Trump’s War With the Fed
POITOU, FRANCE – Yesterday, we were preparing for a train wreck.
It’s what happens when the sordid fantasies of politics run into the gaudy delusions of finance. Everyone can see the crash coming. No one can do anything about it.
Today, we draw up a chair and bring popcorn.
New York Post Guy
Donald Trump is naturally at odds with the “elite.” He’s a New York Post guy; The New York Times despises him.
He sees himself under attack by the elite… which is made up, near as we can tell, of people who walk fully upright and speak in full sentences. He claims they are trying to stop him from making America great again.
But the real fight is not between Mr. Trump and the elite. It is between two factions of the Deep State. Neither has much cause for complaint.
Donald Trump has increased military spending by an additional $52 billion; he’s given the elite a big tax break; he’s done nothing to “drain the swamp” or threaten the Deep State’s power or privileges.
Instead, he is expanding its power with new initiatives (such as the trade war) that bring vast new opportunities for mischief within reach of the chief executive.
But the elite in the Deep State is determined to bring him down. He’s regarded as vulgar, unreliable, and embarrassing.
While he doesn’t really challenge the Deep State itself, he is reshuffling its priorities, and regularly disses and disrupts the institutions and prejudices of its liberal, globalist wing.
Here’s an example from Politico:
Small potatoes in money terms, but symbolically unacceptable to the foreign policy elite.
And so, like a pack of dogs, always at his heels… and always chasing the red meat he has thrown to them… they investigate, probe, and accuse.
Until finally, they get some dirt…
Sex, lies, and videotapes – everything from Russian prostitutes allegedly urinating on the future U.S. president… to the Trump organization stiffing creditors… and using illegal immigrants for cheap labor – the salacious details are brought out into the open.
Did he really use the “n-word”? Is he really barely literate… or a moron?
Did he really connive with the Russkies? Day after day, the reporters unveil the latest horrors, hoping to finally turn the public against Donald J. Trump.
But the base sticks with him. They know they’ve been cheated. And they know it wasn’t The Donald who did it.
He may not be an altar boy or a Rhodes Scholar… but he is their hero. He is their savior. They sleep more soundly at night, knowing they have one of their own in the White House…
And they’re convinced that he could make America great again… if he were allowed to do so.
And so, the train rolls along…
Meanwhile, serious analysts on both the left and right agree that the trade war is a mistake. It threatens the Deep State.
But it plays well to people who think they can win by making the Chinese/Mexicans/Canadians/Europeans lose. The Donald tells them that they “lose” more than $800 billion a year in trade deficits.
He says he can reverse the loss… simply by taxing imports. If the Chinese or Germans want to sell to Americans, he reasons, they can damned well pay for the privilege. Problem solved.
Of course, it doesn’t work that way. Americans don’t lose from the trade deficit… They win.
They send $800 billion a year of phony money overseas. But they get cars, toaster ovens, blankets, and cell phones in return. Taxing these imports merely raises prices for American consumers.
And putting a tax on Chinese imports threatens the whole financial shebang.
The Fed flooded the world with cheap money when it slashed real rates below zero 10 years ago. This raised the world debt level far above its historical norm.
The Main Street economy doesn’t produce enough surplus to finance these debts – not at normal interest rates. They can only be carried – and even then, just barely – by continuing to add more cheap credit to the system.
Now, unwittingly, the “low-interest-rate guy” in the White House is threatening the flimflam that keeps interest rates low… and keeps $250 trillion of worldwide debt from crashing.
If the Chinese cannot sell at a profit… they also cannot buy raw materials from economies all over the world.
Then, almost nobody – emerging economies, export economies, raw materials providers, or even the U.S. – will be able to support its debts.
Trade is symbiotic… complementary… give and take.
The U.S. bought stuff with fake money. The Chinese used the money to build a huge, export-led economy. They also used the fake money to buy up U.S. Treasuries, thus funding American debt and helping keep rates low. This, of course, makes it easier to borrow… and to buy more stuff from China.
Now, everybody’s got overcapacity and too much debt. When the fake money stops whirling around, everything blows up.
(This is such a clear and present danger, we expected the president to back off. We thought some Deep State éminence grise would “have a word with him.” But maybe not…)
This brings us to the Fed…
It needs to raise rates so it will be in a position to cut them sharply (Mistake #3) when the next crisis comes. Fed Chair Jerome Powell has already signaled that two more rate hikes are likely this year.
But the president is already preparing a tweetstorm against “normalized” interest rate policy.
The Donald didn’t understand how the Fed normally colludes with the governing party (maybe nobody wanted to tell him). Now, he doesn’t see the financial calamity headed his way.
He encouraged the Fed to make Mistake #1 (leaving rates too low for too long) in 2017 when it should have been making Mistake #2 (raising rates to bring on a crisis)… so it could still be blamed on Obama.
Now, he’s got a crisis bearing down on him… and a Fed with little room to maneuver. In 2007, right before the financial crisis, the federal funds rate was 5.25%. Today, it sits at 1.9%.
What’s worse, he’s spread the fake news that the economy is doing great… so the Fed can’t plausibly stop its tightening program without calling POTUS a liar.
But when the crash comes… none of this will matter very much.
The Donald will blame the Fed. He’ll insist that it move immediately to cut rates (Mistake #3). But it has a legal duty to raise rates to fight inflation, which is now higher than the federal funds rate.
Unable to resist the pressure from The Donald… and with no clear idea of what it is doing… we predict that the Fed will make Mistake #4. It will fight the downturn with deeply negative rates, promising to deal with inflation later, while the administration ups the deficit dramatically.
Mistake #4 is not new. Zimbabwe, Venezuela, Argentina, Brazil – all have used versions of it. It always does more harm than good. But it is always exciting… entertaining… and breathtaking.
Be sure you are in a position to enjoy it. Sell stocks and bonds. Move to the country. Plant a garden.
Drop out. Turn off… and tune in on Monday.
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