On Tuesday President Donald Trump will address a joint session of Congress on the ‘State of the Union’. On Friday the Chair of the Federal Reserve, Dr Janet Yellen, will address the Executives Club of Chicago on the state of the economy. Neither of these speeches will explain the state we are in.
President Trump will get closer than Dr Yellen, who will barely make an attempt, let alone any sense; but neither will go to the very core of our problem…governmental irresponsibility and malfeasance…from which stems our economic plight…from which stems the growing fault lines that are appearing in our societies.
At this point, permit me to digress…but not really...
After decades of living in towns and cities, I am blessed to live on the side of a small ‘mountain’ in the Welsh hills. My nearest neighbour is a sheep and cattle farmer, a pillar of the local community, and an all round good bloke. He is known as a ‘tidy’ farmer. I also know ‘tidy’ builders, ‘tidy’ shop owners and believe it or not, we even have two ‘tidy’, (and unpaid) community councillors - I am privileged to be married to one of them.
In this part of the world…if you do a good job, if you keep your agreements, if you think about the effects that your actions will have on others and if you put right your mistakes…you are ‘tidy’. If you deal honestly with other people, you are ‘tidy’. If you deal dishonestly with other people, then you will gain a reputation for being ‘as straight as a dog’s hind leg’. The point is this: there is always a reckoning, even for people who think that they are getting away with it.
What has this got to do with the price of fish? Simply this: the reason our economies are in such a mess is because they are run by ‘untidy’ people…
Our economies are largely governed, regulated and manipulated by people who are 'as straight as a dog’s hind leg’, and no more ‘tidy’ than your average ‘dodgy builder’. The havoc caused by these charlatans has been building for decades. It is a fruitless task to identify a single moment in time when it kicked off, particularly since we are discussing aspects of ‘human nature’ which are as old as humans…
But for my purpose here, I suggest that our current malaise began with the Vietnam war and LBJ’s ‘guns and butter’ policies in the sixties, accelerated when Nixon ‘temporarily’ suspended the link to gold in the early seventies, changed gear again with the arrival of the ‘Greenspan Put’ in the late eighties, and has gone into overdrive since the 2008 financial crisis - courtesy of the politically dishonest and economically illiterate policies of QE, ZIRP and NIRP. Along the way we also had the Clinton/Rubin/Summers suspension of Glass Steagall, deregulation of derivatives, and the Bush wars…none of which helped.
Where are we now? As I described in a recent piece called ‘It will end in a knockout and then there will be excuses’ (which drew on the excellent analysis done by Simon Black of Sovereign Man), the US is in the financial state described by the following ten points. This is the stuff that neither President Trump nor Dr Yellen will talk about this week. Why not? Because neither of them are 'tidy'.
1. In 2016 the US government spent $1 trillion more than it received in ‘income’…this is almost double the previous year’s deficit, and comes 8 years into a so-called ‘recovery’: a 12 month period in which there was no major war, no recession, no big new infrastructure spend, and no bank bailouts or other crises
2. The largest portion of the deficit was accounted for by Social Security, Medicare & interest payments on the debt. Note that interest rates were subdued and only a shade higher than their historical lows, due to the activities of the Federal Reserve
3. If the government had decided to ditch all of its other commitments to defence etc, and just funded Social Security, Medicare and interest…it would still have made a loss
4. Despite eating up the largest portions of the budget, Medicare is running out of money, Social Security is running out of money – let’s be clear - they are going bust
5. The Net current position of the government is this – it is in debt to the tune of $19.3 trillion
6. On top of this, the long-term projected costs on Medicare & Social Security, based on historical data & measurable demographic trends, accounts for a further liability of $46.7 trillion
7. If you include all the other stuff, all the stuff off-balance sheet…the total liabilities of the US government, in today’s money, is $95 trillion. That is $280,000 per man, woman and child in the United States
8. The biggest asset of the US government is the $1 trillion in student debt on its balance sheet. (Yes, that’s right, it counts as an asset, even though a huge chunk of it will never be paid back). This is slightly more than the $980 billion that the government ‘owns’ in the form of military equipment and Federal land
9. The Treasury Department failed the audit carried out by the Government Audit Office (GAO), as it frequently does. The GAO reported that they were unable to get their hands on all the accurate data, because for example, the Pentagon doesn’t possess an accurate inventory. (The Pentagon is also notorious for money ‘disappearing’ – see ‘Donald Rumsfeld’ for more details)
10. If the Treasury were a private organisation, failing its audit in such an egregious manner, would result in dire consequences for the organisation and individuals responsible. However, the Sarbanes-Oxley Act does not apply to the government itself, which means that nobody will go to jail. There is no incentive to change
So here we are…pondering whether or not massive infrastructure spending will bring Lazarus back from the dead…wondering whether or not a group of institutionalised academics will raise the Fed Funds Rate from 0.75 to a whole percentage point…hoping that whatever they do doesn’t disturb an avalanche of leverage and inflated asset values…so we can kick the can down the road and repeat the same charade again in June…madness.
There will be no ‘normalisation’ from here, and any politician, economist or central banker who tells you otherwise is either too stupid to dress themself, too dishonest to be left unsupervised, or both.
In a nutshell…despite decades of political lies, academic hubris, and media denial…there will be a reckoning. You can suspend honesty but you cannot suspend ‘truth’…and the truth is that there is no free lunch…there are always consequences. The choice we will have, when the time comes, is whether or not to fall for the excuses that will be rolled out…’no-one could’ve predicted this’…’it was Trump’…’it was prior austerity’…’it was secular stagnation’…’it was lack of aggregate demand’…’we should have done more’…’if people had listened to me (Krugman)’…’I mentioned the risks in a paper I wrote last October (Summers)’...blah blah blah…
Will we allow the politicians, the bankers, and the academics who have presided over this mess to issue ‘get out of jail free cards’, take a nice fat pension, and then slide off to a gated community somewhere in the Hamptons…or will we insist on transparency and accountability? Personally I think that ‘Slick’ Willy Clinton, Alan Greenspan, and Larry Summers et al would all look good in an orange boiler suit...but then again...I'm just a tidy old grump...
Have a good week.