The rabble roused

The Serfs Have Rebelled

This iteration of Tyler Durden and I travel the same road but see what is happening, and the potential outcomes differently. I respect this opinion, but think it wrong in significant detail.

​More below.

"Hayek’s The Road to Serfdom described how personal freedoms are progressively eroded by the state in the name of the common good.

His warning is more associated with totalitarianism and dictatorships, than modern democracies, but the statist attitudes he warned about still apply today and lead to the same loss of personal freedom and increase of state control. In the main, the serfs are patient and tolerant of their masters, but in a democracy, the establishment behind the state risks being challenged. And that has happened twice this year, first with Brexit and now with Trump in America."

Agreed. If you have not read the book do so.

"The starting point for “Trumpenomics” could hardly be worse. The level of debt in both the government and private sectors is too high to be sustained already, and from this elevated base it is proposed to print and borrow much more. Payment for this profligacy can only come from credit creation, as banks mobilise and gear up on their excess reserves at the Fed to buy government bonds. The accumulation of latent fiat money since the financial crisis will at last be applied to driving up prices on Main Street, instead of mainly on Wall Street as heretofore. The status quo has concealed enormous economic and monetary distortions, the unwinding of which will have unexpected consequences for prices."

The first part true, the second mistaken. I do not see where this pressure for inflation comes from. Nor does the author explain why there has been no inflationary pressure over the past 8 years even though the many Central Banks have pumped trillions of dollars into the world's economies. Instead, these economies have been barely able to stay ahead of deflation. My position is that the current demographic of the industrialized nations is such that we are in a deflationary epoch, and inflation will have a hard time taking root, or keeping a grip. The reasons for this are we have a huge cohort of people who are aging, near, or in retirement, and the Millennials are nowhere near as materialistic as their Boomer parents. The result is no one whats access to all of the pumped money. Only the investor/finance fringe has a desire for this money and they continually use it to buy commodity assets like oil, copper, gold, real estate, and this has caused myriad "inflationary" bubbles in these commodities. But until the Average Joe begins using all of this money to chase scarce goods, no price inflation. I do not see this changing.

"Accelerated government deficit spending is an added malevolent influence, which can be expected to drive up prices of ordinary goods, all other factors being equal. While Keynesians believe in economic stimulation, the reality is an added round of monetary debasement will increase the impoverishment of the “deplorables” who voted for Trump. It will turn out to be a destructive Keynesian policy additional to existing policy mistakes."

This money will not drive up the prices of ordinary goods for the reasons discussed above, perhaps in the future, but not in the short, or midterm future. After all, Obama nearly doubled the national debt by adding about $8 trillion. Why no inflation? 

Monetary debasement is occurring, and does cause the value of money to decline, but this is being offset by the constant decline in prices we have been seeing for the past 40 years, not just in technology, but in everything except for government created monopolies, or oligopolies like health care, health care insurance, government, and a few other similar areas. Government, and the Federal Reserve Bank horsing around in the economy, especially the Fed's buying of assets, and confuzilation of the interest rate has made it impossible for us to understand what the price of anything should be. However, it appears that the constant consumer price declines are about right to keep us on track vis-a-vis this horsing around.

"The rise in the dollar against other currencies is also creating destructive chaos. The reserve currency everyone has borrowed is rising in value against local currencies, leading to a scramble for cover, and a shortage of dollars in the interbank markets. These difficulties should not be underestimated, being extremely costly for indebted businesses in emerging markets and in the Eurozone. The rise in dollar term-rates also exposes the ECB’s and Bank of Japan’s monetary policies as being entirely wrong. It has led to substantial falls in the euro and yen against the dollar, and massive additional losses on bond investments denominated in these currencies."

Currency trading is a form of betting on the underlying economies involved. These investors are beginning to wake up to the fact that the EU, and Japanese economies are incapable of sustaining themselves long term based on their current models. The US economy is in a much better position, so money flows here driving up the price, and creating this chaos. This is first and foremost a function of the EU, and Japanese building incompetent economies. It is secondly a function of the fact that these investors allowed their love for all things socialist to cloud their judgement. As those clouds clear, there will be serious changes to currency valuations. Expect more chaos.

"The EU and the ECB have been badly affected by the Trump surprise. Suddenly, Brexit looks like a prescient move, with the UK likely to get a better trade deal with an Anglo-Saxon partner, than originally thought. Other nations could well have their own serf-driven rebellions, with many elections and referendums due in the next year. Furthermore, Trump is likely to reduce America’s NATO commitment in a new policy of détente with Russia. The political situation has suddenly become very dicey, and the economic situation has just become worse as well."

The EU is like 45 year old children wearing adult cloths, commonly throwing a tantrum that daddy is not paying them enough attention, or lavishing them with enough goodies, and money. Trump is a very stern stepfather. Welcome to reality EU. 

The Southern half of the EU is in depression, without any obvious means of escape (except for leaving the EU). The North is faced with endless recessionary pressures caused by draining their treasuries to keep the South afloat. The South, to a man, want nothing more than to be back sucking on the money tit with a resurgent Euro, and EU economy allowing them to live high on the hog again. This is the reason they do not leave. They know that once they leave, they will be permanently become a second world status nation, never to see the first world again. The EU is their Golden Handcuffs, if they leave, they can end the depression but will have to face a permanently lower standard of living, if they stay, they face likely endless depression. Politicians are too spineless to pull the pin on this hand grenade. They have chosen the form of their destructor.

The way Trumpenomics will damage Hillary's "basket of deplorable" is by crimping off trade, and immigration. We are at 5% unemployment/full employment. We need far more immigrants of all skill levels at this economy, and boatloads more if we go back to a normal economy growing at 3-4% per year, which is likely to happen if Trump is successful in streamlining the tax code, and reducing regulations on individuals, and businesses.

Sadly, while tariffs, and protectionist trade policies sound good, they only help the business owners directly benefited, and only marginally. There will be no huge rush to re-hire workers into industries where tariffs inflate prices. Instead the owners will seek to find ways to automate, or make other improvements which will allow them to produce the same, or more product with fewer workers. This process will continue, nothing will stop it, it will continue to crush the workers Trump seeks to help. 

Never forget tariffs flush a small amount of money to the protected business owners, but they cause significant price rise in all related underlying products. By that I mean, and a tariff on steel will cause all products using steel to rise in price, and from the supply/demand law we know this will reduce sales of these products. Essentially, a small help to a few companies will likely cause broad layoffs in myriad other businesses. It will cause a general rise in prices, and it will not create much hiring in the steel business. This is a lose/lose/lose/lose proposition. It should be avoided at all costs.

Last, it does not even account for the damage of a trade war. Smoot-Hawley, Great Depression, these words should come to mind when you hear trad war. Let's not.

The solution is simple but counterintuitive. Trump needs to eliminate all tariffs on imports; he needs to deeply cut back on all regulations relating to businesses, and open a clear path for the organic creation of the broad gig economy; he needs to de-thatch the tax code, although it would be preferable to eliminate the tax code and replace with a sales tax, but he must streamline the individual income tax code, and the corporate tax code, and deeply reduce corporate tax rates. 

These changes will allow businesses the room to maneuver. This will result in a return to economic dynamism, and a return to hiring. By eliminating tariffs new jobs will be quickly created in import sectors, which are a close replacement for many of the eliminated manufacturing jobs. Reducing regulations will allow for a spontaneous resurgence in entrepreneurship, and this is where most jobs are created. Streamlining the tax code will allow individuals to move from friction work to productive work, while lowering corporate, and individual costs. 

I do not know how Trumpenomics will work out, nor even where it will go. But I know for a fact where I do not what it to go.