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.
But hold on a minute… First, a report from the subcontinent…
India just pulled the plug on cash…
The country’s prime minister, Narendra Modi, has made all 500- and 1,000-rupee notes illegal. (In dollar terms, 500 rupees works out at about $7.50. And 1,000 rupees works out at about $15.)
Indians have been ordered to either deposit them with banks by year-end or forfeit them.
In one fell swoop, Modi has taken 86% of India’s physical cash out of circulation.
Monetary Breakdown
Sources on the ground give us a preview of what a monetary breakdown looks like. An eyewitness reports:
I am in Tamil Nadu, in the south of India. And here, as in every other state in the country, queues of people clutching wads of currency stretch halfway down the street.
Elsewhere in the country, trucks line the sides of the roads… silent. Their drivers ran out of cash to pay for food and gasoline.
Bloomberg Markets has more details:
More than half of an estimated 9.3 million trucks under the All India Motor Transport Congress have been affected as drivers abandon vehicles mid-way into their trip after running out of cash…
That adds to the worries of a government battling to keep cash dispensing machines running after efforts to ease withdrawals failed to keep pace for the fifth straight day. After a teary-eyed emotional appeal to citizens to bear some pain and back the fight against corruption, Modi on Monday defended his move to withdraw 500-rupee and 1,000-rupee notes.
It’s easy to cause a disaster. And there are many ways to do it. The Indian government has decided it would get rid of its most useful currency to fight “corruption.”
What really happened is that it found it difficult to collect taxes in a country where so much commerce takes place in cash, off the books. So it wants to clamp down.
But by banning the most popular notes – which make up the vast bulk of the cash economy – it has brought commerce to a halt.
Permanently Skewed
Let’s not get distracted. 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 “countercyclical” 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.
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.
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.
More tomorrow…
Regards,
Bill
Category: Economics