Friday, August 24, 2018

The Most Important Question Heading into this Fall for My Blog, The US, and the World

Is the Trump Economic Boom a Mirage? 

This is the lead question in a recent article by Jim Rickards that looks at whether or not current Fed policy might lead the US into a new recession. I cannot think of a more important question to consider at this time. The answer to that question will determine if regular blog articles continue here, if the US economy remains strong, what happens to the US dollar, and then even what will the impact be on the entire global economy. 

Below are some excerpts from the article by Jim Rickards and a few added comments. It is hard to overestimate how important the answer to this question really is. If the US economy is as strong as it is reported to be and is able to sustain a higher level of GDP, the political landscape tilts towards President Trump and against any substantial major changes in our present monetary system. This would mean that this blog would likely have little news to report or cover leading to no need for regular articles. Most voters will probably be happy enough to keep things pretty much as they are. The status quo remains likely to stay in place.

On the other hand, if the US economy is not as strong as it is reported be or cannot sustain a high enough level of GDP, the door opens for all kinds of disruption and change. The political environment likely changes. The markets and US dollar are likely less stable. We have to go on alert to watch for signals that another deep recession (or even a new crisis) could emerge. So the the stakes are very high in regards to the answer to this question. Below are some excerpts and then a few added comments.

from Jim Rickards article - The Fed is on a Collision Course

"Is the Trump economic boom a mirage? The data say yes, but the Fed models say no. The Fed has a long track record of sticking to its model-based approach and missing major turns in the U.S. economy.

Current Fed policy will push the U.S. economy to the brink of recession later this year. When that happens, the Fed will have to reverse course and ease monetary policy. This will send the dollar crashing while gold and the euro soar."

. . . . 

"As for the Trump bump, growth in the first quarter of 2018 was 2.0%, slightly below the average since June 2009. Growth for all of 2017, Trump’s first year in office, was 2.6%, slightly above the 2.14% average in this recovery but not close to the 3.5% growth proclaimed by Trump’s supporters.

In short, growth under Trump looks a lot like growth under Obama, with no reason to expect that to change anytime soon. In fact, the head winds caused by the strong dollar, the trade wars and out-of-control deficit spending may slow the economy and bring future growth down below the average of the Obama years.

Into this mix of weak growth comes the Federal Reserve, which is tightening monetary policy, reducing the base money supply and supporting a strong dollar. All of these policies are associated with slower growth ahead, an inverted yield curve and a high probability of recession."

. . . . 

"Simultaneously, the Fed is reducing its balance sheet (destroying base money) at an annual tempo that will reach $600 billion per year by end of 2018. This policy is completely unprecedented in the 105-year history of the Fed, so its economic effects are unknown.

My estimate, and that of others, is that this balance sheet reduction policy is equivalent to four 0.25% rate hikes per year on top of the four already planned. The combined effect is the same as the Fed raising rates 2% per year off a near-zero rate base as recently as December 2015.

Bearing in mind that monetary policy works with a 12–18-month lag, this extraordinary tightening policy in a weak economy is almost certainly a recipe for a recession.

Why is the Fed tightening if the economy is fundamentally weak and the probability of a recession is so high?"

. . . . . 

My added comments: This article lays out very well a situation I have been monitoring in terms of what to do about regular blog articles here. If the US economy holds up and really does sustain a strong level of GDP, not much is likely to change very soon. Most people will be happy (or at least satisfied) and the present system is unlikely to be at major risk for a game changing crisis. As I have mentioned here, there is no reason to continue to try and cover an event that is not happening (major monetary system change) just for the sake of trying to produce regular blog articles.

On the other hand, if the situation goes the other way, things could change a lot and then the door to major monetary system change could also open up. Just imagine if things do go south with the US economy. Political opponents of President Trump will seize upon the situation to disrupt his agenda and undercut his political power base. I think it is reasonable to guess that President Trump will point a finger directly at the Fed as the cause of the problem (too tight monetary policy). This would be a very messy situation with all kinds of potential for disruptive changes with the huge political divide that exists today in the US and the country essentially split in half. 

Also, it is not as though no one is urging the President to be more proactive on the concept of monetary reform. The Wall Street Journal recently called on him to use the current environment to educate the public on why reform is needed and start the process. Dr. Judy Shelton has said this might be the right time to think about monetary system reform. The New York Sun has gone a step further in this article and suggested that if the President does not become more proactive in educating the public on this issue and seizing the opportunity, he may find himself in some political trouble if the economy does take a downturn.

This is why I originally decided to see how things go until this fall in terms of future regular blog articles. By the time the November 2018 elections take place, we should have a decent idea where things are headed. The 2018 mid term elections probably either keep the Trump Administration economic agenda in place or severely disrupt it if the Democrats take control of the US House of Representatives. If the Trump economic boom shows signs of being a mirage before the elections, the prospects for change go up. If the economy seems to be doing fine, the prospects for major change go down.

It's a gigantic question and the answer has worldwide implications. We won't try to make any predictions here. All we can do is just observe what actually happens and report it. 

Added news notes 8-27-18:

Another article calling for monetary system reform - this one says events in Turkey provide another example as to why it's needed. Here's a quote from the article:

"The lesson to learn from the Turkish crisis does not only concern Turkey. It is one more crisis which calls for a reform of the international monetary system."

CNBC - US - Mexico reach trade agreement and new NAFTA deal anticipated

CNBC - Markets not worried about Trump because of the "Pence Put"

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