Is President Trump Right About the Fed?
Politics / US Federal Reserve Bank Nov 05, 2018 - 04:51 PM GMTBy: Harry_Dent
While Larry Kudlow (Treasury Secretary and Chief Economic Cheerleader) assures us that Trump is NOT interfering with the Fed, our dear president has proclaimed that our Central Bank is “crazy” for raising rates.
From his, ahem, unique world view, he believes they’re trying to wreck his new gravy train economy… the one he created with major tax cuts ($1.5 trillion), major repatriations from overseas ($2 trillion), deregulation, and a lot of positive talk about 4% to 5% growth again…
But, with no fear of sounding like a broken record: sustaining growth rates at that level are demographically IMPOSSIBLE!
With nine years of stimulus and accelerated fiscal BS, we’re running out of eligible workers to hire. That means wage inflation.
But the bigger problem is that natural workforce growth – people ages 20 to 64 becoming contributing members of the economy – is flat to slightly down for the next several years, and even for decades to come.
And productivity is declining from the aging of our workforce and the Baby Boom. It was 3%-plus in the 1980s and 1990s. Now it’s 0.5% and falling towards ZERO!
Once we run out of workers, after hiring back people who dropped out (something I see happening within the next year), there is NO growth in the workforce and no way productivity magically moves back to 3%-plus.
We’re also running out of affordable homes for sale.
Donald’s massive tax cuts have fueled growth and inflation, even if temporarily.
His stimulus plans and the Fed’s steady rate hikes to “normalize” are causing the dollar to rise and global borrowing rates to rise for emerging countries (and they’re the ones who borrowed most of the money, mostly in U.S. dollars after developed countries maxed out in 2008).
Now currencies are collapsing in countries like Turkey, Venezuela, Argentina, and Iran… and even China a bit.
Emerging stock markets are down 20% to 40%, with China’s down 29% recently.
So, here’s the thing, Mr. President: The sudden two-day crash last week had more to do with China’s desperate new monetary stimulus than the rising Treasury bond rates (which I warned was likely coming and will only accelerate ahead) or the Fed raising rates.
It’s YOUR trade war with China – even though it may have merit – that’s most driving your gravy train onto unstable tracks… and it’s your policies that are driving inflation and rates higher.
In fact, the “bloody nose” you’ve given the Chinese could well be the trigger for the next global bubble burst and debt crisis that starts in the emerging world and spreads back to the developed.
As preschoolers are quick to remind us: when you point a finger, Mr. President, you have four fingers pointing back at you!
Trump is miscalculating the risks of his approach.
He wants high growth with rising inflation as a result, but continued flat-to-low rates. That’s not going to happen at this stage.
He wants to save jobs by shifting production back to the U.S., but what about our exports and the global economy if China falls too hard?
What about the inflation from the tariffs that hit smack at the Walmart level and most impact his base supporters?
Besides, late-stage inflation was likely to occur around this time anyway… why add to it?
So, there is no question about it: Donald has fueled everything that’s causing the Fed to merely continue on a path of normalization after the biggest “gift” delivered to us over nine years. They’re being predictable. Donald is the one that’s acting crazy after putting the icing on the never-ending stimulus cake with massive tax cuts… I’m afraid, Mr. President, you can’t have your cake and eat it to!
Harry
Follow me on Twitter @HarryDentjr
Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.
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