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Part 3: 2017, When The Wheels Finally Come Off

Kunstler  |  Howard Kunstler

Why Trump Can’t Pull a Reagan

When Reagan came into office in 1981, inflation was raging largely because of the effects of the oil crises of 1973 and 1979, which had produced the “stagflation” that confounded the reigning economists’ models (they knew nothing about the relationship between energy dynamics and capital formation). The Fed Funds rate was almost 20 percent in 1981. It had a lot of room to move down. The national debt was less than one trillion (Reagan eventually ran it up to $2.8 trillion). Reagan was able to endure a sharp recession early in his first term — and voodoo economics got him through all the rest of his tenure, with both inflation and interest “normalizing” — as mentioned earlier, he enjoyed the bonanza of the last great non-OPEC oil discoveries coming on-line during his two terms, which ramped up economic activity and growth.

Today, the US is in a box and Trump comes on the scene with nowhere to move. Too much debt can only be managed if interest rates are kept low. Everybody and his mother around the world is dumping US Treasuries. With a bear market in bonds on, the Fed as buyer of last resort will have to sop up whatever comes on the market to keep the interest rate from rising above three percent on the ten-year, and even that may not prevent it. Trump’s vaunted infrastructure stimulus plan will be impossible to carry out without the Fed monetizing the necessary debt. So stimulus implies bigger deficits, which means more bonded debt that nobody wants to buy. The result will be inflation and accordingly further upward pressure on interest rates. Higher interest rates, in turn, will negatively impact economic activity, lowering tax revenue, inducing larger fiscal imbalances and greater instability.

Trump may never even get the stimulus he seeks. The Republican controlled-congress has vowed not to increase the national debt. How can Trump fulfill his pledge to cut taxes and bring on stimulus without hugely increasing the debt? If there is war over spending between Trump and Congress, Congress is likely to win, since they control the fiscal purse strings. Of course, Donald Trump cannot abide not winning. Hostilities between them may become permanent early in Trump’s term and bring on even more dangerous paralysis of governance.

Also early in 2017, the Fed will abandon its “dot plot” talk about further interest rate hikes. They may also surrender their credibility in the process. The system can’t take the strain of three interest rate rises in 2017. It may be that Janet Yellen has raised the Fed Funds rate a total of one-half a percent in two years solely to be able to lower them again when the real economy finally tanks under that strain of incessant central bank chicanery. By the second quarter of 2017, following a 20 percent stock dump, the Fed will start making noises about Quantitative Easing 4 (QE), or they will cook up some other program that accomplishes the same thing under a new cockamamie label. More QE (or something like it) will drive the dollar back down and gold back up. The housing market will be in the toilet and the rest of the economy will follow it down the drain. By the end of Trump’s first year in office, there will another, greater, dump in the stock markets after the initial 20 percent drop in the first quarter. America will be great again, all right: we’ll be entering a depression greater than the Great Depression of the 1930s.

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