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The Economy: “Obama’s Parting Gift… With Fuse Attached”

Wednesday, November 30, 2016 8:41
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“Obama’s Parting Gift… With Fuse Attached”
by Bill Bonner
“Poor Donald… He could be flirting with Miss America contestants and enjoying the pulchritude of beauty queens. Instead, he is stuck with the turpitude of the ruling classes. One job candidate after another. David Petraeus. Rudy Giuliani. Newt Gingrich. The president-elect seems to be reaching out…building bridges…trying to talk to just about everyone.
He has pledged to ‘drain the swamp.’ But, with a few notable exceptions, almost all the visitors to Trump Tower are crafty foxes or dangerous swamp gators. They built careers and fortunes by knowing their way around the Potomac bayous; none will want to drain it. No matter. ‘The Donald’ has peace to make…roles to fill…and not much time to study resumes and make his selections. Even one of his harshest GOP critics, Mitt Romney, has been called in for an interview.
Stuffed shirts: It’s taken us months to find a good handyman for our farm in Maryland; think how long it would take to find a good Secretary of the Treasury! Any recruiter could probably hook you up with a Secretary of State or a Secretary of Defense. The stuffed shirts and hollow men who can play those roles are a dime a dozen. Almost anybody, picked at random on the street, could do the job.
Spend a few trillion dollars bungling and bumbling around the Mideast? What could go wrong that hasn’t already gone wrong? How could you do anything more imbecilic or swinish than what has already been done? Either job is a piece of cake.
Not so for the Secretary of the Treasury. There’s a major challenge coming as the Era of Bubble Finance comes to an end. There is no avoiding it. But the politics of Washington over the next six months will probably determine how it ends: with a whimper of deflation or the bang of hyperinflation.
The entire world has a debt problem- with $223 trillion in debt, about three times global GDP. The US has a big piece of that — $63 trillion of the debt. America’s excess debt- above and beyond what its economy can comfortably support- is about $35 trillion (by our own estimate). And, sometime in the next 12 to 24 months, that debt bomb will probably explode.
Out of road: There’s no need for us to admit that we’ve been wrong about the timing before; you know that. We expected the dot-com bubble to blow up in 1998. It didn’t explode until two years later. Likewise, we warned that the recent mortgage finance bubble had found its pin at least two years ahead of time. Wrong again. And once again, we could be early.
We’re surprised that President Obama could slip away with the bubble still intact. Maybe president-elect Trump and his Secretary of the Treasury will be lucky, too. But we doubt it. Each time, during the crises of the last two decades, the feds have been able to send the bubble down the road by injecting more monetary gas. But now, they’ve run out of road. And they are surrounded by spikes, needles and prickly personalities.
The Fed has already cut its target lending rate to near zero… and left it there for 96 months straight. It could go negative- as it has in Japan, the Eurozone, Switzerland, Denmark, and Sweden. But that is so absurd, it risks sending the world’s financial system into an existential tizzy. ‘Let me get this straight,’ says the puzzled investor. ‘You want me to lend you my money… and then you want me to pay YOU interest every year. Isn’t it supposed to be the other way around?’
Lower interest rates and low price increases are no longer on the menu; the new administration will order up bigger deficits and higher levels of inflation.
No Reagan rerun: But now, as the Trump team comes onto the field, it becomes more and more obvious that these geezers and retreads are too slow to engineer a program of fiscal stimulus and inflation. By the time they get a broad spending scheme underway, the bond market will have already raced ahead of them…and crashed into a wall. We saw a preview of this when news of Trump’s improbable election win reached the markets- investors bet that it would be good for stocks and bad for bonds. ‘Trump will cut taxes and spend more money. We’ll get a replay of the Reagan Boom,’ investors said to themselves.
The Dow, the S&P 500, the NASDAQ, and the small-cap Russell 2000 all hit new record highs. Bonds lost $2 trillion, as investors feared higher rates of inflation. But as bond prices go down, bond yields go up. Rising bond yields mean rising borrowing costs throughout the economy. That does not stimulate a boom; it pinches it off.
That’s the big difference between Reagan and Trump…between 1981 and 2017. Mr Reagan rode into office carried by solvent people who wanted an end to inflation. Mr Trump is borne along on the march to Washington by an army of debtors who would like to see more of it. Mr Reagan could enjoy a boom, as people took advantage of falling inflation and dropping interest rates. Mr Trump, alas, cannot. He will suffer a bust caused by rising rates and increasing prices.
He and his Treasury secretary will be sorely tested. The gators will snap at them. The foxes will outsmart them. The debt bomb will blow up in their faces. And the swamp will suck them down.”


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