Ambrose Evans-Pritchard: Trump Effect Won’t Stop Credit Crunch

Yves here. With an unpopular incoming president who has promised radical change…and sent conflicting messages on what that change will amount to, it’s not hard to believe that Mr. Market’s enthusiasm is overdone.

Trump’s economic program rests heavily on pet Republican ideas that are good for the rich, often at the expense of the growth, such as privatization and tax cuts for the wealthy. And while Trump almost certainly favors deficit spending, which give the economy a boost (even though he’s copped a more fiscally conservative posture of late), he’s not likely to get far with Republican deficit hawks.

So as we’ve indicated, Trump’s plans to deliver, or at least appear to deliver, for his base means he needs to follow through with his promises to “reform” immigration and reverse the offshoring of jobs. On the immigration front, I’ve heard of grocery stores that relied on undocumented workers getting rid of them all shortly after the election. The INS has apparently already started telling employers that they are going to be more stringent about enforcement.

Will Trump go further with trying to bring manufacturing jobs back than merely jawboning some high profile employers? Mind you, I’m not a fan of the facile “those jobs are never coming back” thesis. The tacit assumption in the “the jobs won’t return” argument is that the offshoring was a plus for efficiency.

In reality:

1. Direct factory labor is typically 10-15% of wholesale product cost

2. Lowering direct factory labor cost via offshoring is offset by:

– Higher managerial/coordination costs

– Greater financing costs

– Higher transport costs

– Greater inventory obsolescence risk

– Greater fuckup risk (longer supply chain with more vendors = more points of failure)

– Greater business system rigidity

There are tons of cases where you are shipping raw materials to Asia (furniture manufacture) where the case for offshoring was pretty much non-existant. It doesn’t even pan out in mid-range shoes.

3. There are also industries where the Chinese (and sometimes other countries) have been dumping for over a decade, like coated paper. The economics of domestic manufactures would improve, reducing efforts to crush unions and cut wages.

4. However, US execs are very unwilling to give up their higher incomes. But Asian manufacturers haven’t yet institutionalized a yawning gap between senior management and factory worker pay. And they don’t have our quarterly earnings neurosis either. Taiwanese manufacturers are already looking at locating in the US if Trump imposes tariffs. I similarly saw Japanese invest in manufacturing facilities in the US at projected ROIs that Americans would not consider.

But even if Trump were to impose tariffs and foreign manufactures were to move production into the US as a result, the shift would take at least a couple of years and would be deemed a failure in the meantime.

By Damien Klassen, a research analyst at Schroders. Originally published at MacroBusiness

Ambrose Evans-Pritchard is back in the Fairfax press and the UK Telegraph talking up the prospect of a 2017 crunch:

Trump’s reflation rally will short-circuit. Rising borrowing costs will blow fuses across the world before fiscal stimulus arrives, if it arrives.

By the end of 2017 it will be clear that little has changed. Powerful deflationary forces retain an invisible grip over the global economy. Bond yields will ratchet up further and then come clattering down – ultimately driving 10-year US yields below zero before the decade is over.

I worry about the extreme nature of Evans-Pritchard’s calls and the timing more than I worry about the general direction.

I’m on board with the thought that the Trump effect will be transient. Will everything come crashing down in 2017? Maybe, but if the Trump tax cuts get passed in the first 100 days and implemented as soon as possible, the tax cuts are unlikely to be in much before the middle of the year. So, as poorly targeted and regressive as the tax cuts are, they are large, so I’m struggling to understand how the effect will have faded by the end of the year.

Will Trump clamp down on spending (as Evans-Pritchard suggests) hard enough to crash the US economy? Maybe, but that seems to be a large logical leap when we are really not sure what Trump is going to do.

More from Evans-Pritchard on the Trump effect:

Once markets accept that Trump is not bluffing – that he means to smash globalism – euphoria will give way to alarm, but for now Wall Street remains intoxicated on wishful thinking.

This may be true. Then again Trump may be taking an extreme position with China/Mexico/Canada to negotiate back to a more reasonable one. I don’t know which is true. Evans-Pritchard doesn’t know. I am not even 100% confident that Trump knows.

If we are in for a trade war in 2017, then Ambrose is right about the effect on the stock market and bond rates. But, I struggle to understand what Trump will and won’t do (as does most of the market), and trade wars are not a natural Republican policy whereas tax cuts are.

So, I’m not saying that a credit crunch won’t happen in 2017. And I do worry markets have gotten ahead of themselves in the Trump reflation rally. But, I’m wondering about the wisdom of basing your expectations on being certain about what Trump will and won’t do.

Now is the time for flexibility in your investment outlook.

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  1. Sandy

    Trump is media focused 100%, literally nothing else. This is clear. He watches Morning Joe rather than receive briefings (intelligence and economic, we must assume). Headlines are everything to him. Headline perception translates to his Twitter activity for the day. It’s clear his oligarchic cabinet and GOP Congress will be running their agencies however they seem fit, so long as they keep negative headlines off of Trump.

    Effectively we now have six branches of government at the federal level:

    1) The President and his inner advisors
    2) The Congress
    3) Judiciary
    4) Administrative (deep state)
    5) The Executive (the cabinet)
    6) National media / punditry

    1. Bob Stapp

      If yesterday’s backing-off by the Repubs on the ethics issue is any indication and if you are correct (which I believe you are) that Trump is all about his perception in the headlines, then it stands to reason that the more public uproar that hits the headlines, the better Trump can be steered away from taking his wrecking ball to the already sad state of our country.

      The fact that the backing-down occurred on the very first day of the current session is a good sign. We already know that the Republican Congress is not in total alignment with Trump on a number of issues, but I don’t think they’re at all eager to engage in open rebellion should Trump turn his Twitter machine gun against them.

      It’s possible that we’ve just witnessed the first tremors of what could be a seriously ugly behind-the-scenes battle, that is unless and until the Deep State representative pulls the Donald aside and quietly suggests that his family is in the cross-hairs.

      1. Stelios Theoharidis

        Trump and the Republicans are going to focus on achieving their mutual goals. They don’t have to fight on the things that they agree on. I don’t support these policies but I know they are going to use the opportunity that they have. They will do the things that they agree on already and which Trump has signaled he is supportive on, which we can summarize:

        1. The repatriation of foreign earnings via a tax holiday.
        2. National right-to-work legislation to undermine unions
        3. A socially and economically conservative supreme court justice
        4. Privatization of government assets or services
        5. Some sort of repeal or replacement on the ACA
        6. Action on undocumented immigrants, theater or potentially more harsh
        7. Regressive Estate tax removal
        8. Regressive Corporate tax rate reduction
        9. Regressive Income tax reduction
        10. Elimination of carbon oriented executive orders
        11. Wall building theater

        I am sure there are some others. Are these things going to help the economy? Well most of the repatriation money parked in the coffers of multinationals appears to have already been spent on stock buybacks. It will likely increase the value of certain assets that the wealthy like to park their money in like financial assets, art & antiques, luxury items, etc. But, that may not drive the larger economy that the rest of us live in.

        Could eventually lead to a crash as assets are already highly valued but, its difficult to determine when that would happen and whether it will couple with the baby boomers demographic fade. And, not sure where they are going to find the money to pay for those largely regressive tax cuts, I assume via some sort of magical economic thinking.

        1. Herkie

          And the things they do NOT agree upon, well, the congressional GOP holds ALL the cards there. Remember a number of them were running for president last year till Trump and Putin defeated them. They were gobsmacked at the loss but realized soon enough that they could ride his coattails into a congressional majority in both houses. So, they signed on to his agenda and tactics.

          The congressional GOP and Mike Pence can blackmail anything they like from Trump on policy from the moment he is sworn in.

          I assure you there is more than enough dirt in Trump’s history that if a fraction was hauled out on the evening news by the manipulative mandarins of the GOP they would have America howling for impeachment within the first month.

          Tax evasion alone could get him sent to Leavenworth for quite a stretch. And his “charitable foundation,” ha, if you or I did the things he did with that organization/slush fund bank we would never get out of jail.

          So, I expect the congress to use Trump for as long as they can coerce their priorities onto his desk, the moment Trump stands up to them on any issue he is history.

          And I do expect the economic blowback of their agenda cannot but cause a civil war. This last election year proved two things to me, one is people are VERY angry, the USA is a powder keg ready to blow. And two, there are at least as many people radicalizing on the left as their is on the right, one need look no further than the Sanders campaign to see that.

          I read hopeful articles that the Trump presidency might not be all THAT bad. Of course denial and bargaining are both major features of the grieving process after the loss of a loved one, in this case our country/society/civilization. I however anticipate that not only will it be all THAT bad it will actually be a lot worse, and I give these right wing fascists in power now at least a 50/50 chance of ending the USA if not all of mankind. I seriously do not believe the union has ever been in more peril in it’s history, and that includes the open warfare of the Lincoln administration.

          True there may be no civil war, those patriots that would defend the constitution may simply decide civil war is not worth it and leave. Or, we may have a Soviet style collapse that brings about a confederacy of like minded city states. I am sure about this though, I am leaving on a one way ticket Tuesday for Melbourne, Australia with no plans to return, and I have seldom been wrong about such deeper instincts.

      2. Herkie

        They backed away from the headline heat, that does not mean they are suddenly going to grow ethics or enforce ethical standards. At least not on the right, if a democrat should mess up or give a whiff of ethical impropriety he will of course be crucified on the spot so a GOP governor can name a replacement pending the next election in that district.

        Face it kids, the USA of, for, and by the people is dead and gone and it is never returning. Like me, who will be leaving on a one way ticket to Australia Tuesday.

  2. vlade

    Yves – while I agree about the offshoring productivity gains being a mirage (I call it “offshowing”, as in you had to show off to your investors and press), there have been real automation productivity gains in the meanwhile, meaning that even if the factories come back, not nearly as many jobs will as were lost.

    That said, there was a post at FTA trying to estimate it, and IIRC they got to a number that at least 50% of the jobs lost should be recoverable, which is still pretty damn good.

    1. PlutoniumKun

      I would guess that costs involved in regulation (environmental/health and safety) would be at least as significant as direct labour costs. But even that isn’t a deal-breaker – Germany and Switzerland both have a surprising amount of profitable heavy metal bashing and chemical industries along with regulations significantly more onerous than most of the US.

      I wonder though if whether the pressure to re-shore won’t result in a situation like in Italy, where the ‘Made in Italy’ badge is valued enough to have all sorts of dubious practices, such as the importation of entire third world sweatshops, employees and all, to parts of southern Italy. There is also a lot of ‘finishing’ of high value products primarily manufactured in Turkey or north Africa.

      1. dw

        with Trump’s immigration views. i doubt they would get very far importing labor…and not getting hammered for it

      2. Jabawocky

        Regulations create jobs because they spawn whole industries in monitoring and compliance, not to mention consultancies, impact assessments and so on. Environmental laws are real money spinners. The paradox of regulation!

      3. John Wright

        In the USA we are already seeing some of this “Made in USA” cachet re-branding effort in action.

        DeWalt tools is advertising “Made in the USA with global materials”

        they even have a dedicated website:

        If one goes to the FAQ at this site and patiently clicks through to the item

        “How many jobs will be created with this new initiative?”

        “Production of DEWALT products that are made in the USA with global materials at the Charlotte manufacturing operations facility will help boost the local economy in the Carolinas and create more than 250 new jobs.”

    2. dw

      most of that ‘offshoring’ was done for Wall Street, or because it was the latest business fad. business seems to have a lot fads that come and go. with no gain made from them

      1. AngloSaxon

        The offshoring was done to boost real personal consumption after we hit the “Friedman” moment in 1968. The ability for capital to make profit was gone, which triggered major hikes in inflation that was only “leveled off” and not cured to the mid-90’s.

        In a capitalist economy, high cost production can only boost consumption with larger and larger wage increases, which make profit impossible. The next phase comes inflation when producers try to make profit and eat the wage increases.

        1. Yves Smith Post author

          That is false. Go look at Fed Flow of Funds data. In the supposedly horrible 1970s, corporate profits were not only high, they were rising. The idea that companies had poor profits is a canard. What did happen is stock prices fell due to 1. high inflation makes even decent future profits look unattractive due to high discount rates and 2. US manufacturers often having Japanese and German competitors eat their lunch.

    3. MyLessThanPrimeBeef

      50% on the first iteration or summed over all iterations?

      I mean, if you bring 10,000 jobs back, for example, they will make and spend money to help create more jobs.

      1. vlade

        First order effect I believe – it’s usually first order effect jobs loss that is calculated by offshoring, so the same goes for taking it back

  3. PlutoniumKun

    Trump would have to work very hard and fast to be the cause of a credit crunch before Brexit, rotting European banks, or a crisis in China or India gets there first. I’d agree the article that in reality Trump will find it very hard to make a big short term difference in the economy.

    But I do wonder if even a small increase in interest rates in the US might expose a lot of bad debts in all sorts of unexpected places. If I was conspiracy theory minded I would see the battle over rates in the Fed as being a crucial test of whether the banking side of the Blob wants to go with, or against Trump.

  4. susan the other

    The introduction was good, but I don’t get much info out of Klaassen on AEP. Chances are we will just limp along with artisanal money and lots of tweets and confusion. We have a system that oversupplies and limits at the same time, no? And it isn’t working in terms of accounting. So the problem can’t really be tweaked much beyond where it already is. The problem is something far more basic, like what the hell is money anyway?, or what exactly do we need? And in the end the most practical decisions will be used and they prolly won’t be economic decisions. Blablablah. Interesting times.

  5. Cathryn Mataga

    “Powerful deflationary forces retain an invisible grip over the global economy. Bond yields will ratchet up further and then come clattering down – ultimately driving 10-year US yields below zero before the decade is over.”

    It’s that actually fighting deflation would take something more than random. It’s basicaly Syriza, that whatever you vote for you get more austerity. This is the only option, and it drives the interest rates down and crushes growth. Still, would take nerves of steel to act on this. I don’t know…

  6. Steve C

    I’m expecting Trump’s deficit spending to come in the form of a greatly expanded defense boondoggle. One of the least effective forms of deficit spending but better than nothing in terms of stimulus.

    As for Republican deficit hawks, they’re a fraud. They go into hiding when Republicans are in power.

      1. MyLessThanPrimeBeef

        I think there are Republicans who say Trump is a Democrat.

        And there are Democrats who many swear are Republicans.

        So, that observation can get confusing or at least hard, or not easy, to follow.

        1. Cathryn Mataga

          Maybe. Still my central thesis. Trump is a businessman, even as a failed businessman he has been making payroll. Applying the experience of business to government means austerity, the more the better. In business this works, but for government, no. Groundhog says 4 more years of winter.

  7. blert

    During the 20th Century, America was the dominant factor in global commodity prices.

    All of our conventional econometric models implicitly assume that to remain true.

    But in the 21st Century, Red China is the decisive factor in global commodity prices.

    You can’t get away with using conventional econometric models for an economy that is a simulacrum of a free market… that refuses to accept price signals… that is for all practical purposes a command economy.

    It’s working so much better for Beijing because the Party bosses have long decided to mimic Japan’s export powerhouse model — and run massive trade surpluses.

    These then permit Beijing to import factors of production where they’ve slipped up — especially R&D –( the latter ‘fixed’ by way of theft) — so that Red China does not have the crippled economy she had thirty-years ago.

    Because of command decisions, Red China has astonishing levels of malinvestment.

    Because of command decisions, Red China has entire sectors on ‘life support.’

    A command economy is no longer capable of benefit, for the path forward is too hazy from Beijing.


    1) The most likely trend is that of rising interest rates ( from the Fed ) which might easily cause Beijing’s elites to export their wealth out of Yuan… in a panic.

    The rocketing value of Bit Coin is quite the ‘tell’ I should think.

    It’s not being used as a store of value. Rather, it’s just about the last door out of Yuan. The implied turn-over is fantastic.

    2) The other trend of importance is that of US Treasury liquidations by Red China, Iran, and Saudi Arabia — and OPEC, generally.

    Due to social over-head, KSA needs to obtain $100/ bbl just to stay even. Getting crude oil back up to that level may be a very protracted climb. For American frackers don’t have to pick up any social over-head to speak of. Even $80 / bbl would have them giddy with delight.

    2a) Consequently, the debt issued by frackers is gaining in credit quality at an astounding tempo. Many firms are climbing out of their graves.

    2b) This trend ought to trigger a fracking boom in Britain, too. The collapse in North Sea production has put London in quite a fix. So the political pressure is on.

    3) Figure on ISIS being wiped out in very short order, as it will no longer be receiving American military and financial aid. Using the so-called FSA as a ‘cut-out’ for ISIS’ aid will stop entirely.

    3a) ISIS has just bitten the hand that fed it: Erdogan’s. His war on X-mas and New Years has blown back upon him.

    ( Erdogan has been running a nation-wide propaganda assault against the festivities and cultural impact of December 25 and December 31. Yes, this is pretty bizarre stuff, even for a tyrant. )

  8. Tim

    For anybody experiencing long delays at McDonalds they recently quietly got rid of all non-legal employees as well. I heard that through the grapevine

    I saw it at my local McDonalds where the source used to work, and it had almost double the number of people in the kitchen that they used to and service was still to slow to prevent customers with impatient looks on their faces.

    This looks like wage inflation is coming. If they will to only employ legal they will have to pay more, simple as that, and certainly we should be expecting a large and transient hit to productivity in the 1st and second quarter of 2017.

    Prepare for large stock market shocks of high changes in inflation expectations and potential rate hikes mid year.

    You heard it here first.

      1. Yves Smith Post author

        You can’t say that with any certainty. More than 90% of McDonalds locations are franchise operations. Even though the official franchise agreement no doubt has boilerplate about obeying labor laws, I doubt this is something McDonalds the licensor would monitor. They are much more concerned about enforcing provisions around the customer experience.

    1. MyLessThanPrimeBeef

      I thought I heard they were going more toward casual dining, than fast food.

      It takes time to make better (slightly) meals.

    2. Code Name D

      I think he is refering to the minumum wage hikes going into effect. The predictions being that raising the minumum wages causes wage inflation and produces high unempolyment, McD is forced to reduce its work staff to compensate for “crushing” labor costs.

      More than likly we will see some growth in these sectors. At least where numumum wages are forced up. Low end wages in many areas are already above the min just to pull in workers.

      1. a different chris

        Hmmm maybe. For places like McD’s, it would be a different version of the Henry Ford effect.

        The problem is that in this MBA-polluted world, you weren’t allowed to even take the chance that paying your workers more would make a visible difference and get you more customers. So the competitive outcome was to pay as little as possible.

        But raising the minimum wage changes things quite a bit. McD’s customer base aren’t people deciding between going there and Chez L’Expensive. Their customer base looks a lot like their employees, and Hardee’s employees, and etc. If these guys get a bit more money then they will likely go out a bit more. Again, not to Chez L’Expensive.

        And you don’t have to argue with the MBA-idiot because you all have to pay better.

    3. ocop

      This may be smoke with no fire but I’ve noticed an uptick (East TN) in the past few months in fast-food type help wanted ads. Also heard accounts of planned “self-deportation”. Never thought that tortured phraseology would come back.

    4. animalogic

      Oh, no! RUN !
      “This looks like wage inflation is coming.”
      Imagine — 30 odd years of stagnant or falling wages for the 90% and the mere hint of an intimation of wage growth & it’s : “Prepare for large stock market shocks of high changes in inflation expectations…”
      Oh yes, imagine the pure shock of corporate America having to cut back on its addiction to cheap illegal labour…..
      It’s just not fair….is it ?

  9. Tim

    Trump is a decent negotiator, when bartering the first thing you do is project an unrealistic target for getting the deal done that you don’t expect to get. then appear to compromise back to a value that is still acceptable to you, but pushed the other side of the trade to their limit.

    So yes we will be renegotiating these deals, and the changes will be less than Trump is stating.

    The key to success is the mechanics of the dealing. Will Trump and his cohorts be able to properly gauge just how far they can push those on the other side of the table (understanding the others understanding of how much leverage each side really has, and how much they have to lose politically through compromise).

  10. OpenThePodBayDoorsHAL

    Trumpiness may have a few surprises yet, if animal spirits continue to change, and if (relative) peace breaks out. If they’re as right-wing as they say they are they do not believe in nation building or RTP, those two are probably half the problem out there as Obama continued Bush’s hubric (?) fantasies of global dominion without interruption. But can you make America great while Europe and China sink? Turkey is on a knife edge which means more pain for Europe, and Chinese fun and games with mercantilism and FX look pretty played out, the PBOC either has to devalue (bad) or risk more domestic unrest (worse). Interest rate “normalization” would reveal naked swimmers everywhere, 100 or 200 more b.p. and debt service is a mathematical impossibility for a huge swath of sovereign and other borrowers. More likely we get QE4, maybe student loans this time around. Meantime the real cost of living is chugging along at 10+% increases per year, no you can’t pay your rent from your 401k.

    1. MyLessThanPrimeBeef

      Trump’s trade rep, Lighthizer, was there at the time of the Plaza Accord.

      China is the Japan of the early 21st century. Will there be a Plaza Accord II? That would be the opposite of Yuan devaluation (which, as mentioned, is bad already, and the opposite of Yuan devaluation means, for China, worse, not better – though better, or good, is the opposite of bad).

      1. OpenThePodBayDoorsHAL

        Yes and a quick look at the value of the dollar from the day of the Plaza Accord is pretty telling. Is the dollar “good as gold” when there’s no gold behind it, or has it just been better than any other of the other (very) dirty shirts out there? They yanked gold but the exorbitant privilege continued with oil, but what would happen if the US could no longer print oil? Trump admin has lots of true believers and gold bugs, if you put them in a room with the Chinese for Plaza II who knows what would emerge. Sheng Songcheng, Head of the Investigation Department for the PBOC, made a recent statement that was a shocker:

        “With the expansion of the use of private digital money, sovereign money use will gradually decline, which will reduce the monetary authority of the sovereign currency control. At the same time, the influence of monetary policy control on the supply and circulation of fiat money will also decline and become unstable, which will weaken the effectiveness of monetary policy and distort the transmission mechanism.”

        Fun times. We’re just marionettes.

        1. Oregoncharles

          What is “private digital moneY?” Bitcoin? It’s flying high. But it has limited uses.

        2. MyLessThanPrimeBeef

          Putting them in a room for a Hong Gate banquet.

          From Wikipedia (Feast at Hong Gate):

          The Feast at Hong Gate, also known as the “Banquet at Hong Gate”, “Hongmen Banquet”, “Hongmen Feast” and other similar renditions, was a historical event that took place in 206 BC at the Hong Gate (鴻門) outside Xianyang, the capital of the Qin dynasty. Its location in present-day China is roughly at Hongmenbao Village, Xinfeng Town, Lintong District, Xi’an, Shaanxi province. The main parties involved in the banquet were Liu Bang and Xiang Yu, two prominent leaders of insurgent forces who rebelled against the Qin dynasty from 209–206 BC. The event was one of the highlights of the Chu–Han Contention, a power struggle for supremacy over China between Liu Bang and Xiang Yu which concluded with Xiang Yu’s defeat and the establishment of the Han dynasty with Liu Bang as its first emperor.

          Here, Xiang Yu would go on to become the Croesus of China, and indeed, a mighty hegemon was destroyed, as if he had consulted the Oracle of Delphi.

  11. Sound of the Suburbs

    Doing the obvious maths.
    The US has a major trade deficit, if it imported and exported nothing it would be better off.

    The US got to be a major super-power by being relentlessly protectionist.
    They could do simple maths in those days.

    If the EU could do simple maths the answer would be obvious.

    When the West masters simple maths the East will need to concentrate on the demand side of the equation with higher wages and a welfare state to ensure consumers don’t save for a rainy day.

    The newly balanced world will be ready to trade again.

    The idea was that free market capitalism would naturally reach a stable equilibrium.

    The former Chief Central Banker of India wrote a book “Fault Lines” in 2010 going into all the fault lines in the global economy.

    The natural equilibrium that was supposed to result just isn’t happening; the real world needs some help to achieve that balance.

    Look at the disaster the smaller version has become, the Euro-zone, that stable equilibrium just hasn’t appeared and the poorer nations are collapsing, Greece has gone and the rest of the Club-Med nations are not far behind with France catching up rapidly. Over the financial cliff you go because we are ideologues and believe that stable equilibrium will appear.

  12. Sound of the Suburbs

    Twelve people were officially recognised by Bezemer in 2009 as having seen 2008 coming, announcing it publicly beforehand and having good reasoning behind their predictions.

    Steve Keen is one of those experts who is on record as having seen the private debt bubble inflating in 2005.

    They all think the problem is debt and the drag on the global economy caused by unproductive lending into things like real estate. Productive lending into the real economy generates real wealth to pay back the debt but in countries like the US and UK 80% of lending goes into real estate.

    The Central Bankers are trying to use more debt to get out of a debt crisis; they don’t understand money or debt.

    Bankers don’t understand money and debt either and just don’t lend into the real economy to generate the money to pay back the debt.

    It’s hard to believe debt has been around for 5,000 years and we are as clueless today as we’ve always been.

    In the past they acknowledged their ignorance and had jubilee years every seven years to write off all debt and keep things running nicely.

    The debt tsunami is coming, we are ignorant but don’t know it.

    1. OpenThePodBayDoorsHAL

      Excellent. I would just add that central bankers during the best growth periods understood that their #1 mission was to protect the integrity of the product they were responsible for: money. William McChesney-Martin, Arthur Burns, Paul Volcker all knew, building on hundreds of examples over thousands of years, that the worst possible outcome for money is inflation. Fast forward to The Maestro, who turned this ancient wisdom on its head 180 degrees, somehow we were now supposed to believe that a policy that made you 25% poorer in 10 years (2% “inflation targeting”) was super-clever. Bernanke and Yellen just perpetuate the fallacy, and the results are in: 90% of people are going backwards financially.

    2. Oregoncharles

      Bezemer? You really need a reference there.

      Dean Baker was another; don’t know if he was on the list.

        1. Vatch

          Thanks for the reference. I can only find eleven names, but I skimmed quickly, and certainly missed some things.

          Dean Baker
          Wynne Godley
          Fred Harrison
          Michael Hudson
          Eric Janszen
          Stephen Keen
          Jakob Brøchner Madsen
          Kurt Richebächer
          Nouriel Roubini
          Peter Schiff
          Robert Shiller

          I’ve also seen these names in other lists:

          Ann Pettifor
          Raghuram Rajan (who is mentioned in the Bezemer paper, but excluded from the list)
          William White


  13. Oregoncharles

    ” the shift would take at least a couple of years and would be deemed a failure in the meantime.”
    This may underestimate Trump’s PR skills, which seem to be formidable. He can protect himself somewhat by saying up front that it’ll take a while; then spend the time beating up on some of the more obvious villains. That should prove highly popular, at both ends of the spectrum.

    Just the highly-visible but none too effectual jawboning will get him pretty far, politically. Certainly it’ll cover for slow effects of real policy changes.

    I would think his biggest worry is the impact of mass deportations; not the humanitarian impacts, but the economic ones. Ripping a few million people out of the workforce would open up jobs, yes, mostly low-end ones (if he’s smart, he’ll curtail the H1B program and cut into the Dems’ base); but it will also have a big effect on employers and landlords (we’d be affected). Seems to me it could crash the economy BEFORE the job openings take effect. And business won’t like it a bit; it’ll drive up wages. What will the Fed do then?

  14. Roquentin

    The longer I look at the situation, I begin to suspect that the almost delusional hysteria about Trump being a disaster coming from big liberal media outlets and pundits is really going to bite them in the ass if and when Trump turns out to be not all that bad. Hear me out. He’ll definitely do all kinds of reprehensible things, but their ridiculous outrage has set the bar so high that it will be genuinely hard for him to reach it. I’m starting to see a “boy who cried wolf” scenario developing, where these same media outlets look like fools because Trump will be what amounts to a cruder and more corrupt standard issue GOP-politician.

    I strongly suspect that hardly any of these people have considered what will happen if they are wrong, if the catastrophe they are guaranteeing everyone will happen doesn’t come to pass. It’s just like with their damn foolhardy faith in HRC winning no matter what. It just never crossed their minds that they could lose or be wrong. Worse still, whatever bad things Trump does will look mild in comparison to the “literally Hitler” shit they’ve been spewing for months. They’ll spend most of 2017 flushing their last shred of credibility down the toilet.

  15. Oregoncharles

    ” trade wars are not a natural Republican policy whereas tax cuts are.”
    Trump is not a “natural Republican.” The Reps in Congress will have a lot to say about some policies, but he can make big changes in trade policy on his own.

    Granted, any new agreements will have to go to Congress, but that’s a couple of years down the road. Does anyone know if Fast Track will still apply then? I’m too lazy to look it up. In the meantime, he can abrogate existing agreements. Remember, trade does not depend on “trade” agreements.

  16. TimmyB

    Concerning offshoring, the elephant in the room is tax avoidance. The US Tax Code almost forces manufacturers to move production overseas.

    For example, let’s assume Sneakers Inc. can produce tennis shoes in the US at $10 per pair and sell them at $20 creating $10 profit per pair. That $10 profit is taxed at the US rate of 35%.

    If Sneakers Inc, moves to China, and the costs of making tennis shoes remains the same $10 per pair, then Sneakers Inc. (China) will “sell” tennis shoes to Sneakers Inc. (USA) for $20 per pair. Then Sneakers Inc. (USA) will sell them in the US for that same $20 per pair. Here, the $10 per pair profit remains overseas with Sneakers, Inc. (China) and is untaxed by the US.

    So even if labor costs were the same, the US Tax Code makes offshoring too good to pass up.

    1. blert

      That is spot on.

      This tax angle is far more influential than apparent wage rates.

      The nominal W-2 wage rates bandied about by the MSM are way off.

      Every employer totes up ALL direct wage expenses to arrive at his true cost of direct labor.

      Hence, a so-called $25 wage may be costing the employer $39 per hour to pay out.

      The apparently low wage rates paid in the Third World also come with Third World labor efficienies.

      These are often astoundingly LOW.

      So it’s the Tax Angle that drives off-shoring

      1. Jack Heape

        The tax angle, coupled with the lack of tariffs. Put a 30% tariff in place and the situation is reversed. To the better in my opinion. Jobs and spending are kept here. The corporate tax rate used to be much higher, in the 60’s for instance as did the personal tax rate. Were we as a society much better off then? I would say so.

      2. Fiver

        The ‘driver’ was US financial/corporate power, which actively desired, pursued, identified, determined, developed and deployed all the means to create the conditions their supra-national, global project required on both ends, and everything in between, of every fateful step away from a post-war world that actually had possible futures with virtually unlimited potential for good to the one where the world so dismally finds itself this day. What began in good measure as a panic response by the elite in the latter ’60’s to roll back the tangible gains made in the public interest, the people’s interest, in everyone’s interest long since became a relentless effort to crush any and all efforts to restrain corporate power. Thank you so very much, you elite Titans, you – we have one leg inside the Twilight Zone and now you tell us this isn’t exactly what you wanted? There is an epochal mass grave in our future now, and there’s no doubt who dug it.

  17. ForkLiftDriver

    On-shoring will increase wages, which will
    1. increase tax revenue, and
    2. decrease safety net expenditures.
    It baffles me that no one has documented these advantages. Same applies to raising the minimum wage to a living wage. The political advantages are also substantial.

  18. FedUpPleb

    I think the jobs will return. Trump will have the CEOs falling over themselves to return home I suspect. Those that do not bend the knee will be made to regret their decision.

    This will not keep costs down. On the contrary I suspect they will increase substantially. very substantially. Trump will not care, and neither will most workers by the end. Their largest costs are already “financial” : Housing, insurance, and the dreaded healthcare. Reform and rationalise those, and you can charge $4 for a loaf of bread and people will still consider themselves better off.

    At this stage in world affairs, it is probably safer to simply get the factories back no matter the cost. Offshoring may quickly become unviable, or unadvisable in the world we are heading into.

  19. John k

    Recent rise in interest rates on top of already high prices is already hurting sales. Same will hurt autos already falling sales. Growth from deficit spending won’t arrive for a year, if ever… Ryan and many in house are allergic to deficits. Tax cuts that benefit rich mostly gets saved, same as throwing it down a well, except the gold standard bugs will want to pay for it not with deficits but middle class spending cuts.
    Tax repatriation has no effect at all, this money is already here and/or already spent on stock buy backs.
    Higher rates won’t last, recession drops them back to zero.
    And this not considering either china or eu blowing up.

    1. Lambert Strether


      If Trump doesn’t crack open the chocolate egg that is Saudi Arabia and run off with the toy inside, then somebody else will.

      An impressive degree of realism. Not sure the US has the credibility, though.

    2. blert

      Dimitri is still trapped in Soviet era propaganda themes.

      1) The US jumped into fighting Adolf Hitler — because he declared war on America — in front of all the cameras.

      Of course, WWII was a money pit. It was lose, lose, lose… all the way around.

      2) Wilson was against reparations from the Kaiser. Heck, America couldn’t even get the French and British to ‘pay-up.’ Dimitri assumes that the Germans were paying damages to the US.

      Long before Truman, Wilson understood that reparations would destroy the peace.

      ( The so-called Marshall Plan was entirely devised by Truman. He even wrote the speech for Marshall. )

      Incredibly, the gold that France and Britain demanded as reparations came from the USA.

      Yes, Americans kept extending gold loans// selling bullion to Germany in the ordinary course of trade. Germans exported to America to earn gold to give to France. France largely blocked German trade goods. In a similar fashion, Germany was not permitted inside the British trading empire. ( The Commonwealth.)

      When the worm turned, Germany defaulted to America more than any other trading partner. These epic defaults were a huge reason for the American banking crisis, circa 1930.

      Ramping tariffs broke down the German-American trading engine. Suddenly, the Germans lost the cash flow that was keeping their financial paper afloat. A lot of that paper was held by American financial interests. The result was a balance sheet implosion for those exposed.

      Dimitri’s ‘take’ on American economic history is so wide of the mark… Good grief.

  20. Paul Greenwood

    AEP is always apocalyptic, it is his failing. He is far too rigid and cannot see that events are non-deterministic. Trump is not yet in office but already he is changing mindsets. He can bring jobs back so why didn’t Obama or Bush ?

    Perceptions are key. Obama looked after Wall Street and locked the world into Slump. He auditioned at Goldman just as Paulson was pushing TARP through Congress. Main Street paid for Wall Street and unless that is reversed going forward there will be System Collapse and Dmitry Orlov will publish “QED”

  21. Fiver

    Not only do we not know what Trump wants, but we do know that the Republicans have completely lost it (see Lindsay Graham’s insane conduct at the Senate Intelligence Committee hearings) while the Democratic leadership along with most of the mainstream media and not to be outdone, major elements of the US State, are in any reading of these events in a universe still governed by natural laws, attempting to foment a crisis big enough to dump Trump if need be, even if doing so means risking an acute political, even Constitutional crisis. Considering both Parties and media have placed war with somebody bigger smack in the middle of the table as a condition of Trump’s receiving a temporary certificate of legitimacy, effectively placing half the globe into a heightened state of alert, the prospects are frankly awful. The 1 card Trump has effectively played to gain any traction outside the Republican Party was and is respect Russian interests (which automatically includes Iran and China) rather than pursue the naked neoliberal economic and military ‘security’ absorption of the Russian and Chinese and Iranian and Indian, etc., economies to be completely re-organized and fully integrated based on best cogs in a colossal global machine. If he goes ‘wobbly’ on this he’s done. On the other hand, I sure wish people would be alittle bit mindful that he is going to have a pen, and whatever he says pretty much goes – legally, as per Obama’s shame.

    I think the nature of the US political crisis spells across-the-spectrum risk that will obliterate whatever piddling positives might conceivably be coming down the supposed Republican Legislative pike. And I would not rule out a deliberate market crash courtesy of the Fed, the Banks, the BoJ or the EU or China. When the country that is the ‘indispensible’ power is paralyzed in the grip of its own crisis, others have to start thinking very seriously about making alternate arrangements.

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