Trump Is Trapped
Trump Is Trapped By Bill Bonner – Bonner and Partners
Stocks advanced a little yesterday. 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.
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.