It certainly took long enough, but by the time last Tuesday’s election came, We the People had finally realized we were being manipulated by the media for the benefit of the global elites and the American political class, so we finally did something about it, Donald Trump was elected.
You know what’s really scary? So far, everything we’re seeing indicates that Trump intends to following through on his promises to finally set the U.S. economy free (to the degree he can at this point, based on what we’re hearing about various cabinet picks, etc.), but the reality is it’s too late. In the video below, Peter Schiff even suggests that Donald Trump probably already knows that, but still wants to do what he can to lessen the blow on the American people to the extent he can, which make no mistake, is going to be devastating.
Few people are talking about it now, and I don’t recall any questions on the campaign trail about it, but back in July of 2014, when referring to the coming financial collapse, even Donald Trump said, “Americans need to Prepare For ‘Financial Ruin.’” Around the same time, George Soros put down a 1.3 BILLION ‘wager’ that the U.S. Dollar would collapse soon, and Forbes’ second wealthiest man in the world, Warren Buffet, said a crash was coming as a result of “Too Big To Fail Banks and Derivatives.”
In the article below, written by Peter Schiff, he dives into Donald Trump’s economic plan, and he says that not since Reagan have we heard talk of huge tax cuts, in conjunction with massive infrastructure projects, and how talk like that has many Americans optimistic that we’re going to see another “Reagan Revolution,” or a new morning in America. Unfortunately, Peter is quick to point out that it’s going to look more like midnight in America, and that’s only when things begin to look good. If you prefer, in the video below Peter begins to dig into the details of Trump’s economic plan around the 10:00 mark.
Anyone who follows economics, knows that the world’s best, men like the legendary Jim Rickards, Peter Schiff, Dr. Jim Willie, Bill Holter, and George Soros’ former business partner, the legendary Jim Rogers, just to name a few, have all been saying the same thing. As I mentioned in an article yesterday, Deutsche Bank’s derivative exposure alone, is more than 3x the continent of Europe’s annual GDP, and that’s just one bank. That should put the size of the crash in perspective.
The economic experts I mentioned haven’t been warning of a looming “recession,” a “downtick in the markets,” or a “correction…” They’ve been warning that we’re on the verge of an economic apocalypse that could last well over a decade. As for any hope a President Trump might somehow pull off the impossible, Jim Rickards put it perfectly when he said:
“Systemic risk doesn’t care if you’re liberal or conservative. Think of it in terms of an avalanche bearing down on a skier.”
The global reset that’s coming, and the crash of the U.S. Dollar are not avoidable. There isn’t even a 1% chance they’ll be avoided. Like the avalanche, it’s all about inertia. Some of the decisions that are ultimately going to lead to the crash (and soon), were made decades ago. The chance to right those wrongs has long past. That ship set sail long ago. You can certainly try to understand “why,” the global economy is going to crash if you don’t already understand, or you can begin preparing, while there’s time. ”Understanding” is not a prerequisite for preparation. No one’s family has ever suffered because they were too prepared.
For those who want to truly understand the “why,” few people out there explain it in an understandable language for layman quite the way Peter does.
The election of Ronald Reagan in 1980 provides the best recent precedent for the unexpected triumph of Donald Trump (in my opinion, the other post-war Republican takeovers of the White House — Ike in ’52, Nixon ’68, and W. in ’00 – did not constitute a real break from the status quo.) As many people expect great changes from Trump, it is worthwhile to look at what the Reagan Revolution actually wrought.
Both Reagan and Trump were better known to many as entertainers rather than politicians, both came from outside the Republican mainstream, and both engineered hostile takeovers of the Party. During the 1970s, the Republican Party was dominated by “Rockefeller Republicans,” the Ivy League-educated liberal Eastern elites. Reagan was the Western heir apparent to Barry Goldwater, the deeply conservative standard-bearer who went down in flames in 1964. In 1976, the brash Reagan had the nerve to challenge incumbent Republican President Gerry Ford in the primary, thereby weakening him in the general election, which he ultimately lost to Jimmy Carter. While Reagan was simply too conservative for the Rockefeller wing, Trump’s various positions are similarly inconsistent with much of the mainstream neo-conservative orthodoxy. Both candidates also capitalized on a weak economy as a catalyst to encourage voters to cross traditional party lines. Many of the rust belt “Reagan Democrats” came home to Trump.
While books have been written about the cultural and political legacy of Reagan’s presidency, harder facts can be found in his budgetary record. Despite the economic revival that his tax-cutting and deregulation tendencies delivered, the national debt ballooned as it never had for any other peacetime President. Although the fiscal imbalances have gotten significantly worse since Reagan left office, the Gipper gave plenty of cover for future Republican presidents to run up red ink. President Donald Trump, the self-proclaimed “King of Debt”, now appears to be perfectly positioned to test the limit of how much debt the world’s largest economy can issue.
Leading up to the election of 1980, Reagan and the conservative economists who supported him, warned that Federal debt, which had risen to approximately 26% of GDP, had grown too heavy to bear (data from Congressional Budget Office, July 2010) Reagan brought the spirit of Milton Friedman into the Oval Office, and his campaign was based on a clear intention to roll back the nearly 50 years of socialist government expansion that had occurred since Roosevelt’s New Deal.
But when Reagan came to Washington he was confronted by a strong Democratic majority in the House of Representative led by House Speaker Tip O’Neill, a skillful and forceful defender of big government. Reagan soon discovered that the political price was always very high when government expenditures are being restricted. And so, Reagan decided to move on the tax cuts (a perennial political winner) but never really got around to the spending cuts. As a result, the 26% debt to GDP ratio that he inherited when he came into office expanded to 41% by the time he left. (data from Congressional Budget Office, July 2010) This was not the complete conservative victory for which his backers had hoped.
Trump comes to office with similar expectations for significant changes. The good news for him is that he will face far fewer restrictions than Reagan had to face. Most importantly, both houses of Congress are now Republican. The Supreme Court is currently split along ideological lines but is likely to swing conservative after Trump’s appointment to the open Scalia seat.
On the taxation side, Trump has proposed cuts in personal and corporate tax rates that could likely sail through Congress. How much these moves will add to the deficit depends on how much growth they generate in the economy. Such predictions are very hard to make. But if the tax cuts are assured, the growth is not. However, there is no need to make algorithmic predictions on the budgetary implications of spending decisions. They are what they are, and their impact is immediate. Trump plans massive increases in Federal spending, initially in the form of a trillion dollar infrastructure spending over ten years, and billions to build his border wall and pay for his planned deportation force. On the spending side, Trump could likely get whatever he wants, and more. Had a smaller infrastructure spending plan been proposed by President Hillary Clinton, it would have likely been voted down by “fiscally hawkish” Congressional Republicans. Such scruples could fall by the wayside when the spending requests come from a Republican President.
Although the years of trillion dollar plus deficits we experienced during the first Obama term have been pared down to the $500 -$700 billion dollar range, the Congressional Budget Office’s Summary of The Budget and Economic Outlook, 1/19/16, currently predicts that we will officially return to trillion dollar levels by 2022. (In truth we are already there. Over the last 10 years the actual expansion of the debt has averaged $1.1 trillion per year, about $300 billion more than the average deficit of $790 billion over that time). (TreasuryDirect; usgovernmentspending.com) The CBO’s projections are based on no unplanned spending increases between now and 2022, steady GDP growth in the 2% to 3% range, and no dip into a recession (even though the current expansion is already far longer than the typical postwar expansion). Given this very optimistic set of assumptions, and Trump’s announced plans on taxing and spending, we should absolutely expect a massive expansion of the Federal debt over the next four years. The more difficult question is how it will be financed.
When making a comparison to Reagan, it is important to realize that he financed his debt expansion the old fashioned way: He sold long-term government debt to private investors. In the early 1980s, savings levels in the United States were much higher than they are today. The average American actually had money in the bank. And those with the means to invest were less inclined to dabble in stocks than they are today (there was no eTrade to make the process easy and transparent). The stock market had essentially made no gains between 1966 and 1980, (Dow Jones Industrial Average data) so investors could be forgiven for having given up faith. Bonds were a bigger part of the mix up and down the investment spectrum. And those investors who stepped up to the plate to buy those 30-year bonds in 1981 to finance the Reagan deficit ended up making some of the best portfolio decisions.
It seems impossible to believe in our current low interest world, but in 1982 the U.S government sold 30-year bonds with a 14% annual coupon. That’s right, a guaranteed, principal-protected, 14% annual return for 30 years. Investors today could only dream of something so magical. Of course inflation was higher back then (partly because the government hadn’t yet figured out how to recalibrate the Consumer Price Index), but even at its worst, inflation rose only to approximately eight percent. (InflationData.com) This means that buyers of those 30-year bonds were getting a real rate of six percent above inflation. But it just gets better from there.
Over the course of the Reagan presidency inflation and interest rates came down steadily. This meant that those investors who bought in 1982 would see their real rate of return increase every year. By 1988 inflation had come down to 4%, so those bonds offered a real yield of 10%. The falling inflation strengthened the value of the dollar itself. So in relative terms Americans holding those bonds were seeing a real increase in purchasing power of their principal relative to the falling prices of imported goods. Also, in an environment of falling interest rates investors holding 30-year 14% bonds could sell those bonds before maturity for more than they paid. That’s because even at a price above par the bonds would still offer higher yields to maturity than newly issued bonds. But despite the premium, investors were better just to hold them till maturity. Purchasing Treasury bonds in 1982 was an investment in America’s future, but it also happened to turn out to be the deal of the Century.
Think about how different it would be today for investors making a similar choice to finance the Trump deficits. 30-year bonds are currently being offered at a rate of just under 3%. If you believe the government inflation figures of just about 2%, this means that your effective yield is about 1% (pre-tax). If inflation is even slightly higher, the real yield could be negative. And in 30 years there is plenty of time for inflation to go, much, much higher. If it does, these bonds would be all but guaranteed to deliver less purchasing power than their original cost, even if held to maturity.
If interest rates were to rise from the current low levels, as almost every economist and investor assumes they must, the value of long-term bonds will surely fall. In another danger to bond prices, Bloomberg News reports that the new Trump economic team will likely put pressure on the Fed to reduce the amount of bonds on its balance sheet. To do so in any meaningful way will require that the Fed sell off portions of its $4.5 trillion bond stash of holdings into the open market. This could turn the biggest buyer of Treasuries into the biggest seller.
A sustained period of falling bond prices would mean that if current buyers wanted to cash out before maturity, they would likely have to sell for a loss, not the gain that their fathers would have seen with the 1982 bonds. If rates got as high as five or six percent (and I think they will go much higher) those losses could be substantial. As Jim Grant likes to say, today’s long maturity bonds represent return-free risk. Or as Warren Buffet likes to say, it’s like picking up pennies in front of a steamroller.
The risks become greater still when you consider how America’s fiscal position is much worse today than it was in 1980. When Reagan took the oath of office America was the world’s largest creditor nation. Today it’s the largest debtor. Our debt was just 30% of GDP then, while today its 105% and projected to go much higher over the next generation…even without Trump’s taxing and spending plans factored in.
But arguing the investment merits of long-term government bonds is a bit pointless in the current age. Real investors gave up on bonds long ago. What little savings Americans still have either stays in the bank, or gets directed to stocks or real estate. The bond market has almost become the exclusive playground of central banks. In Japan and Europe, central banks are sucking up the vast majority of government debt. We did the same during our four years of quantitative easing, and the Federal Reserve’s balance sheet remains swollen.
If under President Trump annual deficits explode, whom should we expect to buy the trillions in debt we will have to issue to pay for it? In the recent past, the big buyers have been central banks in China, Japan and Saudi Arabia. Should we expect those customers to return? We may be in an allout trade war with China, Japan is already pushing its own QE program to the limit (its central bank is currently buying large portions of the Japanese stock market) and the Saudis are struggling with $50 oil. We may need to find new buyers.
But don’t look to Mom and Pop USA. Those investors are tapped out. Don’t look to the pension funds. They can’t meet their numbers with 3% coupons. Don’t look to the hedge funds. They are losing money fast due to bad performance, and their investors expect more nuanced thinking than U.S. Treasuries. What’s more, (in contrast to 1982) the U.S. dollar is currently near generational highs. If the dollar should weaken, holders of dollar-denominated debt will be left holding the bag. When Reagan was elected, the dollar had been beaten down to all time record lows, having lost about 2/3 of its value against currencies like the Deutsche mark, Swiss franc, and Japanese yen. So high yielding, dollar-denominated Treasuries were attractive investments for foreign savers. But the dollar has already risen sharply over the last few years based on expectations the Fed would normalize interest rates. Investors should not be under any illusions that the dollar will experience another continued rally. With so many reasons arguing against buying long-term dollar Treasuries, the Fed may be the only game in town.
Given that, it’s impossible to imagine that the Fed will ever allow interest rates to rise by any significant amount. (Doing so would devastate the value of their bond holdings and raise debt service costs past the point where the government, or most private borrowers, could pay). Already more than $4.5 Trillion of Treasury bonds sit on the Fed’s balance sheet. Look for that number to balloon during the Trump years.
Debt monetization was the term that used to be used by economists to describe the undesirable outcome of a country’s central bank becoming the exclusive financier of its national debt. Inflation and currency devaluation were expected to be the results of this brash approach to fiscal policy. But this will likely be our future under Trump. Investors would be wise to recognize this and to diversify appropriately.
In 2009, when the first Quantitative Easing program allowed the Fed to buy large quantities of Treasury bonds, then Fed Chairman Ben Bernanke pushed back against Congressional accusations of debt monetization by claiming that the purchases should be considered temporary, and that they would be unwound when the crisis passed. Since then the Fed has not sold a single Treasury and has used every penny of interest and principal repayments to buy more Treasuries. Should the Trump deficits force the Fed’s balance sheet into the stratosphere, it will be obvious to all what the Fed is doing.
America was able to survive Ronald Reagan’s debt experiments because we started borrowing from a position of relative strength. But the debt took its toll, and we are now a shadow of our former selves. Yet rather than reversing course before it’s too late, Trump may just step on the gas, assuring we go over the cliff that much sooner.
Best Selling author Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital. His podcasts are available on The Peter Schiff Channel on Youtube
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