Donald Trump Cannot Make America Great Again But He Could Destroy It

 I posted this article to my personal blog at Talkmarkets: http://www.talkmarkets.com/contributor/gary-anderson/blog/economics--politics-education/donald-trump-cannot-make-america-great-again-but-he-could-destroy-it?post=100434&uid=4798

Donald Trump is all over the place when it comes to his economic plan to make America great again. But he has made some statements that we can show would not make America great again. The story is not given to Americans in full as to why his plans could be disastrous.  He has two plans, that are shared here. I encourage people to read the entire article because the issues speak to the economic problems of our time.


The closest explanation as to why Trump's plan would fail is the article found in Business Insider, dated May 6, 2016. Trump threatened a haircut on treasury bonds. He threatened to not pay part of the debt back, buying the bonds back for a lower price than at the price they were issued!

Permission Michael Vadon Wikipedia


Of course, the author, Josh Barro, only offered the explanation that Trump's plan would cause interest rates to rise, destroying the perception of safety. He said it would cause an economic crisis, which is very true, but did not explain why.

We know why. Trillions of dollars of bonds are used as collateral in the derivatives markets. If these bonds decline in value, in price, and yield goes up, all those deals and swaps will trigger margin calls and more bonds or gold or money will have to be fronted to bolster the weakened collateral. Banks and counterparties own that collateral, and are responsible for those margin calls should they take place.

That is the reason why Trump's plan would put in danger the financial system, and I personally believe Josh Barro knows it. Yet he didn't say it. The American people as a whole have no idea that treasury bonds are simply collateral in a giant financial market bigger than any market found in the real world, in the physical economy. 

And did Donald Trump surely know about this massive use of derivatives? He seems to want to say that the financial markets will collapse in 2016. Why would he advocate a financial solution for America that would hasten a collapse? Truth is, America cannot be made great again by destroying the financial system.  

And the big secret I share with you is that the US economy cannot be made great again (through robust growth seen in the last century) even if the status quo remains, even if the financial system stays intact. Slow growth is a necessary function of low yields and big demand for bonds as collateral!

The Fed cannot allow unbridled growth because it no longer has the tools to stop inflation if the genie gets out of the bottle. Interest rates must, must in this somewhat diabolical financial system, remain low as long as these bonds are used as collateral. Think about that.

People have to realize that treasury bonds are more senior, as collateral, than gold! They are, as I have written before, the new gold. 

Then, Donald Trump rolled back his threat to give investors less than they paid for treasury bonds. But he offered a second plan. He said that the government could create inflation to make the debt already incurred less expensive. Well, certainly, over time, the Fed targets inflation at 2 percent and rarely reach that target. So, over time, the debt incurred is diminished in value. But this is not a quick fix. A quick fix would require massive inflation, which may go out of control.

Remember when I said that collateral must remain of good value, of stable price, even going up in price, with little rise in yield and little diminishing of that price? Well, as long as bonds are used as collateral, are allowed to be used as collateral, in a derivatives market that is valued at well over 500 trillion dollars, massive inflation cannot be allowed. 

If rampant inflation were allowed, the Fed could not abruptly raise rates, or the Fed itself would destroy the banking system. It would also destroy the government's budget, with entitlement programs tied to inflation. But don't be mislead, the private banking system and collateral would take a beating if bonds suddenly exploded in yield. 

Trump did mention in his second plan that the money supply could be expanded. Well, that could be done in a controlled environment through helicopter money. But Trump's version of money supply expansion was not well thought out by him. The idea of massive inflation as a means to push down the value of debt is dangerous to the system that is in place. This is a system that requires collateral stability, whether it be for the good or ultimately a dangerous experiment in the new normal, in the newest version of the world order. 

The one thing we know is this. The economic system we have, that is now subjugated to the derivatives market, is not set up to allow robust growth in the economy, and Trump cannot make America's economic growth robust again. But he could harm the economy even more through some of his bogus plans.


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