Trumped! A Nation on the Brink of Ruin... And How to Bring It Back

by David Stockman

  Indeed, when the $150 billion per year disability trust fund ran out of cash, the cowardly men and women of Capitol Hill merely authorized a raid on the soon to be insolvent OASI trust fund for retirees and their dependents.

  Accordingly, as the eventuality of the next recession becomes impossible to deny, the updated budget projections will show a swift return to trillion dollar annual deficits even without any new “stimulus” programs. The Washington fiscal fireman will be hog-tied, and the insouciant breast-beating by Barack Obama about how he has tamed the Federal deficit will be reviled by his successors for decades to come.

  It can be said with not inconsiderable certainty, in fact, that under current bipartisan policy and realistic economic forecasts at least $15 trillion will be added to the nation’s current $20 trillion of public debt during the next 10 years.

  That is, under economic projections for the world economy as it is, not as the latter day Keynesian devotees of Rosy Scenario who inhabit the Washington budget offices fantasize it to be, the federal debt ratio will approach 150% of GDP during the next decade. That means, in turn, that when interest rates eventually normalize—as they must if the monetary system of the world is to survive—debt service will soar to $1.5 trillion per year.

  That happens to represent more than 6% of a prospective nominal GDP that has only grown at 3% annually for most of this century. Another description for that unsustainable equation would be a fiscal Doomsday Machine.

  So there is a perfect storm of calamity brewing, and the rumbling sounds of its arrival are being heard by the plain people of America, even if the bicoastal elites remain clueless in their temporary world of Bubble Finance prosperity. Even as they harrumph and remonstrate against Trump’s bombastic and politically incorrect style, they are missing entirely the profound economic grievances, which have brought Flyover America to the political barricades.

  To be sure, The Donald could readily turn into every bit of the scorched earth marauder that the ruling elites are now shrieking about. If he manages to avoid being Goldwatered and actually takes up residence in the White House, we may end up with more of the police state demagogue who harangued the nation during the Republican convention and less of the capitalist insurrectionist who has given hope to tens of millions of voters left behind in Flyover America.

  At this late hour, however, it is not even a case of paying your money and taking your chances. There is no chance at all if Hillary Clinton is elected.

  There will be war. There will be a crash. There will be fiscal and monetary bedlam.

  But there will be no recovery or anything, which passes for real capitalism and honest democracy in America ever again.

  TEN GREAT DEALS FOR THE DONALD

  But there is a sliver of hope. If Donald Trump is elected, eschews a law-and-order crusade and does not capitulate to the destructive policies of the Wall Street and Washington bicoastal establishment, there is a way forward. The political outlaw who considers himself to be the world’s greatest dealmaker would need to do just that.

  To wit, a President Trump determined to rid the nation of its mutant regime of Bubble Finance at home and failed interventionism abroad would need to make ten great deals.

  A Peace Deal with Putin for dismantlement of NATO, cooperation in the middle east, strangulation of ISIS by the Shiite Crescent and a comprehensive worldwide agreement to end the arms trade and pave the way for general disarmament.

  A Jobs Deal based on slashing taxes on business and workers and replacing them with taxes on consumption and imports.

  A Sound-Money Deal to repeal Humphrey-Hawkins, end the Fed’s war on savers and cash, abolish the FOMC and limit the Fed’s remit to passively providing liquidity at a penalty spread over market interest rates based on sound commercial collateral.

  A Glass-Steagall Deal to break up the giant financial conglomerates, limit the Fed’s liquidity window to “narrow banks” that only take deposits and make loans and deny deposit insurance to any banking institution involved in Wall Street trading, derivatives and other forms of financial gambling.

  A Federalist Deal to turn back most of Washington’s domestic grant and welfare programs to the states and localities in return for a mega-block grant with a 30-year phase-out.

  A Regulatory Deal based on an absolute four-year freeze on every single pending regulation, and then subjecting every existing statute to strict cost-benefit rules thereafter.

  A Liberty Deal to get Washington out of the War on Drugs, criminal law enforcement and regulation of private conduct and morality.

  A Health Care Deal based on the repeal of Obamacare and tax preferences for employer insurance plans and their replacement with wide-open provider competition, consumer choice and individual health tax credits.

  A Fiscal Deal to slash post-disarmament defense spending, devolve education and other domestic programs to local government and claw back unearned Social Security / Medicare entitlements benefits from the affluent elderly.

  And a governance deal to amend the Constitution to rescind Citizens United, impose term limits and establish public finance of all federal elections.

  What follows are the facts and analytics that demonstrate why America is fast heading toward ruin under the existing policy regime, and why these ten deals could establish the charter for a new way forward.

  CHAPTER 2

  Why the Flyover Zone Is Hurting—Bubble Finance Is Strictly for the Bicoastal Elites

  WE ARE NOW IN YEAR EIGHT OF THIS SO-CALLED RECOVERY. YET THERE are still 45 million people on food stamps—one out of every seven Americans. The median real household income is still 5% below its level in the fall of 2007 according to the BLS data. And it’s more like 12% lower based on the more honest gage of inflation presented below.

  Likewise, there are still only 71.3 million full-time, full-pay “breadwinner” jobs in the nation—nearly 1.4 million fewer than way back when Bill Clinton was packing his bags to vacate the White House in January 2001.

  At the same time, we have had monetary stimulus like never before. There has been 93 straight months of virtually zero interest rates. The balance sheet of the Fed has been expanded by $3.5 trillion. For point of reference, that is 4X more than all of the bond buying during the entire first 94 years of the Fed’s history.

  So something doesn’t parse, and that’s to put it charitably. The truth is, the Fed’s entire radical regime of ZIRP and QE constitutes a monumental monetary fraud.

  It has not “stimulated” a wit the struggling Main Street economy of Flyover America. Instead, it has showered Wall Street speculators with trillions of windfall gains and gifted the bicoastal elites with a false prosperity derived from financial inflation and government expansion.

  That perverse redistribution to the top of the economic ladder is the inherent result of massive central bank interest rate repression under conditions of Peak Debt. Stated differently, what amounts to a regime of Keynesian central banking has totally backfired.

  In theory, cheap interest rates are supposed to work mainly through the credit channel of monetary policy transmission. Monetary “stimulus” is accomplished by inducing households to ratchet-up their leverage ratios in order to supplement consumption spending from current income with the proceeds of incremental borrowing.

  For about three decades after the 1960s this Keynesian parlor trick more or less worked because U.S. households had unused runway on their balance sheets. But that ended when they reached Peak Debt on the eve of the financial crisis.

  Since then, $3.5 trillion of money pumping by the Fed has not moved the collective household balance sheet of America a single dollar higher. Total credit market borrowings by households—mortgage, credit cards, auto loans, student loans and other borrowings—amounted to $14.2 trillion in late 2007. Nine years later that figure has hardly moved by a rounding error and now stands at $14.3 trillion.

  So what has happened is that the Fed’s massive injection of liquidity in the financial markets thro
ugh QE and ZIRP has never left the canyons of Wall Street. The mechanics of this colossal failure will examined more completely in Chapter 4, but the essence of the result is straight-forward.

  To wit, instead of stimulating household and business credit formation and thereby reflating Main Street consumption and investment, central bank credit flowed entirely into speculative carry trades, structured finance and corporate financial engineering. So doing, it massively inflated financial-asset values and turned Wall Street into a bubble-ridden gambling casino.

  Herein follows an initial bill of particulars on how the resulting bicoastal finance-based prosperity left Flyover America far behind. I show that the “recovery” narrative endlessly trumpeted by the Fed and its fellow travelers on Wall Street and in the financial media does not remotely reflect on the ground economic reality.

  Instead, it derives almost entirely from a narrow band of badly flawed and thoroughly misleading labor-market indicators and other faulty “incoming data” from the Washington statistical mills. The financial-media headlines extracted from the latter, of course, have not changed the dismal reality on Main Street.

  To begin with the most obvious example, consider the graph below on industrial production of consumer goods. It dramatically refutes the whole point of ultra-low interest rates, which are obviously designed to induce households to borrow and spend, and thereby trigger a virtuous cycle of rising demand, increasing production, more jobs and income and even more consumer spending. That’s Keynes 101.

  Yet after seven years of massive monetary stimulus, domestic production of consumer goods is still 9.1% below its pre-crisis peak, and is actually at a level first reached in early 1999!

  Never once in its constant blather about a steadily “improving” domestic economy has the Fed noted this fundamental rebuke to its entire ideology.

  After all, if you are priming the pump with trillions of inducements for households to borrow and spend, why has consumer goods production remained in the sub-basement of its historical trend line and “recovered” at such a tepid rate?

  The disconnect between the mainstream recovery meme and the chart above is implicit in the latter’s construction. That is, the industrial production index is a measure of physical output. Accordingly, it is not distorted by the flaws in the primitive measures of inflation published by the BLS.

  3% COST-OF-LIVING INFLATION IN FLYOVER AMERICA MEANS SHRINKING REAL INCOME

  That’s crucially important because even the tepid measures of Main Street economic improvement ballyhooed by the establishment are based on “real” or “deflated” dollar values. But these deflators vastly understate the actual rise in the cost of living experienced by most of Flyover America, meaning that the advertised figures for “real” wages and incomes, for instance, are highly misleading and overstated.

  In fact, constant dollar median household income—based on an accurate measure of inflation—is down 21% since the turn of the century. Working Middle America has never before had such a deep and sustained setback, even during the Great Depression.

  The drastic deterioration of middle class living standards depicted below, of course, is heatedly denied by the ruling elites. Yet their disavowal is based on the flagrant manipulation of the inflation data by the BLS based on a pseudo-science called hedonics.

  Supposedly, this adjustment to the actual sticker price of goods and services takes account of “quality” improvements like airbags on autos and higher speeds and functionality on computers. Then again, candy bars get smaller; fast food gets less nutritious; retail purchases, especially online commerce, require more and more unpaid “self-service” labor; and Chinese-made toasters go to the junk heap far faster than such appliances did decades ago.

  Never mind. Hedonics was never meant to be scientific or balanced. In fact, it was a back door ruse to trim the cost of Social Security and other entitlement COLAs concocted by Alan Greenspan and George H.W. Bush’s chief economists back in the 1990s. They eventually accomplished by statistical stealth some of the Social Security cuts that Ronald Reagan failed to obtain in the open arena of legislative action during the 1980s.

  This is not speculation. I was there when the entitlement reforms failed and when the plan to shrink the inflation-measuring rod was hatched.

  Consequently, the BLS’s inflation index has become increasingly inaccurate. This hedonics distortion has been further compounded by the underweighting and mismeasurement of the four horsemen of inflation—food, energy, housing and medical—that absorb the preponderant share of Main Street paychecks.

  As detailed below, those systemic errors have been remedied in what we call the “Flyover CPI.” When median household incomes are deflated by this more accurate cost-of-living index, the reason Main Street feels it is being left behind becomes starkly evident.

  In a word, the purchasing power of its wages and savings is being eviscerated. What had been $68,000 in today’s purchasing power at the turn of the century is barely $55,000 today.

  So when Donald Trump tells voters that the system is rigged, they have solid reason to concur. When he proclaims that America isn’t winning anymore, they know he’s talking about them.

  And, yes, when he talks about the crooked establishment he strikes a chord, as well. Rigging the inflation rate with a sawed-off ruler may put lipstick on the official data, but it does not change the truth of steadily shrinking living standards on Main Street America.

  WHY INCOMES AND WAGES ARE FALLING IN FLYOVER AMERICA

  As we indicated, the persistent shrinkage of real wages and net worth in Flyover America is no accident or blemish of capitalism. It is a consequence of the Washington/Wall Street consensus in favor of printing press money, rock bottom interest rates and 2% inflation targeting. Together and at length, these misguided policies have buried Main Street households in inflation and debt.

  Neither of these millstones is even acknowledged by the mainstream narrative because they have been essentially defined away. By the lights of the Fed and its Wall Street acolytes, in fact, debt has been christened a growth tonic while inflation is held to be a special form of monetary goodness that levitates economic output, incomes and jobs.

  Alas, that’s just plain old tommyrot. There is no case for siding with more inflation as a matter of policy and there is much history to warn us of the dangers of rampant debt.

  With respect to the scourge of the ever-escalating cost of living, the chart below tracks our Flyover CPI, which includes heavier weights (66%) than the regular CPI (55%) for the four horseman of inflation—food, energy, medical and housing. It also incorporates a more accurate measure of market based medical costs and housing/shelter costs.

  This Flyover CPI is a far more honest indicator of the actual cost of living pressures faced by Main Street households, therefore, than the sawed-off measuring rod used by the Fed called the PCE deflator less food and energy.

  Needless to say, during the 29-year span since Alan Greenspan’s arrival at the Fed in August 1987, most people have needed food, heating, transportation, shelter and medical care. The Flyover CPI, based on an accurate measuring of those necessities has risen by 3.1% per year during that period.

  That relentless rise in living costs has not slowed down since the turn of the century, as shown in the chart below. Yet compared to the 3.1% per annum gain in the actual cost of living in Flyover America since the year 2000, the Fed’s favorite measure has risen by just 1.7% annual.

  The wedge between these two inflation measures is not just a statistical curiosity; it’s a big deal and a trenchant commentary on why the Washington Beltway and Flyover America are two ships passing in the dark.

  In fact, just since the turn of the century the actual cost of living on Main Street has risen by 40% more than acknowledged by the nation’s purported guardians of price stability at the Federal Reserve.

  That the political class in Washington and the speculators on Wall Street, therefore, are clueless about the deep economic distre
ss afflicting Main Street America is not at all surprising. They think regular people are 40% better off than they actually are.

  Indeed, this relentlessly increasingly cost of living explains the rise of Donald Trump more than anything else. The fact is, when the purchasing power of hourly wages is deflated by this honest measure of inflation, their buying power is 5% lower than it was 30 years ago. Wage earners are not winning anymore, not by a long shot.

  SHRINKING MAIN STREET LIVING STANDARDS IS A DELIBERATE FEDERAL RESERVE POLICY

  This baleful condition is directly attributable to the Washington and Wall Street policy regime. That’s because the Keynesian central banking model adopted at the Fed after 1987 had it exactly upside down.

  At the time and ever since, the dominant new force in the world economy has been export mercantilism in Asia and elsewhere. That eruption of vast new industrial capacity drained the Asian rice paddies of cheap labor, thereby emitting unprecedented deflationary pressures on global wage rates.

  In the face of the “China price” on goods and labor, what was needed in America, therefore, was the very opposite of what Washington’s Keynesian academics and policy apparatchiks delivered. That is to say, under a regime of free markets and sound money there would have been high interest rates, domestic wage and price deflation, high savings rates and massive reinvestment in the nation’s aging capital stock.

  Especially after Mr. Deng opened China’s export drive by radically devaluing the yuan in 1994, the die was cast as more fully explained in chapter 5. But in essence, the only way that real labor incomes could have risen in the United States, in fact, is via a reduction in nominal wage rates off-set by an even faster rate of annual decline in the CPI and other costs of production in the domestic economy.