Fed Signals It Will Break the Economy. Wait Til Trump Finds Out

Update; while the Fed did not break the economy as this article predicted, the Coronavirus did. And the Fed likely is relieved, being afraid of Trump, although we now face deflation. This article was first published by me on Talkmarkets:

Tim Duy, economist at University of Oregon and contributor to Bloomberg View has an ominous prediction. The Fed won't change, just like a leopard won't change its spots, and will likely establish the same policies that it has in the past to break the economy. Duy said:

...What I find most interesting is the adherence to these models even though, as Evans says, they will sustain the economy in the zone where the zero lower bound is likely to be an issue once again. One would think the Fed would continue to adjust policy accordingly in a dovish direction but increasingly is looks like many policymakers intend to 1.) fall back on old models and 2.) accept the likelihood of a return to the zero bound and be ready to use unconventional policy as needed. That strikes me as hawkish – the Fed said policy normalization is underway, and they mean it.
Bottom Line: Expect the rate hikes to keep coming. No reason to pause this year. In some sense, expecting a pause even after policy rates hit neutral is more hope than anything else.
Normalization, of course, will run up against the long bond conundrum. The likelihood of a return to the zero lower bound is great, as Professor Duy says, and for me, a hurtful liquidation and then quantitative easing and Fed balance sheet expansion will follow. It looks like procyclical Fed behavior is here to stay.

This certainly is not what Donald Trump wants to hear. He wants big growth, and the Fed is not going to let it happen. This chart may be the reason why. Notice that labor participation, overall, is the percentages shown on the left and shown with the blue line. That is stable, boringly stable, and historically low compared to over 66 percent before the Great Recession. But the red line and the percentages of young men and women age 24 to 54 is exploding, with a recent slight pullback. We can see participation for that group at over 82 percent!

By Permission

The direction in which the red line is going is what no doubt concerns the Fed, even though the number was over 83 percent just before the Great Recession, in the time of the housing bubble.
Of course, my gripe with the Fed is not so much with breaking the economy, although it would seem they could do better. No, my gripe with the Fed is that it always bails out the wealthy, not homeowners, or small business. The wealth divide is exacerbated by the Fed every time this happens!

It should be against the law.

Bailout the essential financial institutions and the other 99 percent too. You break it, so you fix it, Federal Reserve!

The New Normal is with us to stay, unless massive upheavals take place in the world. The New Normal includes low long bond rates, ie. the conundrum of Greenspan, as well as flirtation with the zero lower bound, negative interest rates, and unorthodox Fed efforts at liquidity.

There are serious problems in flirting with the zero bound, as bankers call for cashlessness. Larry Sumner starts talking about getting rid of the 100 dollar bill. The cycle of doom begins again. And mom and pop are decimated according to John Mauldin.

Flirting with the zero lower bound also wrecks havoc with the money markets. But Duy fears that is where we will be headed once again. The hawks, the break it and fix it later crowd, skewed to the wealthy, will always be in charge of the Fed. I think the doves are there for show.

I am no fan of Donald Trump. But I am no fan of living at the zero lower bound, either. But just as Trump said winning a trade war was easy, his team said breaking the New Normal would be easy. Yeah sure. There is nothing easy about economics. Nothing at all.

Tim Duy does not predict when the stock market will break. We hear in the news that Goldilocks is back. Could be hype. Could be stocks run a bit. But Professor Duy does predict the break will happen, and it will be a crisis of a large magnitude.

The only way it will be pushed deeper into the future would be for companies to take less profit and give it to workers. But it seems as though taking less profit will just be to absorb tariffs. Most companies are in massive debt. They can't afford to cut back on profit and that could be the downfall of the economy.

Donald Trump will not like that he is making things worse in the economy, but he may be doing just that. And he wants companies like Apple and Harley and Ford to make less money by switching manufacturing to the USA, all because of tariffs. That won't help an increase in wages even if the companies were to manufacture here, because cost of raw materials will gobble up any excess profits, and wages will be maxed out at a lower level since Americans make more than Asian workers.

Eswar Prasad, of Cornell University said jobs will not come back to the United States. He said:

...tariffs could end up inflicting collateral damage on U.S. businesses and hurting job growth in companies (located in the USA) that have built international supply chains.
Trump says he is for higher wages.Yet, POTUS appears to be in lockstep with the Fed, and may even be clueless about it, pushing policy that will break the economy and in fact lead to lower wages. So, for anyone who thinks he is a champion of the people, think again. He has many reverse Robin Hood tendencies, not anything like he promised to poor whites who voted for him.

As Dave Chappelle, who possesses more genius in his little finger than Trump has in his entire body, said on his recent special, Trump is helping the comedian, who says has done very well under Obama and under Donald Trump. But he went on to say Trump is doing nothing for the poor people in places like Ohio and the rest of middle America, who voted for him, and has them deceived.

As Tyler Durden has said, low skill jobs may be in jeopardy, exactly the opposite of what the President of the United States says he wants. Blue collar jobs are in jeopardy with Trump. Adding that potential hit to a looming recession will likely make the recession worse, maybe far worse, and seal the fate of POTUS in history.

We could have had a relationship of trust with China. Donald Trump has broken that relationship. China will go elsewhere to sell its goods, and devaluate its currency to avoid the sting of tariffs. Instead of growing trade with China, as huge the nation prospers, we will all see slowing trade and face Donald Trump's taxation without representation. Congress was vested with the power to impose tariffs for a reason by the founding fathers in the Constitution, as Article 1 Section 8 states:

The Congress shall have the Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.
But Congress frittered that power away as it has so many others. When a demagogue like Donald Trump becomes president, those once separated powers are all wound up in him, and Congress is frozen.

So, we are faced with the Fed breaking the economy, as Tim Duy says it surely will, without proper Congressional oversight, and the President potentially damaging the economy without proper Congressional oversight. If one of them does not properly offset the other in a timely manner, we could face a difficult future.

There still could be a deal with China, but Trump rallies his base with hawkish tariff plans. China will court American business, maybe limit tit for tat, but Trump will likely not court China, at least near term. Reading between the lines, China will make it even more favorable for US business to stay in China if this reporting is accurate, while Trump may become even more infuriated.

For Further Reading:

Congress Handed to the President the Power to Level (Levy) Tariffs


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