Trumponomics Will Not Help Flyover America

[Urgent Note: The nation’s future hangs in the balance as Trump approaches his first 100 days. That’s why I’m on a mission to send my new book TRUMPED! A Nation on the Brink of Ruin… and How to Bring It Back to every American who responds, absolutely free. Click here for more details.]

The principal measures needed to eradicate Bubble Finance are few and simple. Namely, repeal of the Humphrey-Hawkins Act, including an abolition of the Federal Open Market Committee (FOMC) and enactment of a statutory schedule for selling-down the Fed’s massive hoard of Treasury and GSE debt.

That’s about it — because price discovery on the free market would do all of the rest.

In a word, it would hog-tie the Fed and permit interest rates, the yield curve, stock prices and the derivative financial markets to be driven by the forces of supply and demand originating in the main street economy, not the central planning agencies of the state. Capitalist markets can then steadily and reliably restore capitalist prosperity.

These simple measures are crucial. The case for abolition of Keynesian central banking, in fact, also explains why what passes for Trumponomics is so hopelessly at odds with unleashing the engines of true capitalist growth and prosperity.

Suffice it to say here that abolishing the FOMC would be far more efficacious in restoring capitalist prosperity to Flyover America than trillions of so called “stimulus” in the form of tax cuts, border fences, highways and bridges and protectionist trade actions.

That’s because the current Keynesian central banking regime of systematically falsified prices for stocks, bonds and other forms of debt and financial derivatives is what is grinding investment, productivity, growth, jobs and real household incomes to a halt.

Viewed from the perspective of history and pre-Keynesian economic thinking, the very idea of 96 straight months of essentially zero money market rates is patently absurd.

Falsification of interest rates to that insensible extent could only be remotely justified by some historically unimaginable crisis of insufficient debt. That’s right — a circumstance in which an irrational abhorrence of debt was causing so much economic harm that it became incumbent on the state and its central banking branch to radically suppress interest rates and thereby deeply subsidize borrowers in order to induce them to accumulate more debt obligations.

Needless to say, after a 30-year national leveraged buyout (LBO) in which the U.S. economy has been saddled with $35 trillion of excess debt, owing to two extra turns of debt on national income, a debt deficiency crisis is the last thing that ails the U.S. economy. And artificially inducing the public and private sector alike to take on even more highly subsidized debt is the last thing an agency of the state ought to be undertaking.

There is no more definitive proof than the national leverage ratio to the current condition of Peak Debt, and the systematic decline in the trend rate of economic growth. It’s risen dramatically since since the late ’80s. It’s smoking-gun proof that the Fed’s Bubble Finance regime initiated by Alan Greenspan has been an abject failure and needs to be eliminated from the Eccles Building root and branch.

That’s what really draining the swamp actually means.

Given this overwhelming evidence that too little debt and too high of interest rates are not the problem, why has the Fed sat on the zero-bound for 96 months running? The answer is simply that they have used the Humphrey-Hawkins mandates as a cover story to justify an intrusive regime of monetary central planning.

The fact is, in a global economy with massive flows of trade, capital and finance, the Fed has no capacity whatsoever to hit quantitative targets for domestic unemployment and consumer inflation — even if they could be accurately measured, which they can’t.

Indeed, under conditions of Peak Debt the only thing the Fed’s futile pursuit of its Humphrey-Hawkins targets accomplishes is to fuel massive bubbles and price distortions on Wall Street, while capriciously transferring trillions in wealth from main street households to a tiny slice of the population consisting of speculators and financial asset-owners.

In chapter 4 of my latest book, Trumped! called “The Case Against Keynesian Central Banking and Why the FOMC Should Be Abolished” I demonstrate why the Fed’s massive intrusion in financial markets is wholly unnecessary. I also showed that if we are to retain a central banking function it should be along the lines of the passive “bankers’ bank” envisioned by Congressman Carter Glass in 1913.

The latter would be operated by green eyeshades, not PhDs. Its purpose would be to liquefy the banking system based on short-term loans against sound commercial collateral at a penalty spread above market-based interest rates. At the same time, it would be forbidden from pursuing macroeconomic targets like GDP growth, jobs, retail sales, housing starts and all the rest of the central planning paraphernalia.

In that context, interest rates would rise to market clearing levels.

That would especially be the case were there to be a statutory mandate to shrink the Fed’s balance sheet back to $900 billion over the next decade — or about $350 billion per year — in order to restore the status quo ante before Bernanke’s insane money printing spree subsequent to the Lehman bankruptcy event. Call it “negative QE.”

Needless to say, under a regime of market determined yields on money and debt, the idea of a massive infrastructure program would be far less attractive, and, in fact, would be revealed for what it is. Namely, a warmed-over Keynesian expedient embraced out of desperation and a failure to understand why the nation suffers from the current plague of vanishing growth, jobs and incomes.

I will pursue that further in the days and weeks ahead, but here is one spoiler alert. The U.S. has nearly doubled its public spending on airports and mass transit since the turn of the century.

That’s hardly evidence that infrastructure investment is being starved, and completely inconsistent with the notion that more spending for these purposes is the key to making America’s economy great again.

Regards,

David Stockman
for The Daily Reckoning