Barron's - How to cut $8.6 trillion in federal spending and balance the budget without raising taxes

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Barron’s Prescription for U.S. Economic Growth

How to cut $8.6 trillion in federal spending and balance the budget without raising taxes.

By

Gene Epstein

Biography

December 24, 2016

“Waste, fraud, and abuse all over the place,” intoned candidate Donald J. Trump early this year about government spending. “Look at what’s happening with every agency—waste, fraud, and abuse. We will cut so much, your head will spin.”

Barron’s would like to take the president-elect at his word. So let the head-spinning begin.

Our prescription for cutting $8.6 trillion out of the budget starts with the 10-year projections for revenue and outlays from the August report of the nonpartisan Congressional Budget Office (CBO). Against that, we phase in an aggressive plan to reduce that “waste, fraud, and abuse,” with striking results.

The CBO’s so-called baseline projection shows a flood of red ink over the next decade, with trillion-dollar deficits emerging as the new normal. In contrast, the cuts we apply to baseline expenditures would be enough to balance the budget by 2024, with revenue actually exceeding outlays by a small sum. In 2026, our path would generate a surplus of $64 billion for that year, compared with a $1.2 trillion shortfall resulting from the CBO’s baseline.

Our fiscal fix would be achieved without an increase in taxes. That’s because, as the CBO makes clear, it “constructs its baseline projections under the assumption that current laws governing taxes and spending will generally remain unchanged.” Revenue would rise each year only because the agency assumes continued economic growth, with real gross domestic product climbing at a modest, but steady, pace. In fact, we reduce the CBO’s baseline revenue forecast by assuming a tax reduction, since the elimination of spending associated with the Affordable Care Act (ACA) would also require ending ACA-related taxes.

ALL THE HEAVY LIFTING TO ACHIEVE a balanced budget therefore occurs on the spending side. Our wish list requires nearly $8.6 trillion of cuts in outlays over 10 years, of which more than $7.8 trillion would be actual reductions in spending, together with a “dividend” of $725 billion from the lower cost of debt-servicing.

With deficits shrinking, growth in Treasury debt would slow. The CBO projects a 10-year cost of debt-servicing at nearly $4.8 trillion, assuming an increase in the average interest rate on the debt to a still-low 3.1% by 2026 from 1.8% today. At the same interest rates, our spending cuts trim that cost to a little more than $4 trillion.

In other words, U.S. Treasury debt held by the public will have grown, but far more slowly than the CBO’s baseline projection. Instead of rising to 85.5% of gross domestic product by 2026, from 76.6% today, the debt as a share of GDP will have fallen to 58%.

That 58% would still be well above the 39% average over the past 50 years, which means it will still be a source of concern. That’s why incoming President Trump should pay heed to former President Bill Clinton’s warning at the 2012 Democratic National Convention: “We’ve got to deal with this big long-term debt problem, or it will deal with us.”

Saving America: Part 1

Saving America: Part 2

Saving America: Part 3

Saving America: Part 4

Dealing with the problem requires recognizing the path we are on, and why it must be reversed. According to the Long-Term Budget Outlook published by the CBO in July, the debt will reach 141% of GDP by 2046. That’s way above its World War II high, and it’s expected to continue climbing from there if nothing is done. Indeed, an earlier CBO report compared the risk faced by the U.S. to the debt-related crises in Argentina, Ireland, and Greece.

The agency foresees that “investors would lose confidence in the government’s ability to manage its budget.” In response, interest rates on government debt could spike abruptly, setting off destabilizing rises in private-sector rates that could cause a financial crisis, which would in turn destabilize the global economy.

That scary scenario looms if the current business-as-usual approach is allowed to continue.

AS A SHARE OF NOMINAL GDP, the CBO’s baseline forecast projects widening deficits over the next 10 years (see chart above).

Barron’s adjusted the agency’s projected baseline revenue by backing out the loss of revenue due to the elimination of ACA-related taxes. But since outlays will have fallen even more, there will be small surpluses beginning in 2024 (see chart above).

In terms of dollar outlays, our $8.6 trillion in cuts will mainly slow the growth of spending, so that revenue eventually catches up and then finally overtakes them. From spending of $3.9 trillion in 2016, we project $4.7 trillion by 2026—still far below the baseline projection of $6.2 trillion.

THE SURGE IN SPENDING foreseen by the CBO is driven by the increase in mandatory programs, “mainly attributable to the aging of the population and rising health-care costs per person, which substantially boost projected spending for Social Security and Medicare.” That need not inform our proposed cuts, however—and in fact, more than 40 cents of each dollar of our reductions comes from programs other than Social Security and health care. For example, we propose a decrease of nearly $1 trillion in defense spending over 10 years out of planned outlays on defense of $6.5 trillion.

Barron’s projections are also meant to provide some budgetary room for the cost of introducing an alternative to Obamacare. The Republican promise to “repeal and replace” the ACA is only partially reflected here. The cost of the ACA is backed out of total expenditures, for a 10-year saving of $1.8 trillion, and we assume no replacement. However, we also reduced baseline revenue by factoring in full repeal of ACA-related taxes, which comes to a revenue loss of $1.4 trillion over 10 years. Those sums might be restored on the revenue side to cover the cost of a trimmed program—hopefully in the form of taxes that don’t include the ACA’s excise tax on the makers of medical devices.

One possible replacement might be a program that would be limited to subsidies for purchasing high-deductible insurance for catastrophic care. Such care is designed to help pay for infrequent major expenses, while leaving routine coverage alone.

It’s irrational that the ACA has effectively outlawed insurance plans for catastrophic care only. By forcing insurers to cover treatments and procedures that many buyers wouldn’t need, the ACA has made such low-cost plans illegal. An insurance plan for catastrophic care might begin to cover costs that exceed $2,500 in any given year. According to one estimate, such a plan would cost a relatively young person less than $100 a month.

The objection might be raised that a government program limited to covering catastrophic care is less than desirable. Indeed it is. But economics, along with politics, is all about the art of the possible. Policies that aim higher will eventually prove too costly to benefit anyone, and would thus be even more undesirable.

IN HIS 1999 STATE OF THE UNION ADDRESS, President Clinton warned: “With the number of elderly Americans set to double by 2030, the baby boom will become a senior boom,” leaving the government “unable to pay the full benefits older Americans have been promised.” Even if the full benefits could be paid, the cupboard would be bare when the millennials become seniors, prompting Boston University economist Laurence Kotlikoff to brand the baby boomers “the greediest generation.”

But since this generation is already advancing in years—the boomers currently range in age from 52 to 70—only so much can be done to scale down benefits without blindsiding them unfairly.

Our cost-cutting proposals, scored in consultation with Cato Institute scholars Chris Edwards and Benjamin Friedman, attempt to root out the waste, fraud, and abuse that largely accrues to entrenched interests such as the garden-variety congressmen who logroll to bring pork-barrel projects to their districts. But we assume our incoming president will pursue aggressive reform, entrenched interests be damned. Our suggestions go after low-hanging fruit from a wide range of programs, departments, and agencies.

Of more than $4 trillion in cuts over the decade in mandatory programs, there is also the previously mentioned $1.8 trillion savings in ACA-related costs. There is a relatively small cut of $170 billion in retirement benefits paid by Social Security, and more than $2 trillion from disability payouts and other health-care programs.

THE FREE-MARKET ECONOMIST Milton Friedman fairly characterized Social Security as consisting of a regressive tax that falls on the first dollar of wages, combined with a pension plan favoring high earners. Accordingly, Friedman marveled that Social Security still had sacred-cow status. Friedman wanted to abolish the system and turn it into a minimum guaranteed income plan for the elderly poor, in the form of a negative income tax—a radical reform that would be a huge cost-saver over the long run.

Instead, we limit ourselves to a plan outlined by the CBO to raise the age of eligibility for full benefits to 67 at a faster pace, and to index initial benefits to prices, rather than wages. As the system works now, benefits, once granted, are adjusted each year according to a price index, but initial benefits are indexed to wages, which generally rise faster than prices. Applying a price index will slow the growth of initial benefits.

Raising the retirement age more quickly to 67 is also a fairly modest step. When Social Security was inaugurated in 1935, life expectancy was 62 and full benefits were granted at age 65. By that metric, since life expectancy in the U.S. now exceeds 75, the age for full benefits could be pushed to 70 or higher.

Another $400 billion can be saved by phasing in a 25% reduction in spending on disability programs known as SSI, for Supplemental Security Income, and SSDI, for Social Security Disability Insurance, with nearly $300 billion of the savings coming from the latter program. Over the past few decades, the general health of the population has been improving; a smaller percentage of people are doing dangerous work; and the work that is dangerous is getting safer. If anything, then, a smaller share of the population should be on disability.

The opposite is true, however, within each age group. So the surge in disability payments cannot be explained by the aging of the population. The SSDI program “creates a very strong incentive against meaningfully participating in the formal labor market,” says Massachusetts Institute of Technology economics professor David Autor, author of the 2011 study, “The Unsustainable Rise of the Disability Rolls in the United States.”

As Autor also points out, “There is a very powerful kind of for-profit advocacy component to getting people onto SSDI.” Law firms that represent claimants are given a percentage of the take, much like personal-injury lawyers. That might seem reasonable, but the sums involved are large enough to create a special-interest group that has a stake in perpetuating the system. As Autor puts it, “The Social Security Administration each year pays more than $1 billion directly to attorneys that prevail against it on behalf of claimants.”

Medicare—medical care targeted mainly at those over 65—is another troubled system. Because it is based on third-party payments, in which the government, rather than the patient, picks up most of the tab, there is an “absence of the normal skepticism we all have when we’re the ones paying for something,” as David Goldhill observes in his book, Catastrophic Care. The result is a plethora of excess care that might actually harm patients.

As Goldhill points out, “30% of spending for colon cancer screening covers people over 75, although the government recommends against testing these people because of the risk of severe complications.” 

Goldhill also notes that “Medicare even pays for screenings for the terminally ill; 15% of terminally ill men were screened for prostate cancer, while a similar share of terminally ill women received mammograms.” He observes: “I’m not sure what’s scarier—that these suffering people were given tests or that they may have been further treated in response to the results.”

NOTHING CAN BE DONE about scary excess care unless there is wholesale reform of the system of third-party payments. But Medicare is rife with “improper payments.” Those include funds paid out without proper billing, for uncovered services or patients, or payments in excess of what is legal. Medicare itself estimates that the “improper payment rate” in 2015 was 12.1%. But that’s probably a low estimate, because fraud by its very nature tends to be hidden by its perpetrators.

We assume that, on a phased-in basis, the improper-payment rate can be cut in half, yielding a 10-year saving of more than $400 billion. We also propose increasing the premiums on Medicare Part B (covering physicians’ and other outpatient services) and Part D (the prescription drug benefit), to 35% of per capita costs from the current 25%. Boosting the premiums, for which low-income enrollees are subsidized, would yield a 10-year saving of a little over $400 billion. Additional savings of $150 billion could come from boosting the deductibles paid on Medicare coverage.

Another $600 billion would be saved by turning Medicaid, the program that provides health coverage for the poor, into a system of federal block grants—which states could use for a wide array of services—with the funds growing at fixed rate of 2% per year. Currently, the states have a fairly open-ended deal with Washington, which has picked up most of the additional cost of Medicaid spending.

The CBO has pointed out that block grants would lead to greater uncertainty for the states. The Cato Institute’s Chris Edwards counters that the welfare-reform bill President Clinton signed into law in 1996 also involved fixed block grants to the states, and gave the states more flexibility in making reforms and cutting costs.

With a similar block-grant structure, states would find a way to allocate the money to the poor who need medical aid. Such incentives are practically reversed under the current system, in which states draw money from Washington almost automatically.

“BILLIONS OF DOLLARS can and will be saved on military (and other) purchases after Jan. 20,” Donald Trump recently wrote on Twitter. TWTR in Your Value Your Change Short position

Our plan trims $950 billion from military spending over 10 years and covers programs such as the one for the F-35 fighter jet, which has suffered cost overruns that are helping to make it the most expensive weapon of its kind. To bring that project under control, for a 10-year saving of $31 billion, we adopt a CBO proposal to cancel the remainder of it and instead build less costly “F-16s and F/A-18s with improved capabilities…that would be able to defeat most of the threats that the U.S. is likely to face in the coming years.”

As critics of defense spending have long pointed out, there is a motivation to make weapons systems ever more complex, since complexity justifies greater cost. And there is generally a crony-capitalist relationship between weapons manufacturers and legislators, as part of what President Dwight D. Eisenhower famously dubbed “the military-industrial complex.”

“New weapons systems,” according to a 2010 letter sent to members of President Obama’s now-defunct Bowles-Simpson Deficit Commission, “cost three to 10 times more to buy and operate than the weapons they are replacing.” As a direct result, “The cost explosion in new weapons dooms the military services to being unable to buy as many weapons as they had.”

This letter, signed by eight men with military backgrounds, including four retired officers, went on to call “the Pentagon’s books” a “bureaucratic system that thrives on corrupted, unaudited accounts,” and referred to the “commendable goal of saving money by identifying waste, fraud, and abuse.”

One clear case of waste, fraud, and abuse has been the Pentagon’s use of half the funds earmarked for Overseas Contingency Operations (OCO)—to be used in the event of war—for base budget operations. By eliminating this misappropriation, we save more than $300 billion over 10 years, while leaving the half of OCO to be used for purposes actually intended.

Another proposed reduction: A phase-out of military bases that protect countries that have long been able to protect themselves, including Germany, Italy, South Korea, and Japan. When candidate Trump spoke of the “military costs” of these bases, he was criticized for not recognizing that the countries being protected do contribute to some of those costs. Factoring in those contributions, Cato’s Benjamin Friedman still finds that a phased-in closing would yield a 10-year saving of $121 billion.

Reduced civilian personnel and operation and maintenance costs commensurate with these other cuts could save the substantial sum of $370 billion, according to Cato’s Friedman. As Friedman notes, the Pentagon now employs some 55 civilians for every 100 military personnel on active duty, the highest ratio ever.

OTHER PROPOSALS FOR slimming down discretionary spending include the 10-year phase-out and eventual elimination of the Education Department and the Department of Housing and Urban Development, for total savings of $700 billion.

Schooling is not the business of the federal government. The Education Department, created in 1979, was one of Jimmy Carter’s worst ideas, and should have been abolished by Ronald Reagan, who spoke of doing so, but did not.

As for the Department of Housing and Urban Development (HUD), nothing very good comes from government involvement in the housing market. HUD was a major contributor to the housing bubble, which battered the U.S. economy and disproportionately hurt the poor.

Cato’s Edwards, keeper of the Website DownsizingGovernment.org, also proposes cuts in a whole range of government subsidies of individuals and businesses, for an overall 10-year savings of nearly $1 trillion. The idea that farmers should receive government subsidies makes no more sense than that supermarkets and restaurants should. Yet this form of corporate welfare goes back many decades, with agribusiness receiving about $25 billion a year, along with aid for research, loans, and insurance.

The federal government funds more than 2,300 subsidy programs, Edwards notes, more than twice as many as in the 1980s. He would cut, although not eliminate, subsidies in a range of programs that include agriculture, foreign aid, commerce, energy, and housing. “Government subsidies are like an addictive drug,” Edwards observes, “undermining America’s traditions of individual reliance, voluntary charity, and entrepreneurship.”

Edwards would also cut grants-in-aid from the federal government to the states, for a 10-year saving of more than $500 billion. “The theory behind grants-in-aid,” he notes, “is that the federal government can operate federal programs in the national interest to more efficiently solve local problems.” In practice, however, the aid system has unleashed waste and abuse—and perhaps even fraud—as federal legislators scramble to maximize subsidies for their states, with issues of efficiency and fiscal prudence all but forgotten. These cuts would put more of the burden on states and localities to fund their own projects.

DOES TRUMP’S APPOINTMENT of fiscal conservative Mick Mulvaney as director of the Office of Management and Budget indicate that the president-elect plans to put taxpayers’ money where his mouth is? “Families across the nation make disciplined choices about how to spend their hard-earned money,” Mulvaney stated soon after he learned of his appointment, “and the federal government should exercise the same discretion that hard-working Americans do every day.”

To expect politicians to exercise such discretion with other people’s money sounds impossible, but laudable. Our proposals are meant as a step toward that goal. 

http://www.barrons.com/articles/barrons-prescription-for-u-s-economic-growth-1482555946

Outside the Box - Dalio on Trump - 30 Days in.

Outside the Box - Dalio on Trump - btbirkett@gmail.com - Gmail

Dalio on Trump John Mauldin | Dec 21, 2016 I have never had the pleasure of meeting Ray Dalio, although I have talked with many people who work with him, and I make it a point to read everything he writes that I can get my hand on. (His outfit, Bridgewater Associates, is notoriously guarded about letting their writings out. I know for a fact that many folks at Bridgewater read my letter – which is admittedly free and certainly doesn’t come with the gravitas of running $150 billion – but in the spirit of the Christmas season I wonder if it wouldn’t be appropriate for them to share a little bit of the wealth.) That being said, Dalio did post a piece a couple days ago on LinkedIn that scratches the political itch that we all seem to have these days. It’s called “Reflections on the Trump Presidency, One Month after the Election”; and given the level of connections that Bridgewater management has and their often outside-the-box views, as well as the fact that this piece from Ray is a relatively positive one that seems appropriate before Christmas, I offer it up as this week’s Outside the Box. Dalio makes the point “This will not just be a shift in government policy, but also a shift in how government policy is pursued.” I am just back from a dinner meeting with a number of people in Washington who have some insight into the process, and I think I have to agree with that assessment. The interesting thing for us observers is going to be how a conservative House with seriously competing ideas as to how tax policy should be done works together with a Senate that has different views and with a Trump administration that has yet again different approaches. One thing I focused on here at the dinner was that there seems to be a consensus building in Congress to almost immediately repeal the Obamacare tax along with several other taxes and have that as one of the first bills on Trump’s desk. The reason for that move is that pretty much everyone agrees nothing will happen quickly, and it isn’t clear which taxes will be cut; but they want to do something to create stimulus as soon as possible, and then maybe even go back and change everything all over again next summer. These cuts will be ones that can be made quickly, and there were more than a few people in the room who are familiar with the congressional process and who think a final tax bill may not be out until later in the summer. And if you want some stimulus quickly, cutting taxes is a simple way to get it. That doesn’t mean the taxes won’t all get put back on in some form or another later on as they figure out what the overall tax picture will l look like; but for now it makes sense to get a quick tax cut to everyone. Frankly, I hope they deal with the corporate tax quickly, as there seems to be some bipartisan consensus on that. That would be better than trying to cobble together one huge omnibus tax bill. The dinner was hosted by the Committee to Unleash Prosperity. In general, much of the room was more optimistic about the potential for GDP growth in the coming years than I am. And they were not as concerned about dealing with the growing total debt of the US, although they did acknowledge that there is a very large contingent of deficit hawks in the Congress and Senate who are going to have their say on the budget and taxes. Those competing concerns – lowering taxes and dealing with the deficit and total debt – leave me distinctly unsure about what will eventually come out of the sausage factory that will create the new tax laws. But I don’t think there will be a quick resolution of the issues. It is somewhat ironic that we did my final tax planning today for 2016, but we really have no idea about planning for 2017 other than to assume that taxes want go down – and we hope that they do! I would love to be pleasantly surprised by a quick resolution on taxes so that we could all get on with business. And for those of you who simply can’t get enough politics these days (which sometimes sadly includes even me – though hopefully I will recover soon), let me suggest a quick read from my friend former Speaker of the House Newt Gingrich. It’s a collection of his essays on this last election cycle, simply called Electing Trump. You can get it for $3.99 on Amazon, and it is available only on Kindle. It really is a quick read – you can probably knock it out in less than 2 hours. As I’ve mentioned before, Newt has graciously engaged me in discussions on a wide ranged of topics in the past year, and our conversations have of course drifted to the political. He was consistently telling me since the fourth quarter of 2015 that Trump had a real chance. And he would patiently explain how frustrated so much of America was. I saw the frustration, but my political experience didn’t let me see how it would translate into a Trump victory. Now, hindsight shows that Newt was 100% on target, and he actually kept a sort of running diary of his comments and interviews, which is how this book could appear so fast. As Newt often says to me, “Real change requires real change.” Halfway measures are not going to make anybody happy. That’s where the rubber meets the road, because what is a good change for some people can be very upsetting to others. We will just have to see what emerges from the major process of change we’re embarked upon. Of course Newt’s book is partisan. As my kids would say, duh. But the political change he covers is part and parcel of a greater change that is happening. We’re near the end of Neil Howe’s Fourth Turning. I am reading a book that is probably going to be the subject of at least two letters early next year. It’s called Men Without Work. There are 10 million working-age men in America who are not participating in the labor force, and that trend line has been moving inexorably from the lower left to the upper right for 50 years, through Republican and Democratic administrations, through recessions and boom times. It wasn’t slowed down by the Clinton/Gingrich welfare reforms. The Greeks and the French have greater labor force participation rates than we do. And when you couple this worrisome trend with all of the other societal changes that are developing because of the increasing use of technology in the business arena, those of us w ho are trying to project macroeconomic outcomes are going to have to start paying much more attention to what’s going on sociologically on the ground. Is Dalio right? Will we see a lift in animal spirits beyond the Trump rally that morphs into actual businesses investing money in the creation of jobs? And will those jobs positively impact Middle America? The economic world is no longer simply defined by supply and demand but is increasingly under the sway of larger social and geopolitical movements. Trying to get a handle on all this is most confusing for a simple analyst like me. I should point out that my colleague Jared Dillian will have a somewhat different take on the same topic tomorrow in his 10th Man. His weekly essay is really beginning to get noticed all over the world, and deservedly so. I am really proud to be working with him and with all of my colleagues. (If you’re not receiving The 10th Man, you can sign up for it here, without cost.) There will be no letter from me this weekend, so let me wish you a Merry Christmas and a Happy New Year and holidays. And I want to thank you for the best gift of all, the gift of your attention and time. It is precious to me, and I continue to try to be worthy of it. Now, let’s have a great week and enjoy family and friends and a little good cheer. Your going into planning mode for 2017 analyst, John Mauldin, Editor Outside the Box JohnMauldin@2000wave.com Reflections on the Trump Presidency, One Month after the Election By Ray Dalio Originally published on LinkedIn, Dec. 19, 2016 Now that we’re a month past the election and most of the cabinet posts have been filled, it is increasingly obvious that we are about to experience a profound, president-led ideological shift that will have a big impact on both the US and the world. This will not just be a shift in government policy, but also a shift in how government policy is pursued. Trump is a deal maker who negotiates hard, and doesn’t mind getting banged around or banging others around. Similarly, the people he chose are bold and hell-bent on playing hardball to make big changes happen in economics and in foreign policy (as well as other areas such as education, environmental policies, etc.). They also have different temperaments and different views that will have to be resolved. Regarding economics, if you haven’t read Ayn Rand lately, I suggest that you do as her books pretty well capture the mindset. This new administration hates weak, unproductive, socialist people and policies, and it admires strong, can-do, profit makers. It wants to, and probably will, shift the environment from one that makes profit makers villains with limited power to one that makes them heroes with significant power. The shift from the past administration to this administration will probably be even more significant than the 1979-82 shift from the socialists to the capitalists in the UK, US, and Germany when Margaret Thatcher, Ronald Reagan, and Helmut Kohl came to power. To understand that ideological shift you also might read Thatcher’s “The Downing Street Years.” Or, you might reflect on China’s political/economic shift as marked by moving from “protecting the iron rice bowl” to believing that “it’s glorious to be rich.” This particular shift by the Trump administration could have a much bigger impact on the US economy than one would calculate on the basis of changes in tax and spending policies alone because it could ignite animal spirits and attract productive capital. Regarding igniting animal spirits, if this administration can spark a virtuous cycle in which people can make money, the move out of cash (that pays them virtually nothing) to risk-on investments could be huge. Regarding attracting capital, Trump’s policies can also have a big impact because businessmen and investors move very quickly away from inhospitable environments to hospitable environments. Remember how quickly money left and came back to places like Spain and Argentina? A pro-business US with its rule of law, political stability, property rights protections, and (soon to be) favorable corporate taxes offers a uniquely attractive environment for those who make money and/or have money. These policies will also have shocking negative impacts on certain sectors.  Regarding foreign policy, we should expect the Trump administration to be comparably aggressive. Notably, even before assuming the presidency, Trump is questioning the one-China policy which is a shocking move. Policies pertaining to Iran, Mexico, and most other countries will probably also be aggressive.  The question is whether this administration will be a) aggressive and thoughtful or b) aggressive and reckless. The interactions between Trump, his heavy-weight advisors, and them with each other will likely determine the answer to this question. For example, on the foreign policy front, what Trump, Flynn, Tillerson, and Mattis (and others) are individually and collectively like will probably determine how much the new administration’s policies will be a) aggressive and thoughtful versus b) aggressive and reckless. We are pretty sure that it won’t take long to find out.  In the next section we look at some of the new appointees via some statistics to characterize what they’re like. Most notably, many of the people entering the new administration have held serious responsibilities that required pragmatism and sound judgment, with a notable skew toward businessmen.  Perspective on the Ideology and Experience of the New Trump Administration We can get a rough sense of the experience of the new Trump administration by adding up the years major appointees have spent in relevant leadership positions. The table below compares the executive/government experience of the Trump administration’s top eight officials* to previous administrations, counting elected positions, government roles with major administrative responsibilities, or time as C-suite corporate executives or equivalent at mid-size or large companies. Trump’s administration stands out for having by far the most business experience and a bit lower than average government experience (lower compared to recent presidents, and in line with Carter and Reagan). But the cumulative years of executive/government experience of his appointees are second-highest. Obviously, this is a very simple, imprecise measure, and there will be gray zones in exactly how you classify people, but it is indicative. Below we show some rough quantitative measures of the ideological shift to the right we’re likely to see under Trump and the Republican Congress. First, we look at the economic ideology of the incoming US Congress. Trump’s views may differ in some important ways from the Congressional Republicans, but he’ll need Congressional support for many of his policies and he’s picking many of his nominees from the heart of the Republican Party. As the chart below shows, the Republican members of Congress have shifted significantly to the right on economic issues since Reagan; Democratic congressmen have shifted a bit to the left. The measure below is one-dimensional and not precise, but it captures the flavor of the shift. The measure was commissioned by a National Science Foundation grant and is meant to capture economic views with a focus on government intervention on the economy. They looked at each congressman’s voting record, compared it to a measure of what an archetypical liberal or conservative congressman would have done, and rated each member of Congress on a scale of -1 to 1 (with -1 corresponding to an archetypical liberal and +1 corresponding to an archetypical conservative). When we look more specifically at the ideology of Trump’s cabinet nominees, we see the same shift to the right on economic issues. Below we compare the ideology of Trump’s cabinet nominees to those of prior administrations using the same methodology as described above for the cabinet members who have been in the legislature. By this measure, Trump’s administration is the most conservative in recent American history, but only slightly more conservative than the average Republican congressman. Keep in mind that we are only including members of the new administration who have voting records (which is a very small group of people so far). While the Trump administration appears very right-leaning by the measures above, it’s worth keeping in mind that Trump’s stated ideology differs from traditional Republicans in a number of ways, most notably on issues related to free trade and protectionism. In addition, a number of key members of his team—such as Steven Mnuchin, Rex Tillerson, and Wilbur Ross—don’t have voting records and may not subscribe to the same brand of conservatism as many Republican congressmen. There’s a degree of difference in ideology and a level of uncertainty that these measures don’t convey. Comparing the Trump and Reagan Administrations The above was a very rough quantitative look at Trump’s administration. To draw out some more nuances, below we zoom in on Trump’s particular appointees and compare them to those of the Reagan administration. Trump is still filling in his appointments, so the picture is still emerging and our observations are based on his key appointments so far. Looking closer, a few observations are worth noting. First, the overall quality of government experience in the Trump administration looks to be a bit less than Reagan’s, while the Trump team’s strong business experience stands out (in particular, the amount of business experience among top cabinet nominees). Even though Reagan’s administration had somewhat fewer years of government experience, the typical quality of that experience was somewhat higher, with more people who had served in senior government positions. Reagan himself had more political experience than Trump does, having served as the governor of California for eight years prior to taking office, and he also had people with significant past government experience in top posts (such as his VP, George HW Bush). By contrast, Trump’s appointees bring lots of high quality business leadership experience from roles that required pragmatism and judgment. Rex Tillerson’s time as head of a global oil company is a good example of high-level international business experience with clear relevance to his role as Secretary of State (to some extent reminiscent of Reagan’s second Secretary of State, George Shultz, who had a mix of past government experience and international business experience as the president of the construction firm Bechtel). Steven Mnuchin and Wilbur Ross have serious business credentials as well, not to mention Trump’s own experience. It’s also of note that Trump has leaned heavily on appointees with military experience to compensate for his lack of foreign policy experience (appointing three generals for Defense, National Security Advisor, and Homeland Security), while Reagan compensated for his weakness in that area with appointees from both military and civilian government backgrounds (Bush had been CIA head and UN ambassador, and Reagan’s first Secretary of State, Alexander Haig, was Supreme Allied Commander of NATO forces during the Cold War). Also, Trump has seemed less willing to make appointments from among his opponents than Reagan was (Reagan’s Chief of Staff had chaired opposing campaigns, and his Vice President had run against him). By and large, deal-maker businessmen will be running the government. Their boldness will almost certainly make the next four years incredibly interesting and will keep us all on our toes.

Thoughts from the Frontline - As the Fed Turns - btbirkett@gmail.com - Gmail

Thoughts from the Frontline - As the Fed Turns - btbirkett@gmail.com - Gmail

As the Fed Turns

By John Mauldin | Dec 19, 2016

As the Fed Turns
Secular Stagnation Forever?
Jobs, Jobs, Jobs
We Got Dot Plots
Trump? Who’s That?
The Great Shake-Up
New York (again), Florida, DC, and the Caymans

“Monetary policy has less room to maneuver when interest rates are close to zero.”

– Ben Bernanke

“Many Americans rely on interest income from their savings to help cover their cost of living.”

– John Delaney

When I was growing up – and until I was well into my 60s, in fact – one of the fixtures of daytime TV was the soap opera As the World Turns. It was often the highest rated of the soaps, but I have to admit that I probably watched it only once or twice. Its stars were the reality-TV celebrities of their time.

Now, there is a high probability that you too are a soap opera fan, but a soap in a different genre, though still brought to you by our beloved mass media…

As the Fed Turns

The highest-rated soap opera ever, at least among those with an economic and investment approach to life, is the show put on by the US Federal Reserve. I’m going to have a few things to say about the recent FOMC meeting, and we’ll use it as a springboard to chew the fat about the new season and upcoming episodes of our very own soap opera: As the Fed Turns. Just as devotees of As the World Turns used to speculate about what their favorite characters were up to, we can have a little fun opining about the Fed’s next moves. Now, a Trump presidency offers a lot of potentially juicy drama, too, and we’ll certainly want to chat about it. And of course, we won’t be forgetting that this is soap opera with real-world implications for the markets and our investment portfolios.

Very few things are certain in financial markets these days. We used to be certain, for instance, that interest rates would always positive be positive. Now we know that’s not so! But last week we experienced a moment of near-certainty when federal funds futures contracts said the odds of an interest rate hike were 95% or better. That turned out to be true. 

What wasn’t certain was what we would hear in Janet Yellen’s commentary and see in the projections of the FOMC participants. They gave us some things to talk about, and they even gave us their dot plots; but there is very little that’s certain in those. In next season’s Fed, executive produced by Donald Trump, those dot plots will have even less predictive power than they do now. There are some obvious reasons why the plots are continually wrong, but they’re about to be more wrong.

What We Learned from As the Fed Turns This Week:

1. The Fed thinks GDP growth is stuck in low gear.

2. They believe the US economy is at or near full employment.

3. Interest rates will rise but not too much.

4. They don’t want to think about fiscal policy.

5. Janet Yellen will stick around through 2017.

6. And the fun part – speculation about the drama surrounding new appointments to the FOMC. Will Trump get to appoint just two governors or the full monty of seven? Both scenarios are possible. As in any soap, you need to have some uncertainty to keep people off balance and paying attention. Trump’s appointees will make a difference in policy, but will their policy change the reality on the ground of the global economy?

I’ll expand on each of the above points. I was travelling or in meetings most of the week, so I wasn’t able to tune into this week’s drama as it unfolded. I think that may be just as well. Initial analyst and public response is often wrong, but it can “anchor” our thinking in ways that aren’t helpful. Sometimes it’s better to walk into the room late and then just calmly meditate on what you see.

Secular Stagnation Forever?

Promoting economic growth and employment is one of the Fed’s core missions, assigned to it by Congress in (I believe) 1974. It was a triumph of Keynesian thought over Hayek’s beliefs; and despite all evidence to the contrary, most market participants still think that monetary policy is the magic that drives the business cycle. Policy is supposed to moderate the boom-and-bust cycle and lift the economy out of recessions within a reasonable period. On that point, monetary policy has failed miserably. We’re seven years out of recession and have yet to see GDP growth break above 3%.

The Fed’s answer in this week’s episode was to throw in the towel: Expect more of the same. Here’s actual growth since 2011 and the FOMC’s projections through 2019. Notice that the top end of the range of growth is barely more than 2%.

You can see that 2013 was a “good” year. Ben Bernanke was confident enough to start talking about “tapering” down from quantitative easing. Staying on that path another year or two might have changed everything. But it didn’t. There was a global taper tantrum; Growth fell back again; and now even the most optimistic FOMC participants see little chance that it will climb much above 2% through 2019.

(One caveat – and it’s one that I feel the need to keep repeating: GDP is a deeply flawed statistical measure that doesn’t fully capture the way today’s economy works. We use it because we have nothing better.)

Former Treasury Secretary Larry Summers, who desperately wanted to star in the show Janet Yellen now headlines, famously called the current trend “secular stagnation.” He thinks we should all get used to it because its structural causes are impossible to change. Yellen and her crew might not use language that strong, but they appear to mostly agree with Larry.

Are they right? Maybe, but I think we can escape this dreary fate if we play our cards right.

Jobs, Jobs, Jobs

The unemployment trend is looking better. The rate has fallen pretty steadily and is now below 5%. The FOMC expects it to stay there, too.

The problem is that not all jobs are equal. The wealthy law firm partner and the student-debt-plagued law degree holder who is instead driving for Uber both count as “employed,” even though their situations are vastly different.

Also problematic: The unemployment rate is down in part because so many workers have left the labor force – or, increasingly, never entered it. My airplane reading this week included a short, fascinating book called Men Without Work: America’s Invisible Crisis, by Nicholas Eberstadt. He documents evidence that this abandonment of the labor force isn’t a new problem, either. It has been quietly building for decades. It has multiple causes that aren’t at all easily solved. It is likely that I will write about this book in at least one or two future letters. Eberstadt’s data is both compelling and depressing.

Roughly 10 million American males of prime working age have literally dropped out of the workforce. And we wonder why productivity is low. Again, this problem has been building steadily since the ’60s. The trend has held steady through boom periods and recessions, and the Clinton/Gingrich welfare reforms didn’t affect it. France and Greece have significantly higher labor force participation rates than the US does. And no, these dropouts are not Trump voters, and it’s not just the labor force they don’t participate in. This is a major and very troubling social trend.

However, let’s not overlook progress we have made. We have indeed seen much improvement from the Great Recession’s depths. Businesses are expanding and creating new jobs. The problem is that we have a mismatch between the skills of jobless people and the kinds of work employers need done. That is not something lower interest rates can solve.

We Got Dot Plots

Now to the main course: Dot Plots du Jour. The dots that the FOMC members contribute to the plot indicate their expectations for the federal funds rate.

By the way, I saw a tweet this week in which someone said that the dot plots are not “forecasts.” It’s true that the Fed doesn’t use that word. They call the plot their “assessment of appropriate monetary policy” for certain points in the future. So technically, it’s what they think rates should be, not a prediction of what rates will be on those dates.

Is that a forecast? You can call it whatever you like. I think “forecast” is close enough.

But before we look at the whatever-you-call-it, here’s a rate history of the last 16 years:

I’ve highlighted this fact before, but it’s worth mentioning again: In 2007, less than a decade ago, the fed funds rate was over 5%. So were the interest rates for Treasury bills, CDs, and money market funds. People were making 5% on their money, risk-free. It seems like ancient history now, but that year marked the end of a halcyon era of ample rates that most of us lived through. The chart below shows historical certificate of deposit rates – but remember, you could put your money in a money market fund and do better than the six-month certificate of deposit yield, back in 2007.

Today’s young Wall Street hotshots have never seen anything like that. To them the jump from 0.5% to 0.75% must seem like a big deal. It’s really not. If the chart above were a heart monitor readout, we would say this patient is now dead and that last blip was an equipment glitch.

The point to all this is that these near-zero rates to which we have all adapted are by no means normal or necessary to sustain a vibrant economy. We’ve done fine with much higher rates before. They are even beneficial in some ways – they give savers a return on their cash, for instance. But there are likely to be consequences once we embark on this rate-increase cycle, and I’ll examine them later in this letter.

The FOMC cast members are all old enough to remember those bygone days of higher rates as well as I do. So we would think they might at least foresee a return to normalcy at some point in the future. Not so. They see nothing of the sort.

Here is the official dot plot published by the FOMC. (I have included their preferred heading so that no one complains about my calling it a forecast, even though that’s what it is.)

Each dot represents the forecast assessment of an FOMC member. That group includes all the Fed governors and the district bank presidents. All 17 of them submit dots, including the presidents of districts who aren’t in the voting rotation right now. There would be 19 dots if the two vacant governor seats had been filled.

That flat set of dots under 2016 represents a rare instance of Federal Reserve unanimity: They all agree where rates are right now. (See, consensus really is possible.) The disagreement sets in next year. For 2017 there’s one lone dot above the 2.0% line, but the majority (12 of 17) are below 1.5%.

Nevertheless, it will be a much different year than this one if they follow through. The dots imply that the fed funds rate will rise a total 75 basis points next year. Presumably, that would be three 25 bps moves, but they can split it however they want. They could ignore their expectations completely, too. This time last year, the FOMC said to expect a 100 bps rise, or four rate hikes, in 2016. We got only one.

Follow the dots on out and you see that their assessments trend a little higher in the following two years, and then we have the “longer run” beyond 2019. Most FOMC participants think rates at 3% or less will be appropriate as we enter the 2020s. The most hawkish dot is at 3.75%.

Think about what this means. Today’s FOMC can imagine raising rates only to the point they fell to about halfway through their 2007–2008 easing cycle. They see no chance that overnight rates will reach 5% again. None.

Here is another view of the same data, courtesy of Business Insider. They added the September dot plots, so we can see how the dots shifted.

Looking at each set of red (September) and blue (December) dots, we see only a slightly more hawkish tilt than we saw three months ago. The “Longer Term” sets are almost identical – two of the doves moved up from the 2.5% level, while the two most hawkish hung tight at 3.75% and 3.50%.

That word hawkish is relative here. By 2007 standards, these two voters are doves. But,  Toto, I’ve a feeling we aren’t in 2007 anymore.

Trump? Who’s That?

I got an email from the brilliant Peter Boockvar after the FOMC news. He said, “If something changed on November 8^th, the Fed didn’t see it.” That was a good way to put it. The same election that jolted markets into some of the sharpest moves in years barely affected the FOMC participants. That’s very clear from the near-identical red and blue dots in the chart above. Peter’s take?

Now the dots predict 3 in 2017, and the market this time actually believes we may get it because of Trumponomics and the reality that Fed forecasts must shift higher. Three rate hikes, though, will only take us to a whopping fed funds rate of 1.375%. Even with a zero rate for 8 straight years, the 25-year average in the fed funds rate is still about 2.75%. Headline CPI today is expected to print 1.7%. We should still see negative real interest rates in 2017. The dollar doesn’t care about the absolute level of rates as it continues to rip on the continued growing rate differentials. I’m waiting for the Trump tweet complaining about the strong dollar. I find that to be inevitable if he wants to bring manufacturing jobs back to the US.

Are the Fed governors and bank presidents in denial? I don’t think so. Whether they supported the election outcome or not, they know what happened. They know how markets reacted. They know a whole bunch of things are about to change. So why are they so stubbornly sticking to their guns?

This may surprise some of you, but I’m going to defend the Fed on this point.

I wholeheartedly believe Donald Trump and the Republican majority will enact a sweeping package of tax cuts, at least a modest infrastructure spending program, and hopefully some radical deregulation. It won’t be exactly what any of us want, but they’ll make some good moves that should help the economy, which is badly in need of some help. (As we will see below, there are other forces that are problematic.)

But here’s the rub. We don’t yet know exactly what it will all look like. Right now, we’re hearing a lot of ideas and speculation. Presidents never get everything they want from Congress. Trump may get more than most, but I doubt he’ll get it all. Senators and Representatives have their own ideas and incentives. Serious prognosticators are paying a lot more attention to House Ways and Means Chairman Kevin Brady than the media is. Brady’s ideas are well-known, but they’d be a radical departure from current policy. And every economist knows that any change comes with a time lag before its effects are truly seen in the economy.

Likewise, the details matter. Tax reductions are generally good, but they can have more or less growth impact depending how they are constructed. There’s also the question of how they will affect the debt. That problem isn’t going away. The same with spending and deregulation.

There’s a lot we don’t know, and right now what we do have is mostly guesswork. Do we really want a Federal Reserve that reacts to guesswork? I don’t. I want them to look at hard data and make their best judgment calls. This week’s hike was probably going to happen no matter how the election turned out. They told us in the dot plot to expect more hikes next year, totaling 0.75%. They have plenty of time to react to whatever fiscal policy changes make it to the president’s desk.

The same applies to their morose GDP projections. Do they think the coming changes will have no effect? Probably not. But they don’t know exactly what the changes will be, which makes their impact hard to assess. Plus, while I don’t agree with Summers on secular stagnation, I do agree that long-term forces are causing a generally slower growth environment.

We’ll get a new dot plot at the mid-March FOMC meeting. By then we should have a much better sense of fiscal policy changes. I suspect the impact will be visible in that meeting’s projections, and certainly by the meeting in June.

The Great Shake-Up

The current FOMC may have some new voters by March. There are two vacant seats Trump can fill as soon as he takes office and gets the Senate to confirm them. But it appears Janet Yellen isn’t going anywhere. Asked about her own future at the news conference, she noted that the Senate had confirmed her to a four-year term as chair and that she plans to finish it on schedule, that is, on February 3, 2018.

And this is where we get some drama. Trump could have anywhere from a minimum of two appointments in his first term to possibly all seven. We’ll start with some facts and then throw in some speculation. I should note that I have talked about this with a number of people who have deep insights and contacts in the Federal Reserve, but I owe a special word of thanks to Danielle DiMartino Booth, whose new book on the Fed will be out on Valentine’s Day. We will preview it here, and I’m sure it’s something you’ll want to read. It is getting rave reviews from the coterie of insiders she has allowed to read it. Now to the drama…

At Yellen’s press conference she made a couple of notable points. She specifically noted that Federal Reserve appointments aren’t tied to presidential elections. I think that was a hint that she will defend the Fed’s independence, or at least try to.

She also left open the possibility of staying on the Board of Governors even after her term as chair is over. Those are separate appointments. She can stay on the board until January 31, 2024. At age 70 now, I doubt she will, but it’s possible. We know Supreme Court justices delay retirement so that a president they like can appoint their successor. I think Yellen was reminding Trump that she has that option.

The same is true for Vice Chair Stanley Fischer, by the way. His board term lasts until January 31, 2020, so if he chooses to stay it will be until either Trump’s second term or someone else’s first .

You all know that I think the Fed needs a major shake-up. I think Trump can do it, too, but only to the extent there are vacancies he can fill. There are the two current openings, but beyond them he will need some of the current five governors on the FOMC to step down voluntarily. The others’ terms all extend through 2022 or later.

For the record, the other three serving Board of Governors members are Daniel Tarullo, whose term does not end until January 31, 2022; Jerome Powell, whose term isn’t over until January 31, 2028; and Lael Brainard, whose term ends on January 31, 2026. They can all elect to stay.

Now, I am told that Yellen actually wanted to raise rates in September but that she would have had two dissenting votes from members of the Board of Governors. It’s one thing to get dissenting votes from the district Federal Reserve presidents who are serving as voting members on the FOMC; it’s another thing to get dissenting votes from the members who are appointed to the Board of Governors. There has not been a dissenting vote from a governor since 1996 – not to say it couldn’t happen next meeting, but just to give you an idea how rare it is.

If Yellen and Fischer decided they wanted to stay and the other three current board members also agreed to stay on, together with the generally dovish district Federal Reserve presidents, they could seriously hamstring any real shift in Federal Reserve policy that Trump might prefer.

That means the two appointments that he initially makes may be his only true options to eventually become chairman and vice chairman. While I don’t think this outcome is likely, is clearly an option in everybody’s back pocket. That ratchets up the importance of the first two appointments.

Fortunately for Trump, it’s pretty rare for Fed governors to complete their full 14-year terms. First of all, you have to realize that they get something like $169,000 a year. That’s a rounding error in their speaking income, not to mention what they can get by sitting on major corporate boards and consulting. And seriously, you have to be a total data wonk to get any excitement out of some of the responsibilities they have. So consequently, they either retire or seek other opportunities (and maybe a bit more fun). So there’s a good chance Trump appointees will hold at least four of the seven Board of Governors seats by the end of his first term. That could happen as soon as mid-2018 if Yellen and Fischer retire when their leadership positions end.

Okay, let’s ratchet up the drama. Lael Brainard was hoping to be appointed Secretary of the Treasury under a Clinton administration. Clearly, that’s not going to happen. She’s young enough that a future Democratic president could appoint her to the position, but does she want to hang around on the Federal Reserve for a minimum of four more years? I am told she doesn’t.

By people who know Governor Tarullo (and like him), I am told that he is likely to leave sooner rather than later. Currently, he is head of the Federal Financial Institutions Examination Council, a spot he is certainly qualified for but one that is generally given to the Federal Reserve vice chair. He is 64 years old, and I don’t think he will want to hang around just holding down a spot.

Jerome Powell’s background is impressive, but I wonder if he would want to be the last man standing of the current governors. I have heard nothing either way and no one seems to really know, other than Governor Powell. He is actually the lone Republican on the board but has not proven as hawkish as some people thought he would.

Also for the record, I know that both John Taylor and Kevin Warsh would like to be Fed chairman. Either one would be a good chairman, but my true preference would be Richard Fisher, the former Dallas Federal Reserve president. The coming times are going to be extremely difficult to navigate by the limited means of monetary policy, but within that scope, the wisdom and counsel of Richard Fisher would be a great addition. There are any number of good governor nominees, but let me put the names of Dr. Lacy Hunt and David Malpass on the list. Especially Lacy. True aficionados of the genre know that these two are not always on the same page, but they both bring an enormous amount of historical knowledge and economic sagacity. We are coming into a world where there will not be many good choices, and choosing among the – well, let's just call them less than optimal – choices will demand that wisdom. Just saying…

So it’s possible that Trump gets at least six and maybe seven appointments within his first two years to the Board of Governors of the Federal Reserve.

Even if you like nothing else about Donald Trump, you really should celebrate this part. The stars have lined up to give an “outsider” president a shot at completely remaking the Federal Reserve. Washington is full of agencies that need a shake-up, of course. I expect many will get one. None need it more than the Fed. In terms of long-term impact, reshaping the Fed could be one of Trump’s greatest undertakings.

That being said, if he gets the number of appointments that I think are likely, that means he “owns” the Fed, in terms of having to take responsibility for its actions. It goes back to Colin Powell’s philosophical line, “You break it, you own it.”

The problem is, as I have been repeating, that monetary policy is unlikely to be all that effective in the future. It is questionable how effective it has been in the recent past, aside from driving up asset prices, which hasn’t done much for Middle America.

I keep pointing out that we really do have to be paying attention to what is happening in Italy and Europe, too. Italy is truly on the brink of a major crisis. Maybe I should write that as MAJOR CRISIS. One that can send Europe into a deep recession and push the world to a global recession.

Let’s review the reality on the ground. In a conversation I had yesterday with Dr. Lacy Hunt, he pointed out that total US debt is $70 trillion. $20 trillion of that will have its interest rates reset within the next two years. That means a minimum of $200 billion more interest, which comes directly out of the productive economy. Now, that money is partially transferred here or there, but it is clearly not stimulus. As I have demonstrated in past letters, at some point debt becomes a drag on the economy, and we are at that point.

Further, and without getting too deep into the weeds, the QCEW (an employment report) suggests that the actual number of added jobs in the US may be overstated by 190,000 or more and will get adjusted next year when we get the normal revisions. And as I mentioned, 10 million American males are no longer in the labor force and aren’t looking for work. No productivity or any other help for the economy there.

The bulk of the current FOMC members believe that GDP growth will remain below 2%. There is reason to think that 1.5% is closer to the real potential. For all intents and purposes, that’s stall speed. A crisis in Europe, and President Trump has a recession on his hands. And as I have consistently pointed out for 20 years, presidents have *&^%&^% little control over the economy – but they get blamed or praised, take credit or point fingers, for whatever happens.

Whatever happens, it is going to be an interesting next four years. Let me make a personal admission. This will probably earn me no kudos from anyone, but in my private moments over the summer and going into the election, I consoled my friends with the possibility that while Republicans might lose at the ballot box, the fact that the likelihood of a recession in the next four years was so high that a Clinton presidency and progressives in general would be blamed for it. Blamed unfairly, at least to some degree, although they are responsible for the regulatory environment we live in today. But this would lead to a massive sweep in 2018 and 2020 and in the long view might change things for the following 10 to 15 years.

Now? Republicans own it. At least in the minds of the voters. And for the record, let me clearly state that the policies that I expect a Republican president and Congress to initiate will go a long way to mitigating the negative effects of a recession, far more than the dovish and more repressive regulatory and high-tax policies of a Clinton administration would have done. But arguing that things are at least better than they would have been does not make for a very good political campaign slogan.

To an agonizingly great degree, the incoming US administration is hostage to the German election cycle, which means that Merkel cannot condone bailing out Italian banks until after her election in the fourth quarter of next year. Sometimes, bond markets can be very inconvenient. Italy is in extremely deep kimchee. And that’s putting it delicately. Unlike Greece, Italy matters. Italy is too big to bail out, too big to save. A breakup of the euro practically guarantees a deep recession in Germany – and I mean really deep. Which will suck in its other northern partners. A recession in Europe would drag the world down – including a debt-driven China.

You want soap opera? What happens when the currencies of the world start falling significantly against the dollar? Currency manipulation or the real world? What does a Trump Treasury Department do in response? Labeling everybody as currency manipulators won’t work very well. Punitive tariffs are counterproductive. Do we actually respond by monetizing the federal debt (at least the debt held in the US) in order to reduce the value of the dollar and keep from completely devastating the potential positive aspects of a new corporate income tax policy? That would not be an irrational response, as it would essentially be what the rest of the developed world was doing.

Dear gods, we are moving into a world where we have absolutely no idea how things are going to unfold. The uncertainty gage is pegging into the far-right red zone.

“The problems of victory are more agreeable than the problems the defeat. But they are no less difficult.”