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Trump Kills the Tea Party

Politics / US Politics Jul 26, 2019 - 02:41 PM GMT

By: Peter_Schiff

Politics

After claiming to be the greatest at just about everything, Donald Trump has finally found an area where he can stake a credible claim. By negotiating a disastrous budget deal with Democrats, the President could become the greatest creator of government debt in the history of the country. While Trump is selling the two-year deal as a major victory because it increases military spending and removes the possibility of a government shutdown for two years, in reality, the agreement to suspend the debt ceiling and push annual deficits even further above the trillion dollar mark may only succeed in destroying the Republican Party as we know it.

The Tea Party wave of 2009 and 2010, a Republican movement born in reaction to the budget blowouts of the Obama Presidency, is now officially dead. It's ironic that as Trump hammered the final nail into the Tea Party's coffin, no one seemed happier than the corpse itself! There was hardly a word of discomfort from all the Republican Senators and Congressmen who had so loudly railed against debt when the other party occupied the White House. There is simply no legitimate way that Republicans will ever be able to argue again that they are the party of fiscal discipline. They may try, but only the most partisan and credulous voters will buy it.


CNBC's Rick Santelli, the unofficial godfather of the Tea Party, should at least speak a few words at its funeral, and perhaps take the opportunity to reconsider his admiration for the man who murdered it. But don't hold your breath. Trump has accomplished something Obama never could: convincing Republicans to abandon any remaining conservative principals to support massive increases in the size of government, without any regard for how much money will have to be borrowed to make it possible!

As I laid out in a commentary I wrote just before Trump took office in January of 2017, Republican bona fides on the issue of fiscal responsibility were never that strong to begin with. In fact, deficits have tended to expand faster under Republican presidents. Given the reputation of each party this may strike some as a surprise. But it makes sense when you consider the politics.

In short, here's how the two parties operate: Democrats promise to raise spending and raise taxes, Republicans promise to cut spending and cut taxes. But, whereas Democrats have generally succeeded in both of their aims when they have power, Republicans have just succeeded in cutting taxes BUT NOT spending. (spending cuts require politically difficult choices that are much harder to vote for than perennially popular tax cuts). This puts a giant thumb on the Republicans' budgetary scale.

Unlike prior Republicans, Trump never so much as paid a single word of lip service to spending cuts. As the self-proclaimed "King of Debt," in the private sector Trump never had any problems borrowing more than he could reasonably be expected to pay back, as long as there was an opportunity to renegotiate with his creditors in the long run. Individually, he has been repudiating debt (largely without consequence) for the past 40 years, so why would anyone expect him to stop now?

But deficits under Trump have expanded even faster than I had expected. The really alarming part is that this occurred with GDP growth higher than I anticipated, and without the additional red ink of a $1 trillion plus infrastructure spending plan that I had assumed would pass in the first two years of his presidency. If the economy slows significantly, as I suspect it will in the near term, we may see annual deficits in the multi-trillion dollar range almost immediately. Republicans and Democrats may be inclined to think that deficits of that size won't matter either, but I suspect that they will.

Donald Trump won the 2016 election in part by casting doubt on the strength of the Obama economy. At the time, most in the media and on Wall Street were united in their belief that prosperity had increased impressively from the depths of the 2008-2010 Recession. They believed that the strength was particularly evident during Obama's second term when interest rates and unemployment fell to generational lows, and the stock market soared to all-time highs. Given the media's love affair with Obama, it's not surprising that the narrative was not heavily scrutinized.

But Trump correctly sensed that the good times were not being felt by the vast majority of working-class Americans. He argued that Obama and the Fed conspired to create a "phony" recovery by keeping interest rates artificially low. The result was a "big, fat, ugly, bubble", as he declared in the first presidential debate in 2016, that disproportionately benefited the wealthy, and that set the stage for a crash once the bubble burst. To fix the problems, Trump prescribed a regimen of tax cuts, regulatory relief, and tough trade policies.

As it turned out, Trump was right about the underlying economic fragility, and I praised him at the time for having the independence to go against the grain. The ultralow interest rates and quantitative easing that had been in place since the Great Recession had in fact benefited the wealthy more than the working classes. That's because low interest rates are effective at pushing up asset prices (like those in the stock, bond and real estate markets), but appear to be ineffective at creating lasting benefits in the broader economy. And since the rich are more likely to own stocks, bonds, and real estate, they are more likely to benefit from Fed rate reductions.

In contrast to Trump's economic populism, Hilary Clinton's main message was that the best way to keep the Obama economy going would be to stay the course and elect her. Trump won that rhetorical battle in a few swing states and became President.

However, once he took office, the bubbles in stocks and bonds just got larger and larger. But as President, he fully embraced them. Despite the fact that few of the major economic trends have significantly altered course in the transition from Obama to Trump, the President asserts that the economy is currently the "best in our history" and that there are no bubbles in site. This fact-free position has encouraged him to wade into a truly bizarre rhetorical paradox (one that would intimidate mere mortals). While insisting that the economy is in fantastic shape he is simultaneously calling on the Fed to slash interest rates from their historically low levels. If the economy were so strong, why would it need that kind of emergency help?

But the numbers don't really support Trump's bluster about a bulletproof economy. If the economy were so strong, why did the June Richmond Fed Manufacturing Index not only miss expectations, but tumble to its lowest level in over six years? Why did the June Chicago Fed National Activity Index just fall for the seventh consecutive month, its worst losing streak since the Great Recession?

Weakness in the housing market has also been well documented, despite the generationally low interest rates that should be greasing the skids. Not only did June existing home sales miss expectations, but annual sales have fallen for 16 consecutive months, according to data from National Association of Realtors. If sales are this weak despite falling mortgage rates and "the strongest economy in history," imagine how much weaker sales would be if mortgage rates rise and the economy slows. According to 2016 data from the U.S. Census Bureau, the homeownership rate for African Americans has already fallen to generational lows. How much longer before the same may be true for the general population?

As we move into the thick of the 2020 presidential cycle, the roles of booster and critic have reversed. While this is generally true in every election, this time the flip-flops can't be any more egregious. Elizabeth Warren made news this week by issuing a lengthy warning that America's economy is built on a dangerous foundation of soaring debt. She drills down into the ugly reality of bubbles in student and corporate debt, and laments the continued decline of our manufacturing sector. She concludes that despite the happy talk from Washington and Wall Street, we are headed for another economic crash.

As it so happens, the Senator is right (something that doesn't happen often). Working class voters may feel just as left out in 2020 as they did in 2016. If the pitch worked for Trump then, maybe it work for Warren, or any Democratic nominee, now?

However, the two differ substantially on solutions. Whereas Trump favored largely pro-business remedies, Warren believes that only government has the wisdom and ability to save the economy. If she has a chance to implement her socialist policies, the economy may never recover.

The recent budget developments should make it perfectly clear that there is no resistance to the trend of budgetary catastrophe. It doesn't matter who wins elections. Another debt crisis may just be unavoidable. The dollar should be tanking and bond investors fleeing. But of course, traders and investors can only look at seemingly benign short-term effects of massive deficit spending, and the temporary aversion of a messy fiscal crisis. This willful ignorance will cost us in the long term.

Gold initially sold off a bit on the deal due to the relief that a government shutdowns in the next two years have been averted. But the suspension of the debt ceiling, the repeal of prior efforts to restrain spending, and reckless expenditures on both welfare and warfare may make gold an even better buy post deal than before.

In the coming years, multi-trillion dollar annual deficits could be the norm, until we start measuring the numbers by the tens of trillions. This merry-go-round will keep spinning until the ride crashes. There will be no cavalry to ride to the rescue. The deficit hawks in the Republican Party have all joined the other side. While this may make things easier for the politicians, it will make things much harder for the public.

Read the original article at Euro Pacific Capital

Best Selling author Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital. His podcasts are available on The Peter Schiff Channel on Youtube.

Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

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