Trump Is Trapped

BALTIMORE – Stocks advanced a little on Monday. Investors were said to be hopeful about the upcoming trade talks with the Chinese.

With a little luck, President Trump will talk to Chinese President Xi Jinping about the ongoing trade war. He’ll announce a big victory – just as he did following talks with North Korea last year.

Then, he’ll let things go back to where they were before.

Do Nothing

His modus operandi is now well known. He stirs up a fight. Then, he moves on to another fight… while the dust settles quietly over the last combat.

It’s not a bad way to do things. To your fans, it looks like you’re fighting their battles. Your enemies, too, get themselves worked up, eagerly pretending to defend Western civilization against the Barbarian from Queens.

Most important, a president who only fights fake battles does little harm. If presidents were rated properly, the one who did the least would be the one who got a big monument on the Potomac.

Doing nothing is generally underrated. And, in today’s case, neither the president nor the Fed can do much anyway.

The problem with the Fed is that it is trapped by its own fraud. That is, it has created a fake economy, one that depends on phony interest rates.

Now, if it tries to restore “normal” interest rates – set by willing buyers and sellers of credit – the whole thing will fall apart. Borrowers can’t afford “normal” interest rates.

The basic problem is that markets are natural things. They give us information. We can distort the information – with jiggles and jives. But that doesn’t really help. Because then, we have counterfeit information that leads to more mistakes.

The Fed distorted the most basic and important number in capitalism – the cost of capital.

Pressing down interest rates too low for too long (Mistake #1), it led investors, householders, and businesses to believe that capital was cheap.

With short-term interest rates below inflation, naturally, they borrowed rather than saved. Debt rose… and rose… and rose… so that today, total U.S. debt is about $69 trillion, of which the feds themselves are on the hook for $21 trillion.

Time Is Money

Remember, time is money. Money is time. You do a day’s work, you receive a day’s pay. You exchange one for the other. And there are only so many hours in the day.

Tradition is what we have after generations of trial and error. And traditionally, an economy can support 1.5 days of debt servitude for every day of output. That is, total debt should be about 150% of GDP.

Today, the U.S. economy has mortgaged up twice as much time as usual. With yearly output around $20 trillion, its debt-to-GDP ratio is over 300%. As long as interest rates are low, and stocks don’t crash, Fed chair Jerome Powell can claim he is normalizing interest rates.

But then, when the going gets tough, he will rush to make them more abnormal than ever – just like the Japanese did.

Rich Get Richer

Meanwhile… over at the White House… the president is trapped, too.

Government is fundamentally a system that is deeply conservative… helping to make sure the rich get richer. All of its major activities are focused on it.

The tax code, with its emphasis on taxing current income rather than unrealized capital gains, for example, helps keep middle-class people from accumulating significant wealth, while the rich – who don’t rely on labor income and don’t have mortgages to pay – skate along happily.

And the regulatory system is also basically a system for keeping out competition.

Nobel laureate George Stigler proposed a general theory in which “every industry or occupation that has enough political power to utilize the state will seek to control entry. In addition, the regulatory policy will often be so fashioned as to retard the rate of growth of new firms.”

Federal spending, too, consists of two parts. There are relatively small bribes to the many zombie voters – medical and retirement disbursements, mostly.

And there are relatively large pay-offs, salaries, fees, and contracts to the cronies, the elites, and the insiders.

Tax, Spend, Borrow

This taxing, spending, and borrowing rewards the people who control the government at the expense of those who don’t.

And by bipartisan consensus, with the approval of the Deep State, Congress, the press… and the great and good all over the country… the available funds – whether from taxes or borrowing – have already been claimed.

Money will continue to go to the military, to various other boondoggles, and to old people. Old people vote. The military/spooks are at the heart of the Deep State.

This leaves the president with relatively little room to maneuver. He can only tinker around at the edges of policies, mostly on “cultural” issues, such as border walls, “taking the knee,” shutdowns, and other distractions. Major budget cuts are off limits.

There is always a risk, of course. Sometimes, fake wars blow up.

But most likely, with the houses of Congress deadlocked between the two parties, and with Mr. Trump’s own predilections towards sparring with the media rather than fighting for real change, we can expect more mock wars in the months ahead… but no change of direction.

Regards,

Bill Bonner's Signature

Bill

Category: Geopolitics

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