Donald Trump says a lot
of whacko things and his recent wild pitches about defaulting on the national
debt and replacing Yellen because she is not a Republican sound as if they were
coming right out of his wild man wheelhouse. Certainly these statements
have gotten mainstream financial journalists and editorial writers in high
dudgeon.
Said the NYT editorial
page about Trump’s observation that if things got bad enough he’d seek to
negotiate “discounts” on Uncle Sam’s towering debt,
Such remarks by a major
presidential candidate have no modern precedent. The United States government is able to
borrow money at very low interest rates because Treasury securities are
regarded as a safe investment, and any cracks in investor
confidence have a long history of costing American taxpayers a lot of money.
Well, now. These “very low rates” could not have anything to do with
the fact that the Fed has vacuumed up $3.5 trillion of Treasury debt and its
close substitute in GSE securities since September 2008. Apparently, the law of
supply and demand has been suspended until further notice—-except for the fact
that when Bernanke even hinted that the Fed might sell down some of its grossly
bloated balance sheet in April 2013 treasury yields erupted higher in
the infamous taper tantrum.
The fact is ultra low rates on Uncle Sam’s mountainous debt have everything to do with
central bank manipulation of interest rates. There has been a central bank
Big Fat Thumb on the scales for nearly two decades, and it now includes
the $1.7 trillion of treasury debt owned by the People’s Bank
of China (including its off-shore accounts), the $1.2 trillion owned by
the BOJ and the nearly $7 trillion owned by central banks and their
affiliates as a whole.
That’s right. The world’s central banks own more than 50% of the publicly
traded US debt of $13.5 trillion, and not one single penny of it was purchased
with real savings or anything which remotely resembles honest money. It
was all scooped up when central banks hit the “buy” key on their digital
printing presses.
In short, the “very low
yield” on US Treasury debt is the product of a giant monetary fraud, not a
testament to the strength and safety of Washington’s credit. And it
most certainly has nothing whatsoever to do with investor “confidence” in
Washington’s integrity.
Just the opposite. The
Wall Street traders are all in on the scam. The marginal bond price
is “discovered”, in fact, when fast money traders buy the stuff on 95%
repo leverage while front-running the central banks.
So Donald Trump’s
wild pitch in this instance can’t hold a candle to the truly scandalous
arrangement under which Uncle Sam’s debt is actually priced. Even the treasury
debt in commercial bank vaults is mainly there because regulatory
authorities permit the fiction that it is risk-free and
therefore require zero
capital backing.
Still, that didn’t stop
the Washington Post from harrumphing even more self-righteously than the NYT. By its lights,
Trump’s purported cave man views threaten financial civilization itself:
If these phrases
mean anything, they contemplate at least partial repudiation of the U.S.
government’s obligations, sacrosanct since the time of the founding. The “full
faith and credit” of the United States, established over centuries and embodied
in its debt, is the glue that holds global finances together. The minute the United States tried to
reduce its debt load by offering creditors less than 100 percent of
principal and interest — i.e., by “discount,” or “making a deal,” like
Argentina or Greece — every institution that had taken this country at its word
would be instantly destabilized. What
the Post was all lathered up about is the official policy
Here’s the thing. What the Post was all lathered up about
is the official policy of
the United States—–and one that is actually pursued with a
punctilious vengeance. According to Janet Yellen and her entire posse of camp
followers in the Eccles Building and on Wall Street, the Fed must
move heaven and earth to boost the inflation rate to 2% annually.
Not only that, it must
use the shortest measuring stick possible (the PCE deflator less food and
energy) to track its progress and keep the printing presses running white hot
to ensure it stays there. That is, it must deliver 2% inflation at
all hazards, world without end.
Then again, isn’t that the very skunk in the woodpile? After
all, under a scenario of 2% inflation year-in-and-year-out, a 30-year
US treasury bond will be worth exactly 54.5 cents on the dollar at maturity. The Donald could only imagine a discount off that depth.
Yes, the savvy insiders argue its 2% uber alles. That is,
everything goes along for the inflationary ride—–prices, wages, profits, rents,
indexed social benefits and the works. Except it doesn’t work that way in the
slightest. Just like the Donald says, debtors get relieved and savers get
creamed.
The deliberate national
policy of 2% inflation is the most capricious form of economic injustice
imaginable. Not even its perpetrators have a clue as to the utterly random
incidence by which it impacts economic agents over time and the resulting
windfall gains and losses in wealth which flow therefrom.
And that’s not the half
of it. The Fed’s deliberate 2% inflation policy not only results in the
arbitrary seizure of deep discounts on the public debt by the government,
but also an immense dissipation of economic resources by the private
sector. That is, all
kinds of racketeers are enabled to make a handsome living peddling
information and services which would never be needed under a regime of sound
money.
Economists who work the
“fed watch” beat are a prime example. If the Fed had stuck to the
original passive rediscounting mission conferred on it by
Carter Glass in 1913, there would be no open market operations and
the Fed would not be stuffing its balance sheet with trillions of public debt,
thereby drastically falsifying its price.
And that means that
racketeers like the so-called economist quoted below would be as rare
as white buffaloes. Lou Crandall thus declaimed in tones of righteous
disdain:
“No one on the other side
would pick up the phone if the secretary of the U.S. Treasury tried to make
that call,” said Lou Crandall, chief economist at Wrightson ICAP. “Why should
they? They have a
contract” requiring payment in full.
Right!
The do have a
contract—-and it’s to have 45% of their investment seized every 30 years
by the central bank. And they even get to pay court jesters like Crandall to
watch the central bank’s machinations as their wealth steadily erodes.
This is why
Trump’s politically incorrect bluster is such a refreshing tonic. It exposes
the entire tissue of fraud, corruption and willful deceit that underlies the
Washington/Wall Street status quo.
None of his loudly
remonstrating bettors, for example, even bothered to mention the context in
which he mentioned the possibility of default in the form of negotiated
discounts on the public debt. Namely, what happens, the GOP nominee
inquired, if interest rates rise by “2, 3 or 4%”?
That is a perfectly valid
question and one that is studiously avoided by the Keynesian Cool-Aid
drinkers who pass for economists and fiscal experts. The truth is, interest
rates must return to something like our current 2.3% core CPI inflation plus a
2% margin for risk, return and taxes or the entire monetary system will someday
blow sky high.
Yet ten years from now
the public debt will be $33 trillion at minimum—-unless you really believe that
the central banks have abolished the business cycle and that the word
“recession” will disappear from the face of the earth.
But then again, an
average 4.5% carry cost on the prospective Federal debt would amount to $1.5
trillion annually or 6X
the $253 billion the CBO currently projects for net interest in 2016.
Can you say with the
Donald, “debt discount”?
In fact, perhaps it ought
to be pointed out that the scam built into the phony $253 billion net interest
figure built into the Federal budget accounts for this year leaves
Trump’s alleged voodoo economics far behind. To wit, in the most recent
year, the Fed earned upwards of $120 billion from its $4.5 trillion trove of
Treasury and GSE debt but paid virtually nothing for its $4.5 trillion of liabilities
because, alas, they were conjured from thin air.
So after paying
the banks their IOER (interest on excess reserves) bribe of about $12
billion and the salaries of several thousand economists and other apparatchiks
of dubious value, it remitted its “profit” of more than $100 billion to the US
Treasury as an offset to its interest expense.
Now, that’s
voodoo economics, if there ever was such a thing.
Indeed, the
Capitol Hill guardians of fiscal virtue being implicitly heralded by the Trump
bashers, have discovered that the Fed’s phony baloney profits are the gift that
never stops giving.
After a two-year
stalemate on the matter of the bankrupt highway trust fund, for example, these
practitioners of “fiscal responsibility” dipped into allegedly excess system
“profits” at the Fed to cover the gap. That is, these phantom revenues
were pumped into the highway trust fund because these incompetent cowards could
not see fit to cut out the massive waste which goes into mass transit,
bicycle paths and the repaving of little-used state roads, on the one
hand, or raises the gasoline tax, which hasn’t been adjusted for inflation
since 1993, on the other.
So “confidence”
is being threatened because Donald Trump has told the truth that the Federal
debt is on a track toward unmanageability and default while Washington plays
games like this?
Moreover, the highway
trust fund caper was only small beans. During the last several years, the
reported Federal deficit has been reduced by upwards of $250 billion owing to
another scheme of phony “profits” repatriation. Namely, Fannie Mae and Freddie
Mac have generated giant profits under an accounting scheme that is a
complete circular fraud.
These GSEs are
effectively “renting” Uncle Sam’s credit rating in order to be
in the mortgage guarantee and warehousing business without paying any
meaningful rent for the long-term risks they are incurring. Stated
differently, Washington is parking the risks off budget and booking the
profits in its current accounts.
And that gets us to the
real screeching about the sacred independence of the Fed elicited by Trump’s
welcome statement that he wouldn’t reappoint Yellen. Whether that is because she
is not a Republican or because she is utterly incompetent as an economist
doesn’t matter. The notion that the Fed is not part and parcel of the state and
its massive intrusion in private capitalism is a just plain bad joke.
Yes, Uncle Sam’s credit standing is in deep trouble and
the Fed is heading for a monetary calamity.
But these untoward prospects have nothing to do with a
couple of wild pitches from Donald Trump. Upon closer examination, it
is evident that they were right on the money.