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Will the Swamp Swallow Trump?

Thursday, November 24, 2016 12:00
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(Before It's News)

Image result for pictures of draining the swamp

 

Authored by Bonner & Partners’ Bill Bonner, annotated by Acting-Man’s Pater Tenebrarum / ZeroHedge.com

 

Permanently Skewed

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.

team-a

Lieutenants in Trump’s army: Bannon, Flynn & Sessions

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 “counter-cyclical” 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.

economic-stimulus-comic

This cartoon shows the basic problem with the superficially so attractive notions pushed by Keynesianism. The government has no resources of its own – there is no Santa Claus. It just shuffles resources around. Every cent the government spends has to be taken from the private sector, whether by taxation, borrowing, or even worse, inflation. And every cent government takes from the private sector to fund its spending can no longer be allocated by the latter. In order to believe that this is somehow good, you have to subscribe to the idea that government bureaucrats are better at allocating scarce resources than the market. You might as well advocate for communism then.

Cartoon by Red Panels

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.

vigilantes

Lately the bond market vigilantes have actually come off the fence they have been sitting on – but it is still too early to tell if they really mean it.

Cartoon by Chad Crowe

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.

Shovels and Pumps

After his victory over the forces of Hillary Clinton and the Establishment,  he has turned his face towards the nation’s capital. With nothing in his way, he will seize it in a matter of weeks.

Mr. Trump has surprised the nation twice. First, the amateur politician trounced Jeb Bush on the sand flats of Florida. Then, he outflanked Ms. Clinton in the upper Midwest.

Clinton was the odds-on favorite. But she fought an unimaginative battle with mercenary troops who had no stomach for real fighting. Mr. Trump called up citizen soldiers out of the hollows of West Virginia and the old industrial suburbs of Gary, Indiana.

They appeared on the battlefield as if out of nowhere, attacking the former secretary of state on her exposed flanks. They were “deplorables,” she had said, but they fought well. And now, with Washington’s two protective armies swept from the field, Mr. Trump advances.

ko

Oops! The undisputed favorite is knocked out by her opponent and his army of “deplorables”.  A case of getting unexpectedly unfriended by American voters.

Cartoon by Luojie

“I will drain the swamp,” he has promised. Yesterday, we spent much of the day with someone who knows the swamp well.  David Stockman was a very young congressman from Michigan when Ronald Reagan called on him to dig drainage ditches as his chief budget engineer.

Reagan was an “outsider,” an actor from California, not a lifelong politician. He, too, had beaten the insiders’ man – President Carter. And he, too, brought shovels and pumps with him when he arrived in Washington.

“Yes, the parallels are certainly there,” Stockman told us.

“I’ve been in touch with the Trump team. I’ve even written a book about Trump. [Find it here.] But those guys are going to be surprised. They just have no idea what they’re up against.”

Dependent on Debt

But to back up a bit… we have an economy that depends on debt. Banks loan new money into the system ex nihilo – out of thin air. Without those new loans, the money supply falls as old debts are settled. Without more money, the economy stiffens.

Our friend and economist Richard Duncan estimates that credit (debt) must increase by at least 2% a year or the economy will fall into recession. For the last 35 years, interest rates have been coming down, to make borrowing easier. Now, there is plenty of debt in the system – $63 trillion in the U.S. alone – but not much room left for interest rates to go down.

 

debt-rates-and-gdp

An explosion in debt, an unprecedented decline in interest rates and very little economic output growth to show for it. This is a nigh intractable problem and governments definitely lack the competence to deal with it successfully. In fact, their policies have produced this boondoggle in the first place – click to enlarge.

 

“Monetary policy is exhausted,” says David. “Everybody knows that. What they don’t know is that fiscal policy is exhausted too.” [Note: Monetary policy attempts to stimulate the economy by setting the price of credit. Fiscal policy attempts to stimulate growth by increasing government spending.]

Donald J. Trump has promised to get the economy growing at a 4% annual pace. To do so, he will have to stimulate it somehow. The experts will tell him he has only two tools: monetary or fiscal stimulus. (He hasn’t asked us; we’d advise him to stay in New York.)

The “reflation trade” – betting on rising stock and commodities prices and falling bond prices – is a gamble on inflation; it is a bet that Mr. Trump will rotate from monetary stimulus to fiscal stimulus. Long term, we think it’s a good bet.

Inflation is what “The Donald” is promising. But fiscal stimulus requires congressional approval. He may not get it. That may be Mr. Trump’s biggest surprise of all. He may not drain the swamp. He may sink in it.

 

Swamp Gators

As noted above: Either Congress goes along with Mr. Trump and the credit bubble ends in an inflationary blow-up, or it holds the line – refusing further fiscal stimulus – and the result will be a deflationary disaster.

There are, of course, more twists, turns, and nuances in this plot. But that is the basic storyline. Stockman believes the swamp will swallow up Mr. Trump, his army, and his big budget plans.

 

hair-force-one

Will the new owner of Hair Force One succeed where all others before him have failed? It is highly doubtful, but what is certain is that an era of great entertainment lies directly ahead. We’ll take it – it is all we can realistically ask of politics.

Cartoon by Mark Knight

“I’ve seen it happen. There are alligators in that swamp,” says David, showing his scars. Each gator will fight for his own subsidy, his spending, his budget, his tax break, his job, his power, his agency, his pet project.

There will be splashing around… tails swinging wildly… body parts chewed off… and blood in the water up and down the Potomac.

Republicans will want cuts to social programs if they are going to approve more spending on infrastructure and the military. Democrats will refuse to go along with Trump’s spending unless social programs are preserved.

Every step the new president takes will bring him deeper into the swamp. The bottom line, says Stockman: “Ronald Reagan’s program didn’t survive. Neither will Mr. Trump’s.”

http://www.zerohedge.com/news/2016-11-24/will-swamp-swallow-trump

More great articles here: http://www.zerohedge.com

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Total 2 comments
  • Only if he fails to actually drain the swamp.

  • The neocons are busy rerouting the swam water into a channel that returns the swam water back to where it will remain until nuclear destruction cometh.

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