After Obama, A New Dawn Or More Of The Same?

Tyler Durden's picture

Submitted by William Anderson via The Mises Institute,

Nearly four decades ago, political pundits were shocked as voters turned away President Jimmy Carter and voted in Ronald Reagan, who promised to bring fundamental change to Washington and the indwelling political establishment. At the time, unemployment was rising quickly and inflation raged in double-digits, and Reagan had promised to deal with the economic failures by cutting income tax rates, slashing government spending, and reducing the regulatory burden.

As we know, Reagan succeeded in convincing Congress to do one of those three things — cut income tax rates — but the spending and regulatory monster continued to grow. The Carter administration already had initiated most of the major deregulation initiatives, and Reagan’s role in that area was minor at best. Reagan had to deal with something else in 1982 that threatened to turn his presidency into a one-term failure: a major recession in which the nation’s unemployment rate rose to above 10 percent and the disappearance of whole swaths of the nation’s industrial sector, resulting in what has been called the “Rust Belt” of the northern United States.

Ending 1970s-Style Inflation

We know the rest of the story. The economy recovered (despite interest rates that were above 10 percent) and Reagan won re-election in 1984 in a huge electoral landslide. We also know that while the Reagan administration had many failures, capital investment nonetheless turned toward the “high-technology” sectors and telecommunications.

The one thing that was on no one’s political agenda in 1980 was on Federal Reserve Chairman Paul Volcker’s mind: how to wring inflation out of the system and reestablish some balance in the monetary sector. Reagan claimed that by cutting tax rates, businesses would follow with new investments and increase the supply of goods available to consumers, thus reducing inflation on the “supply side.” This is why the Reaganites referred to their plan as “Supply-side Economics.”

Volcker understood, however, that while supply-side’s boosters might have claimed it to be a painless way to end inflation, it clearly would be doomed to failure, something Austrian economists like Murray Rothbard and others also comprehended. Inflation is first and foremost a monetary phenomenon and reducing inflation would not come about by just cutting taxes and producing more goods. Instead, Volcker and the Fed needed to stop expanding the economy’s money supply and also allow interest rates to rise — and rise they did.

Unfortunately, the pundits (along with most economists — who should have known better) employed the post hoc ergo propter hoc fallacy, claiming that higher interest rates caused the severe recession of 1982. Instead, the higher interest rates exposed the economic malinvestments that needed to be liquidated before the economy could have a real recovery, and while Austrian economists are not necessarily satisfied with what the Fed and US government did during the 1980s, some positive things happened with the economy during the 1980s.

Will Trump Pop the Bubble?

Donald Trump faces a much different situation post-election than did Ronald Reagan, but nonetheless a recession looms, as the Federal Reserve policies of the past two decades have piled up a mountain of malinvestments, and especially since 2008, when the housing bubble finally crashed.

Since then, the economic “game plan” for the Fed and the Barack Obama administration has been to prop up the weak sectors of the economy through a combination of outright subsidies and Fed security purchases. The stunning diagram below explains in part why both interest rates are extraordinarily low and the US economy remains sluggish.

As one can readily see, Fed purchases pre-2008 meltdown consisted mostly of six-month U.S. Treasury Bills, with the dollar amount being about 5 percent of US Gross Domestic Product (GDP). Post-meltdown purchases, however, have skyrocketed, and the Fed, while cutting back on six-month T-bills, has engaged in two very questionable activities, including the purchase of massive numbers of mortgage securities to continue what is left of the housing bubble, and buying long-term US bonds in order to decrease the interest rate spread between short-term and long-term securities. This is something that former Fed Chairman Ben Bernanke called “Operation Twist” (or what Peter Schiff more aptly said should be named “Operation Screw”).

The purchases tended to level off after 2014, but not until the Fed was propping up a quarter of U.S. GDP through its purchases. Yes, the official rate of unemployment in this country is less than 5 percent, but no one — not even Paul Krugman — is claiming that all is well. Certainly, both Bernie Sanders and Donald Trump were able to generate a lot of political enthusiasm for saying the economy is in peril.

The Real Problems Underlying This "Expansion"

Because Keynesians are wedded to the false “theory” of aggregate demand and aggregate supply, they are incapable of understanding the real issues facing the economy, and no one should be surprised. After all, Japan’s political and business leaders have been delusional for a quarter of a century, as the government now is trying to “stimulate” the economy via negative interest rates, something that truly places the government in a war with nature. For that matter, Krugman’s recent claims that future “austerity” measures — presumably imposed by the future Trump administration — will lead to a recession actually demonstrates a terrible ignorance of what actually causes economic downturns.

The US economy clearly is sluggish, yet interest rates are very low, thanks to Fed programs like quantitative easing. Yet, while Keynesians call for increased amounts of government borrowing and spending (called “fiscal policy” in Keynesian jargon), the problem isn’t a lack of government-bred “stimulus.” The problem is that of large-scale malinvestments. When the Fed finds it necessary to use its large checkbook to manipulate huge swaths of the economy through playing with interest rates, there is no doubt that there are large underlying weaknesses throughout the economic system. Combine that with the vast government subsidies of “green” energy and the gargantuan amounts of money being poured into the unproductive US Armed Forces, and one can see that the government is cannibalizing the productive sectors in order to prop up the unproductive ones.

Federal Reserve Asset Composition

What Must Be Done

What needs to be done, or more specifically, what must the government not do so that a real economic recovery can occur? First, and most important, the Fed must stop purchasing mortgage securities and long-term treasuries. That means that both mortgage rates and long-term interest rates will rise, and this also will pull up short-term rates. The economy cannot have a recovery if the Fed fails to do this.

All of this seems to be counterintuitive, since both Keynesians and Austrians agree that the immediate effect of the Fed’s discontinuation of such purchases would mean a steep, short-term recession. Permitting interest rates to rise means that both housing and related industries will be hit hard (as was the case in 1982 — and the industry demanded a bailout). The current economy — sluggish as it is — is addicted to low rates, and this cannot go on if the USA is going to avoid the fate of Japan and Europe, where the economy also is weak.

Austrians vs. Keynesians

However, Austrians and Keynesians diverge at interpreting what actually is happening after interest rates increase. Keynesians claim that aggregate demand is falling and will continue to fall until the economy reaches bottom unless government intervenes through spending and more money creation. Austrians, on the other hand, realize that in the short term, malinvestments that built up during the credit-caused boom are being liquidated, and if government and monetary authorities permit the liquidation and do not block the redirection of resources, entrepreneurs will lead the economy into a real recovery.

For that matter, Austrians and Keynesians are not even on the same planet when it comes to interpreting the role of interest. Austrians note that interest rates are connected to time preferences of borrowers and savers, and that interest rates send signals regarding the direction of capital goods and consumer goods. Keynesians, on the other hand, see interest rates as the gateway for aggregate demand, and suggest that interest rates generally should be lower than they would be if set by the market.

This difference of thinking is crucial. Keynesians demand an economic version of the alleged Einstein definition of insanity: doing the same thing repeatedly and expecting different results. Japan has engaged both in massive government spending (read that, building tunnels, roads, and bridges to nowhere) and monetary manipulation, even resorting to negative interest rates, and yet Japan suffers from anemic economic growth — and will continue to experience the same until someone is willing to admit that 25 years of “stimulus” does not an economy make.

Donald Trump will face this moment, like it or not. Barack Obama faced it and decided to kick the can down the road and opt for yet more “stimulus.” How Trump deals with it will determine whether or not the US economy recovers from bad policies, or goes the way of Japan and Europe.

The irony (at least for Keynesians and fellow True Believers) is that the very thing that Keynesians believe will create long-term economic downturn — raising interest rates — is what the US economy needs most. More than a decade of artificially-low interest rates has distorted the economy’s structures of production to the point where it will take a sharp recession to bring back productive balance — as counterintuitive as that may seem to many readers. There is no doubt that should Trump agree to allow rates to rise, he will pay a steep political price, as there is no doubt that the Dow Jones Average will tank and short-run liquidation of malinvestments will create some havoc.

What should Trump do when higher interest rates expose many of the dislocations? In a word, nothing. When the 1982 recession was in full force and much of official Washington, along with journalists, was calling for reflation of the economy, bailouts, and other “corrective” measures, President Reagan simply replied, “Stay the course.” Although, as noted earlier, Reagan did a number of things that were both politically and economically harmful throughout his presidency, nonetheless, he was right on that point, and ultimately his stubbornness bore some economic fruit.

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Manipuflation's picture

It is obvious. Look at Trump's appointments. Banker, banker, banker. Not fooling me.

Delving Eye's picture

Repealing Dodd-Frand = kicking can down the road

knukles's picture

I think we lost one in exchange for millions of crazy people.

vato poco's picture

has no one learned the Big Lesson of 2016? NEVER UNDERESTIMATE TRUMP

Lumberjack's picture

The man was dropped a huge pile of shit on him. Takes a pretty big person to own something like that and he did. Those that caused that shitpile in the first place are first to try to make him own it even though he had nothing to do with it period dot com. There is most certainly going to be bumps and grinds for him especially in the media and maybe not being exactly correct at times, but that pile of shit needs to be dealt with and the can stops here.

Jeff Welch's picture

Explained perfectly, I hope president Trump pulls the plug on this house of cards. It will be painful for the 45-60 year old crowd like myself but it's going to happen one way or the other so just rip off the bandaid and get it done already.

O C Sure's picture

It appears the author may need to reconsider the nature of the event and address the cause.

...You go to work in the morning. Your neighbors go to work too and their neighbors' neighbors as well. While your entire neighborhood is away, a sophisticated group of neighborhood dismantlers come and take all that they can and rebuild a new neighborhood miles away with the value they took from your neighborhood. This new neighborhood is already accounted for and sold to very happy inhabitants. You and your neighbors return from your hard day's day to nothing. What just happened? Theft or investment?

https://genius.com/Oc-sure-theft-not-malinvestment-annotated

new game's picture

WISH/THINK/REALIZE moar print, the merrry-go-round of central banks buying each others debt will continue with moar print.

the ass rapping of the economy will go on unabated.

even if trump came out and stated this article in eighth grade understandable economics the vast majority would not be able to withstand the pain of missing paychecks and going on unemployment and foodstamps. the hole is dug and there is no getting out without the majority of the country going banannas. as much as im into pain with real gain, it doesn't matter. we have to run the route(cocaine) jj kale.

and the fed knows this...

BennyBoy's picture

 

Ugh. Moar of the same.

toady's picture

More of the same,  only with more nationalistic fervor. 

GUS100CORRINA's picture

While you comment is thought provoking, I hope you are wrong.

If one takes a moment and looks at some of the numbers on the debt clock web site (http://www.usdebtclock.org/), one quickly arrives at a SHOCK-and-AWE moment. In addition, reports on the OCC web site show the notional value of derivatives now held by largest US banks north of 150 TRILLION.

The choices made for personnel by the TRUMP/PENCE team are probably being driven by a need to have people on the team who understand the RISKs and TRAPs built into these financial systems.

I remain especially concerned about the DERIVATIVE BOOK on bank balance sheets. 

WHY DO AMERICA's LARGEST FIVE BANKS NEED 150+ TRILLION IN DERIVATIVES???

WHAT ARE THESE BANKS DOING WITH THESE DERIVATIVES?

Very, very strange????

 

silverer's picture

Donald won't let it go the way of Japan or Europe. He'll just default. Bankruptcy, baby!

Raffie's picture

I think Mr Trump knows the sooner the crash happens the sooner we start healing, BUT will make him highly unpopular.

Kind of right know we will lose the arm, longer wait and it is the arm and shoulder, longer arm to the other shoulder and so on.

Feel he knows what must be done.

Time will tell.

barndoor's picture

I think that Trump will be perfectly fine with being unpopular, as long as he is able to implement the best policies.

I'm totally kidding - he's a raving narcissist who is obsessed with his own image.  It's the reason why he can't shut the fuck up about the election / popular vote / inauguration crowds....

Raffie's picture

So it is not okay for him to bring up issues that need to be fixed that has been ignored for decades?

Most people yell about an issue TILL they get what they want, then they ignore the issue they yelled about.

Hmmm u should rethink your logic.

SHEEPFUKKER's picture

That means defaulting on the Fed. Is there another national currency already ready to launch?

The Alarmist's picture

King Barak was the new Louis XIV ... "Apres moi, le Deluge!"  And so it starts.

The big difference between Trump and Obama is that when Trump uses his pen and phone to take executive action, people on the left actually complain at the erosion of rights, especially the perceived rights of non-citizens.

SILVERGEDDON's picture

Whelp, Texas, Utah, and Arizona have made silver and gold legal tender......................

There's a money concept who's time has come around again.

As for the Fed and their illegal currency in the US, fuck them, their fiat, and the fucking fake debt tied to using it.

LOCK 'EM UP, DONNIE, AND THROW AWAY THE FUCKING KEY !!!!!!! 

Fathead Slim's picture
Fathead Slim (not verified) SHEEPFUKKER Feb 6, 2017 8:37 PM

Yes, the US Dollar. What we're using now isn't the dollar, they just call it the dollar.

nmewn's picture

Keynesians hate people who save.

knukles's picture

Keynesians hate people, period

SILVERGEDDON's picture

Oh fuck yeah, they hate Jesus big time - ever since he threw the money changers out of the Temple. 

Solio's picture

A new dawn of more of the same.

Mustafa Kemal's picture

still anonymous sources

Dusty Springfield:

Wishin' and hopin' and thinkin' and prayin'

quax's picture

It's definitly something new, when we learn that even General Barry McCaffrey turns out to be a snowflake.

http://thehill.com/homenews/318086-retired-general-trumps-putin-remarks-...

American Gorbachev's picture

Japan was/is a 'test case/model'

they've kept going since 1990 (27 years)

the US is only 8 years into it's similar path

the "Japanification" of the US economy will continue,

because Wall St. likes it the way it is and has been for eight years

 

BigFatUglyBubble's picture

Except the Japanese people have modified their lifestyles drastically.  I don't Americans are going to be able to adapt the way they have.

American Gorbachev's picture

THAT is THE ?  

in my experience/observation, the Millenials have really been screwed over with false hopes (and now false fears)

will they follow the same path as the Japanese ?

or will they rise up to overturn a system which has a hundred year start on them ?

i am hopeful, but not optimistic

Mustafa Kemal's picture

"will they follow the same path as the Japanese ?"

Lets hope not. If reports are to be believed, they have a very low unemployment rate. Not so here.


BigFatUglyBubble's picture

Correction: Except the Japanese people have modified their lifestyles drastically. I don't think* Americans are going to be able to adapt the way the Japanese have.  It will be chaos in the streets.

PoasterToaster's picture
PoasterToaster (not verified) Feb 6, 2017 6:50 PM

As much as NeoKeynesianism needs to be kicked to the curb, analyses like these that ignore the root of the problem are getting further and further out of touch with the times.  The central issue is not what kind of fake moneytoken system we have and how it should be managed to keep the banks in charge. 

The real issue is wrenching the printing press from the cold dead hands of the people who own all the banks.

FreeShitter's picture

Same as the last fuckers post JFK.

TeethVillage88s's picture

Mr. Trump Goes To Washington... the Movie.

He has 100 day Agenda to follow... he hires GS Alumni... Yale Skull & Bones Guys... Military General to run Dept of Interior and DHS...

But does he know Book of Five Rings and the Art of War? Probably.

President Donald J. Trump must invite them into the Admin, WATCH them, Observe Them, Learn From them, Pass their methods and teachings on to his Military & Other advisors... and scheme for his own agenda. Who are these many power players in the Global World/USA?

President Trump would call this Intelligence Operations, Counter Intelligence, and Immersion into the world of Finance.

No. I have no idea the relationships that pre-existed and what alliances have been made... especially with bankers since they are the primo Intelligence Operatives.

TBTF are the Primo USA Operatives and Intelligence Gathering Organizations, they are power players.

My list of Global Power Players is probably lame:

- Central Banks
- Elites/Wealthy/Money Trust
- China/Chinese
- Iran/Islamic Terrorists (from say 1970-2017)
- Lawyers, Bankers, FIREs, Lobbyist, Politicians, MSM, University System, Neo-Science/Quasi-Science, Corporate Drug Industry/Big Pharma
- Globalists, Big Oil & Gas, Big Engineering, Big MIC, Big Telecom, Big MSM, Big Banks, Big Pharma, Big Chemical, ...

https://rainbowwarrior2005.wordpress.com/tag/israel-moses-sieff/

Moses Sieff Bank (family out of Italy)
Goldman Sachs
j m n Rothschilds

https://www.youtube.com/watch?v=fZByXz0i-zY

5 mins in Stockholders of New York Federal Reserve

Jamie Dimon, CEO JP Morgan
Jeffery B. Kindler, CEO Pfizer
James Tish, CEO CNA Financial

Here’s a look into who was involved in setting up the Federal Reserve in 1913.

* Rothschild Banks of London and Berlin
* Lazard Brothers Bank of Paris
* Israel Moses Sieff Banks of Italy
* Warburg Bank of Hamburg, Germany and Amsterdam
* Kuhn Loeb Bank of New York
* Lehman Brothers Bank of New York
* Goldman Sachs Bank of New York
* Chase Manhattan Bank of New York (Controlled By the Rockefeller Family Tree)

Mustafa Kemal's picture

"But does he know Book of Five Rings and the Art of War? Probably."

The former I doubt, the latter possibly.  We will see if he adheres to any of it soon, such as only fighting wars you can win.

No where in either of these books does it recommend bluster.

I forget the word, but one of the important concepts in the book of  5 rings is an extremely fine sense of how far the opponents sword reaches. To fight well, you need to keep it so that that point is a hair away from your nose.

Musashi!


BigFatUglyBubble's picture

If Iran sets a precedent for other countries to dump the petro-dollar then...

pndr4495's picture

“Forget the politicians. The politicians are put there to give you the idea you have freedom of choice. You don't. You have no choice. You have owners. They own you. They own everything. They own all the important land, they own and control the corporations that've long since bought and paid for, the senate, the congress, the state houses, the city halls, they got the judges in their back pocket, and they own all the big media companies so they control just about all of the news and the information you get to hear. They got you by the balls. They spend billions of dollars every year lobbying to get what they want. Well, we know what they want. They want more for themselves and less for everybody else. But I'll tell you what they don't want. They don't want a population of citizens capable of critical thinking. They don't want well informed, well educated people capable of critical thinking. They're not interested in that. That doesn't help them.” Credit George Carlin. This guy Cohn seems to forget that GS had to receive bailout money, Buffett money & all sorts of money conjuring to prevent receivership & bankruptcy. Yet we continue to allow the banker 3 card Monte to go on. Trump is just the latest dealer.

The Gray Man's picture

What is the election of Donald Trump? What type event was it? The pundits on both sides, the SJW, the left wing in general, the globalists, have all totally missed the underlying message of what his election really is, despite the "irredeemable Deplorables" begging for them all to listen for the last eight years.

They have missed, and are still missing, the message:

https://freeamericannational.blogspot.com/2016/11/what-is-election-of-do...

VWAndy's picture

 I seem to have missed all the perp walks.

two hoots's picture

The world is changing at an exponential pace and few, if any,  have any control of it's outcome.  Look for the G8 to become the world governing/security council separate and apart friom the UN.   Economics is just one of the many factors that have the potential to upset the world apple cart   This is an obvious SWAG ("scientific wild ass guess" as opposed to the current urban definition). 

francis scott falseflag's picture

 

I don't think you can ever call the "Deep State" rising out of the depths of the Abyss to destroy an elected

POTUS' administration, 'more of the same.'

 

But I'm from the Midwest so what do I know.

Porous Horace's picture

Any effort to "drain the swamp" would have to start with the CIA, NSA and DOD. Trump isn't draining shit. He'll do as he's told or they'll blow his brains out.

WTFUD's picture

The can will be kicked; Only a matter of direction.

francis scott falseflag's picture

There is only one direction to kick the can.

The road is a metaphor for the Arrow of Time

spanish inquisition's picture

Still trying to get a handle of this... Both sides want to kick the can at this point. If the Fed pulls the plug in the first year, they can't blame Trump. Trump has other fish to fry in the first year and is not interested in fighting the Fed. Trump's best option is to try to extend and pretend to implement other policy. It takes time to make change and is now about rooting out the Obama/Clinton/Bush globalist crime family at this point. 

JailBanksters's picture

More Wars, More Debt, More AshkeNazi's in the House, New Batch of Swamp Dwellers

What could possibly go wrong ?