How Trump Turns on The Fed

POITOU, FRANCE - The U.S. economy... all $20 trillion of it... explained in a single tweet (any similarity between this and one you might get from the president of the United States of America is pure coincidence):

• Just look at the Dow (near an all-time high)... and unemployment (near an all-time low)...
  
  The tax cuts ARE WORKING! The trade war, too! And those who say otherwise are just jealous SOBs!

Cartoon Personalities

In reality TV - and performance art of the wraslin' genre - you add dramatic tension by creating simplified, cartoon personalities and then allowing them to get into snits with one another. The audience tunes in to find out how the spats will be resolved.

In professional wrestling, it is pretty straightforward.

One of the wraslers insults or challenges another one. Wives and girlfriends are brought onstage to stir up animal passions. There's some pushing and shoving in the dressing room - caught by security cameras! And then, the stage is set for a resolution in the ring.

A tweet is not long enough to elaborate on a policy, an idea, or a complete thought. But it is great for this kind of feud-building.

President Trump uses tweets effectively. For example, he tweeted that the lawful head of North Korea was a "bad dude," a "maniac," and a "rocket man."

Gauntlets were thrown down... leading to a rumble in the jungle - in Singapore - where the U.S. president said he would be "honored" to meet with Kim Jong-un.

Upon completion of the meeting, the U.S. president announced victory and declared that North Korea was "no longer a nuclear threat."

The celebrity feud is part of the entertainment world's advertising strategy.

Trump versus Jimmy Fallon, Arnold Schwarzenegger, LeBron James, Rosie O'Donnell, Mark Sanford, Robert De Niro... etc., etc., etc.

Trump uses it in politics, too - Trump versus Low Energy Jeb, Lyin' Ted, Elizabeth "Pocahontas" Warren, "Dog" Omarosa... etc., etc., etc.

Same Team

In both politics and entertainment, the feuders appear to be going at one another with hammers and tongs. But they are really on the same team.

In the entertainment world, ratings and name recognition for both sides generally go up.

And in the political world, though elections give the win to only one of the contenders, they are all playing the same game.

The political system transfers money and power from the public to politicians, their handlers, their cronies, and their zombie clients.

Various moving coalitions of these people fight over who gets what... But they all favor big, ambitious government... with themselves at the head.

The celebrity feud has proven very effective as a political tool, too, because it offers voters a shortcut.

Complex subjects are reduced to simple popularity contests. Trump or Hillary? Choose your champion; no need to think about it any further.

All of which makes us look forward to the coming tweet feud between The Donald and Fed chair Jerome Powell.

The president already set it up when he said, during an interview with Reuters earlier this month, that he was "not thrilled" by rising interest rates. When the crash/recession arrives, the complex issues will be simplified into a personality battle.

The president will accuse Powell of destroying his beautiful economy. Powell may have no idea what game the president is playing. He will respond with well-reasoned arguments... and ultimately cave in when the going gets tough.

Perhaps the pressure's already getting to him. Powell's remarks in Jackson Hole last Friday were interpreted by some as being "dovish." Powell says, "...there does not seem to be an elevated risk of overheating," signaling that interest rate hikes might be put on hold.

Wall Street knew what to do: buy. The S&P hit an all-time high. [More in today's Market Insight below.]

But the real clash is still in the future... perhaps a year or more out. So let's just look a bit beyond the tweets... at why it's just a matter of time before the showdown occurs.

Cheap Trick

To that end, we have the latest numbers on the tax cut.

Proponents, led by Mr. Trump, claimed it would add growth and jobs, and inflate incomes. Critics - including your editor - claimed it was a cheap trick that would merely increase the deficit (thereby shifting the burden of paying for government onto a future, unknown, unborn, and unaware public).

The final results won't be in for a while, and even then, they will be subject to much dispute. But the initial figures may be fun to look at.

In order for the tax cut to "work," it had to generate enough extra GDP (jobs, incomes, tax receipts) to pay for itself. That was the promise. But tax cuts - like debt, invasions of Russia, and bad marriages - are easy to get into and hard to get out of.

Most often, you wish you had never gone in.

First, personal incomes have, so far, not gone up. They've gone down. From Bloomberg:

• Once the impact of inflation is included, ordinary Americans' hourly earnings are lower than they were a year ago.
  
  Real wages have remained mostly stagnant despite an expanding economy, record stock prices, soaring corporate profits, and a giant deficit-fueled stimulus from Trump's tax cuts that took effect Jan. 1. The Trump administration claimed its policies would immediately boost wages, with its tax overhaul ultimately increasing average pay by $4,000 to $9,000.
  
  That hasn't happened. And though Trump regularly boasts of the economy's performance, many Americans don't feel they're sharing in the gains - a risk for Republicans as they seek to defend their House and Senate majorities in November elections.
  
  A majority of voters believes their personal financial situation has remained the same or gotten worse over the past two years, said Tim Malloy, assistant director of the Quinnipiac University poll.

How about the "paying for itself" claim?

The feds take about 16.5% of GDP in taxes. That means that for every $6 the economy produces, $1 goes to the government. But that works in reverse as well. For every $1 the government loses in tax revenue because of the cut, the economy must produce an additional $6 just to keep tax receipts steady.

Otherwise, tax receipts would fall and the debt would rise; we would be spending our children and grandchildren's as-yet-unearned money, in other words.

From the get-go, that seemed a very unlikely bet. And now we see, in the latest quarter, tax receipts fell by almost exactly the amount of the tax cut - 6%. There was no apparent offset from a growing economy; the tax cut did not even make a down payment on paying for itself.

As predicted, too, the deficits and debt continued to grow. June accounts showed a $75 billion deficit, with $607 billion year-to-date, up 16% from the previous year.

In July, the monthly deficit rose again... to $76.9 billion. Total net government debt has risen $1.3 trillion over the last 12 months.

In short, nothing so far suggests that the economy is ready to dance a new jig. The party's been going on a long time. The revelers are worn out. The ashtrays are full. The Fed is putting the liquor away. And the police have set up a DUI roadblock down the block.

Pretty soon... someone is going to turn out the lights.

Then, as the drunks stagger to their cars... the stock market crashes and the economy comes tumbling down...

And even before the sun rises... or the markets open... Mr. Powell will find himself the target of an early morning tweetstorm.

Regards,


Bill Bonner, Bonner & Partners
Vivek Kaul's Diary

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Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.