has the money supply and the amount of private debt. No-one...
  • The Santa Claus Rally is Especially Pronounced in the DAX
      The Gift that Keeps on Giving Every year a certain stock market phenomenon is said to recur, anticipated with excitement by investors: the Santa Claus rally. It is held that stock prices typically rise quite frequently and particularly strongly just before the turn of the year.   Unbeknown to many, Santa Claus paid a high price for enriching investors [PT]   I want to show you the Santa Claus rally in the German DAX Index as an example. Price moves are often...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

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