The Rising Tide Which Lifted All the Yachts

This is an excerpt from David Stockmans book: Trump’s War on Capitalism.

As we have  seen,  The  Donald’s economic policy  actions and nostrums were  thoroughly wrong-headed and  counterpro- ductive. But   the  opposite  assumption—that market capitalism was  working according to the  texts   penned by  Adam  Smith— was also  dead wrong and  had  been  for decades. Today’s bailout- ridden crony capitalism is not  remotely the  real  thing, and  that’s especially because free markets can’t function efficiently and  pro- ductively when  they  are flooded with  cheap credit printed by the central bank.

The  ill effects  of these  perversions are  legion, but  one  of the most  obnoxious is the  massive  financial windfall to  a tiny  elite of the  wealthy and  a concomitant depletion of the  middle class. Ironically, The Donald was  elected and  heralded by  the  latter, but   his  policies did  absolutely nothing to  change the  system’s long-standing windfalls to the rich.

Here is but  one of the smoking guns that can be offered in evi- dence. To wit, in 1989 the collective net worth of the top  1 percent of households weighed in at $4.8 trillion, which  was 6.2x the $775 billion net worth of the  bottom 50 percent of households. By Q1 2022, however, those figures were  $45 trillion versus  $3.7 trillion, meaning that the wealth differential was now 12.2x.

In round numbers, therefore, the top  1 percent gained $40 tril- lion of wealth over  that thirty-three-year period compared to  the mere  $3 trillion gain  of the  bottom 50 percent. Stated differently, there are currently 65 million households in  the  bottom 50 per- cent,  which  have  an average net  worth of just  $56,000. This com- pares to  the  1.2  million households in  the  top  1 percent which currently sport an average net worth of $38,000,000.

Needless to say, there is no reason to believe that left to its own devices  free  market capitalism would generate this  680:1 wealth differential per  household. Indeed, three decades ago—and well before the  Fed went  into  money-printing  overdrive—the per household wealth differential between the  top  1 percent and  the bottom 50 percent was barely half of today’s level.

Back  in  the  heyday of  America’s  post-war prosperity, in  fact, President Kennedy’s famous aphorism that “a  rising tide  lifts  all boats” was repeatedly confirmed. But once Alan Greenspan inaugu- rated the current era of rampant central bank money printing, stock market coddling and  egregious bailouts, the  more  accurate charac- terization is that a rising tide  mainly has been  lifting all the yachts. And it goes without saying that only a teensy-tiny number of MAGA red caps were to be found actually lounging aboard these  vessels.

The  truth is, Donald Trump’s tenure in  the  Oval  Office  wit- nessed the  steepest climb  ever in the  wealth of the  top  1 percent. Nor  is that surprising. The  Donald was relentless in demanding that the  Fed  push interest rates  ever  lower  and  run  the  printing presses ever  faster. Most of the  billionaires, however, have  never bothered to thank him  for the resulting windfall.

There  is no  mystery, of  course, as  to  why  capitalism lost  its historic middle class growth mojo  during recent decades. Or why that occurred even  as  financial markets became bubble-ridden fountains, pumping egregious amounts of windfall wealth to the very top  of the economic ladder.

The culprit was “financialization.” By inducing relentless debt creation and   leveraged speculation,  the  Fed  and   other central banks have  bloated the  financial asset  sector out  of  all  historic proportion to the real economy.

Net Worth of Top 1 percent versus Bottom 90 percent, 1989 to 2022.

Thus,  between 1954 and  the  mid-1990s, total household  finan- cial  assets  oscillated around  2.5x–3.0x GDP, as  tracked by  the purple line  below. But  once  the  Fed’s  printing presses went  into high gear  under the  Greenspan “wealth effects”  doctrine and  the serial  bailouts that flowed  thereafter, the  ratio escalated steadily skyward, reaching nearly 5.0x GDP in 2021.

The  fact  is,  there was  no  sustainable or  sound basis  for  the eruption shown in the chart below. As we indicated with respect to total assets  in Chapter 2, this  ratio amounts to the  price-earnings (PE) multiple for the  entire economy. And since  the  trend rate  of economic growth and  productivity has deteriorated notably sincem the turn of the century, if anything the macroeconomic PE multi- ple should have  been  falling, not  rising.

Nor  is this  eruption of the  de  facto  macroeconomic PE  ratio merely an  academic curiosity. At the  1954–1987  average of 2.7x GDP, household financial assets  in 2021 would have  totaled $64 trillion, not  the actual level of $114 trillion. That  is to say, finan- cialization has  generated upwards of $50 trillion  of extra house- hold financial assets  out  of thin air.  And  about three-fourths of that bloated asset total is held by the top 10 percent of households.

Financialization of the US Economy: Financial Assets as Multiple of GDP, 1948 to 2021.

What has kept the financialization ratio trending skyward was the very opposite of sound, sustainable economics. After 1990 the savings rate  dropped precipitously, even as the debt-to-GDP ratio rose to new heights. America did not  save its way to solid  financial prosperity but  borrowed its way to a fantasyland of phony wealth for the few and  deteriorating economics for the many.

The  cornerstone of  long-term growth and  wealth creation is net  savings from  current economic output. The  latter measures true  savings or  the  amount of  economic resources left  for  new investment in productivity and  growth after  government borrow- ings  have  been  subtracted from  private household and  business savings.

But as to the current trend, fuhgeddaboudit. This measure aver- aged a healthy 7.5 percent to 10 percent of GDP in the  economic heyday before 1980. But  especially after  the  money-pumping era of Greenspan and  his  heirs  and  assigns commenced in the  early 1990s, the net national savings ratio headed relentlessly south. By 2022 the ratio was an anemic 1.0 percent of GDP—a sheer rounding error in the sweep  of post-war history.

Again, the  actual net  national savings in  2022 was  just  $260 billion, but  that figure  would have  computed to  $1.96 trillion at the 7.5 percent net savings rate  of the pre-1980  period.

That  $1.7 trillion of net  national savings has  gone missing, of course, does  make  a huge difference. Gross savings by the private sector had  fallen  sharply, and  then The  Donald came  along and enabled governments to  scarf-up most  of the  available new  sav- ings  to fund massive, serial  budget deficits.

So,  the  obvious question answers itself.  A true  MAGA  policy would have  reversed the  Fed’s  long-standing war  on  savers  via dramatically higher, normalized interest rates, while  at  the  same time  getting the US  Treasury’s sharp elbows out  of the  bond pits by balancing the federal budget.

That  would have  generated the  surge in net  national savings needed to revitalize investment in productivity and  growth. Alas, sound money and  fiscal rectitude were not  terms that the  Donald had  any familiarity with  whatsoever. In fact,  his  stance on  these crucial matters  was  worse   than that of  every  Democrat presi- dent of modern times, starting with  Joe  Biden and  going all the way  back  through Obama, Clinton, Carter, Johnson, Kennedy, Truman, and  FDR.

That’s right. At the end  of the day, The Donald’s monetary and fiscal  policy  bacchanalia amounted to  an  outright war  on  capi- talist  prosperity. That  alone should disqualify him  from  another berth on the Republican ticket and  term  in the Oval  Office.

The nation can ill-afford four  more  years of The Donald’s apos- tasy  on  the  core  issues  of  central banking and  the  public debt. That’s  because neither public nor  private debts liquidate them- selves  over time. If the   badly unbalanced income/outgo  rela- tionship is  not  addressed, chronic cash  shortfalls from  current operations just  cause  debts to accumulate and  compound.

It is not  surprising, therefore, that during the past  half century the  nation’s combined public and  private debt-to-income (GDP) ratio soared skyward. In fact,  the  150 percent debt-to-GDP ratio which  had prevailed through the  1970s  went  vertical thereafter, reaching 358 percent by  the  time  of  the  Great Financial Crisis, where  it remains stranded to this  day.

As it happened, once the Fed got into  the money-printing busi- ness after  1970, everybody joined the debt accumulation parade— governments, businesses, financial institutions, and  households, too. Accordingly, the  $1.7 trillion of total public and  private debt outstanding on  the  eve of Nixon’s dollar default in August 1971 rose to $10.7 trillion upon Greenspan’s arrival at the Fed in August 1987;  and  it then reached $50.0  trillion on  the  eve of the  Great Financial Crisis in late 2007, stood at $66 trillion when The Donald was sworn in, and  totters at just  under $95 trillion at present.

In  effect,   continuous  Federal  Reserve money-printing  has resulted in what  amounts to a massive  national leveraged buyout. Just during the thirty-six years since Greenspan took over the Fed, total public and  private debt (i.e.,  held  by households, businesses, and  financial institutions) has  soared by a factor of 9.2x.  By con- trast, America’s  nominal income (GDP) rose  by just  5.6x during the same  period.

Again,  we are not  talking about mere  academics. Had the  red line in the chart remained at its 1.5x level of historic times, which ratio was pretty much constant all the way back  to 1870 and  which had  accompanied the  greatest century of  economic growth and middle-class prosperity in human history, the  nation’s total debt today would be about $40 trillion.

Accordingly, the  aforementioned actual figure  of $95 trillion means that the  main  street economy is now  lugging around an incremental debt burden of $55 trillion. And  that’s  why aggregate economic growth and  middle-class prosperity is faltering badly.

Yet,  did  Trump—the King of  Debt—have a  clue  during his presidency or after?

He most  definitely did  not.

National Leverage Ratio: Total Debt to GDP, 1947 to 2022.

In fact,  real  economic growth has  dropped from  a trend rate of 3.5 percent per  year  before the  turn of the  century to  barely 1.5 percent per  annum since  then. And  the  reason for that is real fixed private investment has stopped growing because the meager private savings available have  been  channeled into  private specu- lation and  public debts.

Since  the  year  2000, real  net  fixed  private investment—which strains out  the  inflation and   the  annual depreciation from  the gross  investment figures—has dropped  from  $933 billion to  just $621 billion during The  Donald’s final  year  in office.  Relative to national income, this  figure  plunged from  7.1 percent of GDP at the turn of the century to 3.4 percent in 2020.

Stated differently, main  street has  experienced a continuing deterioration in the  share of national income being plowed back into  new  investment—the motor fuel  of growth and  rising pros- perity. But  then again, Donald Trump’s MAGA  notwithstanding, the 1 percent did  get their yachts.

Real Net Private Investment  Percent of Real GDP, 1997 to 2020.

The Sound  Money Road Not Taken

Had he accepted it, the true  mission of the Low Interest Man was to  make  the  dollar good as gold again. That  meant big  budget surpluses, high interest rates, a tumbling stock  market, the end  of financial engineering in the C-suites, and  the painful sweating out of inflation that became embedded over the last several  decades in wages,  prices, costs,  house prices, and  much more  on main  street.

Those  were the things which  draining the Swamp was actually all about.

But none of that was in The Donald’s DNA. Not  even remotely. Nevertheless, deflationary austerity  was  and   remains  the   only viable  alternative to  the  failed  spend, borrow, print, and  inflate economic policies of  the  Washington  uniparty—the embedded groupthink apostasy that Donald Trump embraced with  unre- served gusto.

The  truth is, all of today’s maladies—low growth, high infla- tion, a shrinking middle class, and  the concentration of vast wind- fall  wealth at  the  tippy-top of  the  economic ladder—stem from the  central bank’s basic  modus operandi. That  is, the  Fed’s  over- whelming presence in Wall  Street money and  capital markets via massive  bond-buying, interest rate  pegging, yield  curve  manipu- lation and  price  keeping operations designed to prop-up equities and  other risk assets.

This   modern  form   of  Wall   Street–centric central banking has  been  an  abject failure and  not  just  because it is anti-growth, pro-inflation, and  deeply biased in  favor  of the  super-rich, who own  most  of  the  financial assets  which  have  been  inflated to  a fare-thee-well. Its even more  fatal  defect is that it led to near  total capture  of the Fed by  Wall  Street operators, traders, speculators, and  their shills  in the financial press.

The result was crony capitalism in capital letters. And that put the Eccles  Building at the very epicenter of the Swamp.

There  is no  mystery as to  why  this  is the  case—even  crediting the arguably good intentions of the twelve people who serve on the FOMC (Federal Open Market Committee). With every Fed meeting there are extant literally tens of trillions worth of bets that have been placed by Wall Street’s fast money-operators based on the expected FOMC policy  announcement. The latter include changes in money market rates  by as little  as twenty-five basis points, guidance on the monthly rate of bond-buying or selling to the nearest $5 billion, and hints in the post-meeting statement and chairman’s press conference as to  what  hairline maneuver the  FOMC might undertake at  the next  monthly meeting and  in the months immediately beyond that.

In a word, the  rise at the  Fed  of what  Alan  Greenspan called “the   wealth effects  doctrine” has  fundamentally changed Wall Street. In days  of yore  it invested based on  the  facts  embedded in the flow of business and  financial information on the free market. But  now  it trades overwhelmingly on the  flow of monetary policy tweaks coursing through the  brains of the  twelve  FOMC mem- bers  and  a handful of  Wall  Street gurus who  attempt to  divine their latest revelations and  intentions.

Accordingly, the Fed dare  not  disappoint the momentary Wall Street consensus because its  entire “policy transmittal” process works  through the Wall Street–centered financial markets, not  the main  street banks and  S&Ls of times  gone by. Under today’s Fed model, prices in the  money, bond, stock, and  real  estate markets are actually the  transmission mechanism which  purportedly con- veys the Fed’s policy signals and  intentions to main  street.

So, for want  of a better term, Wall Street has the FOMC by the short hairs. And it never  lets go. Doing Wall Street’s short-term bid- ding at  meeting after  meeting after  meeting leads  to  nothing less than permanent policy capture of the Fed by traders and speculators.

And  we  do  mean traders, not  investors. In theory the  latter were   historically happy  with   honest  market-based  pricing  of financial assets  on Wall Street and  a convertible dollar linked to a fixed  weight of gold. After  all,  old-fashioned “investors” were  in the  business of picking profitable investments for  the  long-haul based on the intrinsic facts of the instrument in question.

That’s  not  the  case  with  today’s Wall  Street traders. Not  by a long  shot. To  the  contrary, they  make  their money through Fed subsidized carry  trades or  options market positioning based on zero or negative cost of capital in real terms, and also via artificially low cap  rates  (i.e.,  long-term interest rates  and  their reciprocal in the form  of higher P-E ratios). So if you are invested in assets  that are appreciating due to rising valuation multiples and  are funding them to the tune of 80 percent or more  in zero cost overnight debt markets, it is truly  a case of shooting fish in a barrel.

This proposition cannot be overstated. Dwelling down in the canyons of Wall  Street cheek-by-jowl with  the  traders and  specu- lators, the  members of the  FOMC lose all contact with  the  long- term  trends they are  fostering through their day-to-day capitula- tion  to the demands of the fast money. For instance, the overnight interest rate  (Fed funds and  money market rates  which  track it) is of little  use to main  street because prudent businesses do not  wish to finance either fixed  or short-term capital in overnight markets that can  be  here  today and  gone tomorrow in  terms of rate  lev- els, conditions, and  availability. And that’s  for the obvious reason that their funded capital—buildings, machinery, inventory, receiv- ables,  etc.—is not  highly liquid or capable of being monetized at book value  on a moment’s notice.

Besides, their capital stock  is designed to  support the  long- term  capacity of an  enterprise to  produce goods or  services. It’s not  there to be liquidated in order to pay  off short-term funding that can’t be  rolled over.  So the  Fed’s  number one  policy  tool— the  Fed  funds rate—is  essentially irrelevant  to  the  main   street economy.

But  in contrast to main  street businesses, Wall  Street traders’ books are  far  more  liquid, meaning that assets  can  generally be quickly liquidated, even  if it  involves a mark to  market loss,  if funding is interrupted. It also means traders are inherently incen- tivized to  borrow short and  cheap and  to  invest  in  longer term assets  with  more  yield  and  and/or appreciation potential. In this context, therefore, cheap carry  trade finance is the  mother’s milk of speculative riches.

As it turns out, during the  years  of egregious money-printing, the  inflation-adjusted or “real”  cost  of carry  trades has  been  neg- ative  during the  preponderance of time. For  instance, during the 108  months between February 2008  and  Trump’s arrival in  the Oval  Office,  the  real  federal funds rate  was negative every  single month. And  when  that span is extended out  to  the  present—184 months—the data shows  it  has  been  negative 96 percent of  the time.

So, if you were a fast money operator on Wall Street you made profits by borrowing on the money market and  rolling it over day after  day,  even  as the  longer-duration assets  being funded were producing higher yields  or better rates  of appreciation and  there- fore a positive spread on the carry.

In the  great scheme of things, this  was damn near  criminal. It showered Wall  Street speculators with  hideous riches, and  pro- vided a giant incentive for  capital and  talent to  flow  into  finan- cial speculation. And also, for the corporate C-suites to indulge in massive  financial engineering—huge stock  buybacks, overvalued M&A  deals,  leveraged recapitalizations, etc.—in  lieu  of  produc- tive investment on main  street.

The  latter point cannot be  emphasized strongly enough. The Fed’s day-by-day Wall Street coddling, subsidizing, and  price-sup- porting  actions have  turned the  capital markets into   a  casino where  short-term trading is everything, and  investing for the long run  is hardly an afterthought.

Unfortunately, stock  options–endowed  corporate executives cannot resist  the  resulting temptation to get  richer quicker. That is, the  opportunity to goose options’ value  via financial engineer- ing machinations that generate stock  price  gains  in the short-run, even  as  they  undermine long-run earnings growth through too much debt accumulation and  too little  investment in plant, equip- ment, technology, and  human capital.

A succinct word for  this  perverse process, of course, is finan- cial strip-mining.

The  question therefore recurs. How did  the  monetary policy mechanism work before the Fed fell into  bed with Wall Street after Greenspan’s post Black  Monday bailouts in October 1987? And why  in  those now  forgotten earlier times  did  the  US  economy thrive just  fine absent the  heavy  hand of Fed  micro-management of the nation’s total GDP?

The  answer is that even  Volcker  did  not  target interest rates or  attempt  plenary management of  the   GDP.  His  goal   was the  restoration of  sound money and  returning goods and  ser- vices inflation to  absolutely minimal levels.  Likewise, the  great William McChesney Martin before him  had  no pretense that he and  the  FOMC were  running the  US  economy. He knew  that was the  job of businessmen, investors, savers,  workers, consum- ers, and  even  speculators pursing their own  best  interest on the free market.

In short, for the  Fed’s  first seventy-three years  of existence up until Greenspan’s arrival in August 1987, its modus operandi had not strayed too far from the original vision of its legislative author, Congressman Carter Glass. The latter’s vision  was that the  Fed’s purpose would be to safeguard sound money and  to ensure that the  commercial banking system remained liquid as the  US  econ- omy  expanded in  the  normal course or  encountered temporary rough patches from  time  to time.

But   the   watchwords  were   sound  money and   a  well-func- tioning banking system. The  pre-Greenspan Fed  was  not  in  the jobs,  growth, housing, business investment, and  2 percent infla- tion  business. All that claptrap was  invented by  Greenspan and his  heirs  and  assigns based on  the  excuse  that the  misbegotten Humphrey-Hawkins mandates of 1978 made them do it.

The  latter did  not—there are  no  rigid inflation or  unemploy- ment targets in the  legislation, just  a motherhood-type aspiration for  full  employment and  low inflation. But  the  Fed’s  subsequent mission creep into  outright monetary central planning has  now gone so far that the damage can only be undone by returning to a strict  Carter Glass  approach to central banking.

That  is to say, the  one  decisive reform that is needed is to jet- tison the  FOMC and  all  activist day-to-day Fed  intervention in financial markets and  return to a passive discount window modal- ity.  That  shift  and  that shift  alone would rescue the  Fed  from  its captive status deep down in the bowels of Wall Street.

To  be  very  clear,  under this  alternative monetary regime the banking  system could  get   liquidity when   it  was  needed, but only  at  a penalty spread above a market-driven floating rate  at the  Fed’s  discount window. Under a revived Glassian model the money market, not  the FOMC, would set the discount rate  based on  the  supply of  savings and  the  demand for  borrowings. And the discount window would be open for business one commercial bank-borrower at a time,  day in and  day out.

There  would be  no  monthly Fed  meeting drama—endlessly amplified by financial TV—about the  Fed  funds rate  and  level of bond-buying. Nor  would there be a massive  concentration of bets (i.e.,   front-running) around the  Fed’s  expected action because policy-action would be delivered in tiny fragments and  via contin- uous pricing bits at the market-driven discount window, not  via a “breaking-news” flash on bubblevision ten times  per  year.

Moreover, the  remit of  the  Fed   under the  Glassian model would be strictly limited to support for  commercial bank liquid- ity. Period. The private economy would take  care of growth, jobs, and  the  other elements of  GDP. And  White House bullies like LBJ and  Donald Trump could huff  and  puff  at length about eas- ier money, but  to no  avail  because there would be no  FOMC or monetary politburo to heed their wishes.

At the same time,  there would be no financial bubbles or main street goods and   services   inflation, either.  That’s   because the mechanism by  which  the  Fed  fosters financial bubbles and  CPI inflation—artificially low interest rates  and  inflated financial asset prices—would be disabled.

The  vast  unearned  windfalls garnered  by  the  super-rich in recent years  were  not  the  natural product of capitalism at  work. Bubbles happen when  the  central bank subsidizes debt and  cod- dles  speculation. This inherently attracts talent and  capital to the speculative trading pits,  leading to  even  higher asset  prices and ever larger speculative bubbles.

However, under a  Glassian model, attempts  at  debt-fueled speculation  would self-correct. That’s  because the  interest rate at  the  discount window would automatically rise  in  response to surging demand for  credit, and  appreciably so.  That  was  effec- tively  demonstrated by  the  Volcker  interlude in  the  early  1980s when  Tall  Paul essentially enabled the  Fed  funds rate  to  find  its own  market-clearing level.  It did—at  22 percent in the  face of the virulent inflation that had  been  unleashed by the  money-printers during the previous decade.

At the  same  time,  the  banking system would not  be left  high and  dry.  But  instead of  validating the  Wall  Street canard that discount window borrowing is a bad  thing because it taints the reputation of the bank obtaining the  Fed  advance, such  discount borrowing would become par  for  the  course. It would become the  one  and  only  source of sound money liquidity injections into the  banking system to support real  growth and  productive main street investment.

In the historic monetary literature this was called a “mobilized discount rate.” This  kind of  free-ranging market rate   not   con- strained by the  Fed’s  heavy  foot  would choke off excess  demand for credit, and  do so long  before today’s plague of Fed-subsidized financial asset  inflation had  time  to build up a head of steam.

One   more   feature of  a  restored  Glassian discount  window model is crucial and  would guarantee that its  modus operandi would be  non-inflationary at  the  CPI level,  as well.  Glass  never intended for the  Fed  to be in the  business of buying and  holding Uncle Sam’s debt paper, thereby subsidizing the government bor- rowing rate  and  encouraging the  politicians to run-up the  public debt. Government debt came to dominate the Fed’s portfolio only by the accident of enlisting it to finance WWI.

By contrast, Congressman Glass  was  a believer in  what  was called the “real bills” doctrine back  in the day.  In simplified terms it held  that bank loans  backed by already produced goods (i.e., finished inventory or receivables paper due  for settlement within a set period such  as ninety days) were the  only  suitable collateral for loans  at the Fed discount windows. Accordingly, when  the Fed printed new  money to  advance a discount loan  to  a commercial bank member, the  associated collateral would signify  that new supply of goods had already been  brought into  existence to match with  the expanded credit.

To be sure,  the  real bills  route to Fed  liquidity support for the banking system was not  perfect. But it stands head and  shoulders above the  current defective arrangement where  the  Fed  creates endless amounts of new credit by buying government paper with- out  regard to the supply-side of the economy.

For  this  to  work  in the  present era  only  one  change would be needed, and  it  would bring the  Fed  inflationary money-printing spree  and  endless showering of windfall wealth on  the  1 percent to an abrupt hall.  A present day Glassian Fed would accept only secured commercial loans as collateral for new Fed credit. It would therefore cap its current holdings of federal debt and guaranteed housing paper at the present $8.3 trillion level and undertake a fixed plan of paydown.

For  example, as long  as it was fixed and  irrevocable, the  Fed’s current rate  of $95 billion per month of government debt liquida- tion  (called quantitative tightening or QT) would result in an end game  of  zero holdings of  government and  GSE  paper roughly seven  years  down the  road. Under that scheme the  Fed  would never  buy  another US  Treasury bill,  note, bond, or  guaranteed GSE  security, ever again.

Accordingly, the  Fed’s  heavy-handed price  supports for Uncle Sam’s  debt emissions would end  and  legislators would have  to service  the  public debt in the  bond pits  out  of private savings at honest market rates. Upon the  Fed’s  ending of public debt mon- etization, therefore, yields  on  Treasury paper would soar,  caus- ing profligate spending by the  Washington War  Machine and  the domestic stimulus racketeers to come  to an abrupt halt.

That   would  also   end   the   current  inflationary  disconnect between excess  demand fueled by  US  Treasury debt monetized by the Fed  and  the available supply of goods and  services. Under a Glassian discount model, Say’s Law would prevail: new supply would come  into  being first and  only then could new central bank credit follow.

Equally important,  the  cavalcade of  money-printing central banks that have  enabled the  collapse of America’s  trade accounts and industrial economy would undergo a decisive volte-face. Dollar- denominated interest rates  would rise, causing the dollar’s FX rate to  sharply strengthen. And  that would be  unrelenting bad  news for the  mercantilist exporters, which, as The Donald so unartfully described it, were stealing production and  jobs from  America.

More precisely, these  great mercantilist production machines have had  one Achilles  heel all along. Namely, they converted their dollar-based imports of  energy, metals, and  myriad other com- modities into   processed goods and   finished manufactures and components, which, in  turn, were  resold to  the  US  and   other advanced economies at a profitable mark-up. However, were these goods converters to allow  their currencies to abruptly collapse in the  face  of  a  newly  hardened dollar, their domestic economies would face  gale-force inflation as the  domestic currency cost  of imported supplies soared.

At length, China and  the  other mercantilist exporters of the world would need to  severely  tighten their monetary policies by raising rates  and  shrinking their own  domestic money supplies. This  would be  necessary in  order to  support plunging FX  rates and  thereby counter the  severe  imported inflation that would be generated by a strong global dollar. Even  then, local wages would have  gone up  with  rising domestic inflation, while  debt service and capital costs would also rise owing to higher interest rates and credit scarcity. In short order, the  artificially competitive advan- tage  that had  materialized during the  Fed’s  money-printing era would be substantially vaporized.

In a word, a sound dollar has been  the  key all along to revers- ing the  accumulating main  street disaster in trade, industrial pro- duction, jobs,  and  middle-class incomes. And yet, Donald Trump was and  remains surely  the  most  pig-headed dollar-trasher to rise to the top  of American politics. Ever.

The current roadblock to fixing  the  Fed,  and  therefore fixing the  American economy and  restoring sustainable prosperity,  is that the  conservative party in America has  come  under the  thrall of a dangerous protectionist, statist bully, and  monetary quack. Unless he  is sent  to  the  showers decisively there is literally no hope for  an  outcome that does  not  end  in  financial, fiscal,  and economic disaster.

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