Today, we look at the biggest threat to Mr Trump’s presidency.
So far, we have been delighted with the election of Mr Trump. Not because we have any confidence in, or affection for, the man.
But he claims to be a disrupter. And this is an economy that badly needs disrupting. We want to see what happens.
So, let’s begin by looking halfway around the world, where a dear reader updates us on India’s recent attempt to curtail cash:
‘My daughter is in India for a wedding and has personally been impacted by the lack of cash. ATM lines for five to six hours to get out the equivalent of about $20. No taxis because no one has any money. Hotels don’t have money either. Things have ground to a complete halt.’
Not interested in India?
But this story is a warning to us. There is not enough physical cash in the system. We rely on bank credit to fill the gap. And that means the credit system must not fail…credit must not contract…ATMs must work…credit cards must be honoured…
…the whole system has to work…or it will collapse into an awful mess.
Ours is a system that runs — since 1971 — on credit, not cash. And credit is subject to the credit cycle. It expands. And it contracts.
But a credit contraction in a global economy with $63 trillion in debt is a big deal. That’s why the feds fight so hard to stop it. Economists, politicians, Deep Staters — everyone wants to avoid a correction in the credit market. At all costs.
The pattern began after the great stock market crash of 1987, when newly arrived Fed chief Alan Greenspan rushed to support stock prices with aggressive rate cuts.
It was the debut of the ‘Greenspan put’ — the Fed policy of cutting rates to put a floor under prices if the stock market tried to correct.
After that, each time the market sneezed, the feds were there to wipe its nose.
The recession of the early 1990s (which George HW Bush blamed for his election loss to Bill Clinton)…the 1997 Asian financial crisis and the collapse of the hedge fund Long-Term Capital Management…the mini recession following the 9/11 attacks…and, finally, the 2008 crisis.
Each time, the Fed (aided and abetted by the same Wall Street insiders who are now joining the Trump team) made credit available on easier terms.
And now, by our estimate, we have about $35 trillion in excess debt. It’s a ‘debt bomb’ that will probably blow up in Mr Trump’s face.
But the Fed was not leading…
It was following the example set by the Bank of Japan, which has been fighting a credit contraction for more than a quarter-century.
It was the BoJ that was a pioneer of Zero Interest Rate Policy (ZIRP), Quantitative Easing (QE)…and Negative Interest Rate Policy (NIRP).
And now, the BoJ leads the way again. Reuters:
‘The Bank of Japan on Thursday fired a warning shot to markets by offering to buy unlimited bonds for the first time under a revamped policy framework, as domestic debt yields surged in the wake of Donald Trump’s upset U.S. election victory.’
Yes, that’s what it says. The Japanese have finally gone ‘full retard’ in their fight to stave off a correction.
They can win battles in this war against the markets, but they can’t win the war. Markets can be held off. They can be deceived. They can make mistakes. But they can never be stopped.
This week, we are preparing another open letter to Mr Trump. (You can catch up on our first here.)
We will advise him to ‘disrupt sooner rather than later’. It will be painful. So, take the pain now…and make it hurt.
Oh, yes…and put the blame on the people who most deserve it: Clinton, Bush, and Obama…Greenspan, Bernanke, and Yellen.
Go on TV. Address the nation. Tell them that you have been left a $35 trillion debt bomb.
Disrupt the system. Let it explode…just like Reagan backed Paul Volcker at the Fed and let the inflation bomb explode.
For Markets and Money, Australia