By David Stockman as originally published on Contra Corner and reprinted here with permission
Somehow the Donald managed to say less during his 15 minutes of fame at Davos than even the swamp creatures he abhors might have offered up.
But the pity of it is that the whole thrust of what he did say was dead wrong: America is not back; it’s fading fast—and mostly on account of the Welfare State/Warfare State/Bubble Finance policies Trump inherited.
Still, while the Donald has managed to do essentially nothing during his first year except emit a fulsome stream of pugnacious tweets, what he has done mostly has made the big problems worse.
We are referring to his $80 billion DOD boondoggle; his $1.5 trillion red-ink funded tax cut; $800 billion of net borrowing since inauguration day; utter silence and inaction on the $2.5 trillion entitlement monster; the seconding of foreign policy to a passel of discredited generals and recycled neocon interventionists; and most especially his relentless attacks on the very immigrant workers that America will desperately need as the 80-million strong Baby Boom ages-out into Welfare State dependency.
But above all else, the Donald has whiffed entirely on what is really killing the American economy. That is, the nation’s out-of-control central bank.
Via its massive falsification of financial asset prices, the Fed has turned Wall Street into a gambling casino, the corporate C-suites into financial engineering joints and Washington into a profligate den of debt addicts.
Likewise, its idiotic pursuit of more inflation (2%) through 100 straight months of ZIRP (or near zero interest rates) has savaged retirees and savers, enriched gamblers and leverage artists, eroded the purchasing power of stagnant worker paychecks and unleashed virulent speculation and malinvestment throughout the warp and woof of the financial system.
Of course, we did not really expect the Donald to take on the money printers–notwithstanding his campaign rhetoric about “one big, fat, ugly bubble”. After all, Trump has always claimed to be a “low interest man” and he did spend 40 years getting the worst financial education possible.
To wit, he rode the Fed’s easy money fueled real estate bubble to a multi-billion net worth, or so he claims, and pronounced himself a business genius—-mostly by virtue of piling cheap debt upon his properties and reaping the windfall gains.
Stated differently, the Donald came to office wholly unacquainted with any notion of sound money and free market financial discipline. And now he has spent a year proving he is completely clueless as to why Flyover America has been shafted economically.
Rather than the top-to-bottom housecleaning that the Eccles Building desperately needed, Trump actually appointed a pedigreed Keynesian crony capitalist Washington lifer, Jerome Powell, to chair the Fed.
Then and there, and whether he understood it or not (he didn’t), the Donald surrendered to the permanent rulers of the Imperial City. That’s because at the end of the day, it was the Fed’s serial financial bubbles and massive monetization of the public debt that has enabled Washington’s imperial hegemony abroad, welfare state largesse at home and the egregious inflation of financial asset prices for the rich and the bicoastal elites coupled to them.
In short, Donald Trump has no semblance of an agenda that could Make America’s Economy Actually Great Again (MAEAGA), but there is no new news in that: The Donald’s bombastic, idea-free campaign oratory boiled down to the erroneous claim that the USTR (United States Trade Representative) and bad trade deals were the cause of America’s economic slide and that as a deal-maker of epic abilities, he would make it all better again.
Au contraire. America’s jobs and worker incomes were not stolen by shifty foreign negotiators and they will not be reclaimed via the trade wars implicit in Trump’s threat to mobilize the machinery of state against nefarious foreign practices. As the Donald put it:
“The United States will no longer turn a blind eye to unfair economic practices, including massive intellectual property theft, industrial subsidies and pervasive state-led economic planning. We cannot have free and open trade if some countries exploit the system at the expense of others. We support free trade but it needs to be fair and it needs to be reciprocal because in the end unfair trade undermines us all.”
That’s dead wrong. When foreign mercantilist governments are stupid enough to subsidize exports or state owned companies or to drastically suppress their exchange rates, they are transferring economic gifts to America’s consumers. Or, as our free-trade comrade Jack Kemp used to say back in the day about Japan’s mindless protectionism: If they are foolish enough to fill their harbors with rocks, why is it that we should do the same?
The truth is, there has been massive, uneconomic offshoring of American jobs; and it is also true that domestic wages have been hammered in terms of real purchasing power.
But that was caused by the Fed, not nefarious foreigners or incompetent negotiators at the Commerce Department and USTR.
The Fed has systematically inflated domestic prices, wages and costs for the last 30 years in its misbegotten quest for 2.00% inflation. But that has not helped worker real incomes by an iota as proven by the chart below: Average real median weekly earnings of men in Q4 2017 were actually slightly lower than they were three decades ago!
By contrast, nominal wages have risen by 150%—-from $9 per hour to $22.23 at present. Obviously, those gains did not go into rising living standards. Instead, they fueled an ever-widening gap between domestic production costs and the China Price for goods, the India Price for Services and the Technology Price for labor substitution.
Consequently, millions of breadwinner jobs have been off-shored directly or automated, and tens of million of domestic jobs which managed to stay at home have been subjected to withering downward pressure on nominal rates of pay.
And that’s the skunk in the woodpile. The Fed’s holy grail of 2.00% inflation is not an equal opportunity inflator.
Even as it drives the domestic cost of living higher, it does not uniformly lift wages by commensurate amounts at the bottom and middle of the job ladder where direct and indirect foreign competition is the most intense; and that’s especially true after full allowance is given to the relentless increase in out-of-pocket costs for employer medical plans and the cutback of pensions and other traditional benefits.
To be sure, the Keynesian pettifoggers at the Fed and on Wall Street insist their pro-inflation policies do not disadvantage domestic producers vis-a-vis their foreign competitors because foreign exchange rate adjustments allegedly compensate for inflation difference between countries.
Except that’s pure academic theory that does not hold up in the real world under the baleful, Fed-driven regime of dirty floats and reciprocating monetary inflation. Indeed, if a bill of indictment was ever needed against the perpetrators of America’s wage theft, it is the chart below.
Our monetary central planners—whom Trump has praised and renewed—-have crucified American workers on a cruel cross of 2.00% inflation.
The fact that Trump has no economic program was starkly evident in his boastful claims about the purportedly booming US economy, the lowest unemployment rate in decades and the $7 trillion gain in the stock market since November 8, 2016.
Needless to say, our delusional President is staring straight into the jaws of an epic bubble. Upon its imminent collapse, the nation’s deeply impaired economic fundamentals will be starkly exposed—-especially the monumental $67 trillion of public and private debts, which will be monkey-hammered by the unavoidable normalization of interest rates in the years ahead.
Soaring yields, in fact, will make a lie of virtually everything the Donald bragged about in his speech and will presently turn Wall Street’s party hats into veritable crowns of thorns.
The current $14 trillion of household debt will be hammered with soaring service costs, driving real living standards lower; the $13 trillion of outstanding business debt—most of which has financed unproductive financial engineering deals—will slam profits and cash flow; and Uncle Sam debt service costs will quickly escalate from today’s sub-economic $300 billion per year to more than $1 trillion annually within a few years.
Meanwhile, even as the Donald spoke, the CNBC crawler below the screen reported a disappointing GDP headline number of 2.6% for Q4, but that wasn’t the half of it. Annualized, seasonally-maladjusted, 90-day rates of change, of course, are only one step removed from pure noise.
But right below the report’s headline number was the truth that made a mockery of the Donald’s boasting about accelerating growth. During his first year in office, as measured by Q4 GDP on a year over year basis, the US economy grew by just 2.5%.
But as the chart makes clear, that’s hardly something to write home about. Self-evidently, the 2017 US economy was more inherited than driven by Trump policies—-none of which have been enacted except for the tax bill signed on virtually the last day of the year (the minor impact of cancelling a raft of prospective regulations has been vastly exaggerated by the White House)
In fact, however, just a few years back the Y/Y growth rates were higher at 2.7%, 3.2%, 2.7%, 3.8% and 3.3% for Q2 2104 through Q2 2015, respectively. As is also clear from the chart, short-term growth rates have undulated with the ebb and flow of global trade mini-cycles and the yo-yoing of credit impulses emanating from the Red Ponzi which lies beneath them.
Indeed, the real point is that after 103 months of expansion, the US economy has never attained true “escape velocity”. Indeed, as the fiscal and monetary headwinds gather force all around and threaten to extinguish what remains of the current recovery cycle, the real GDP level reported this morning is distinguished by the opposite of what the Donald claimed.
To wit, exactly ten years after the pre-crisis peak, real GDP stands at $17.3 trillion (constant 2009 $), thereby representing a punk 1.4% annualized growth rate since Q4 2007. And that is the lowest10-year peak-to-peak growth rate ever recorded—including during the 1930s.
What we mean is that the US economy does not remotely resemble the picture of rosy health which Trump painted at Davos. Moreover, another crucial element of today’s GDP report actually underscores why the massive Trump/GOP additions to the near-term Federal deficits will extinguish what remains of the current expansion.
Rather than the beginning of a boom, in fact, the Donald’s triumphalist speech actually came on the cusp of “that’s all she wrote”.
What we mean is that the 4.6% bulge in personal consumption spending during Q4 was the only thing that held up the GDP growth rate. And that, in turn, resulted from a last-gasp surge in credit card borrowing. As the ever astute David Rosenberg noted:
Some haunting math from the GDP number. The savings rate fell from 3.3% to 2.6%. If it had stayed the same, real PCE would have been 0.8% (annualized) instead of 3.8% and GDP would have been 0.6% instead of 2.6%.
That’s right. Had US consumers not gone berserk on their credit cards during Q4, the Donald’s delusionary speech would have been punctuated by news of a stalled-out economy.
In fact, the Q4 personal savings rate of just 2.6% was the lowest rate (save for one quarter) in the 30 years since Alan Greenspan inaugurated the modern era of Bubble Finance. With real wages and incomes still stagnant, theref0re, American consumers have turned to the measure of last resort—they are now draining their rainy day funds like never before.
Needless to say, no capitalist economy can thrive without a healthy rate of savings and investment. That imperative, however, has been cheated during the last several decades by the monumental fiat credit emissions of of the Fed and the massive purchases of Uncle Sam’s debts by foreign central banks.
Finally, however, the era of QE and massive monetization is over and done. As the US Treasury gets set to issue upwards of $1.2 trillion of new bonds in the fiscal year (2019) starting in October and the Fed ramps its bond dumping rate to $600 billion per year, the question recurs: Who is going to buy $1.8 trillion of bonds within a 12-month period at current rates (2.65%).
We’d lay odds on nobody. And we’d further bet that the Donald’s delusional triumphalism at Davos will soon be mocked by the bond market carnage that lies just around the bend.