Finance

Alan and Ben and Janet and Jay

By David Stockman  |  December 10, 2018

I’m sick and tired of paying these dues
And I’m finally getting hip to the American ruse

– MC5, “The American Ruse” (1970)

That’s quite a rogue’s gallery, there: Alan and Ben and Janet and Jay…

Really rolls off the tongue, like the start of a nursery rhyme or an advertising jingle. Or maybe it’s the new title of yet another 21st century re-boot of an old-school classic. (“Alan & Ben & Janet & Jay”…oh my…)

Sure, we’re children to be hooked. There’s “product” to be slung. And there’s a lot of still-stretching tension nobody seems to want to talk about.

Like that $11 trillion economic enema depicted below, between the “blue” and the “orange” lines.

That’s not the work of fools, knaves, and/or traitors fronting for or even deep inside working “against” the U.S. government.

It’s not the work of the U.S. Trade Representative. Nor is it the product of Commerce Department and/or State Department trade apparatchik black magic. We can’t even pin it on globalist minions at the World Trade Organization, the International Monetary Fund, or the World Bank.

And it’s certainly not down to NAFTA.

That trade deficit is due not to bad deals. It’s about bad money.

America is losing its shirt because our monetary central planners have it all upside down.

They seek to inflate domestic prices, wages, and costs at 2% per year. That’s in a world teeming with cheap labor.

I contend a regime of honest money would generate deflationary adjustments designed to keep American industry competitive on the global market.

Bubble Finance is about drastic financial repression: ultra-low, sub-economic interest rates, “financialization,” and debt-fueled consumption.

Sound money is about market-driven – or “higher” – interest rates, savings and investment in people and plant, and industry competitive with the rest of the world.

U.S. Balance on goods and services ling graph

America’s greatest export (historically, or at least from 1893 to 1971, when we racked up trade surpluses every single year) are the ideas and institutions of free enterprise and capitalist invention.

That all went wrong in August 1971, when Tricky Dick unleashed the most powerful central bank in the world to print money at will and paved the way for the Federal Reserve to export monetary inflation.


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In the pre-Keynesian world, a monetary settlement asset greased the flow of trade and international finance. It was gold. It was not the fiat credit of banks – “national” or “central” or otherwise.

There could be no such thing as $15 trillion of continuous U.S. merchandise trade deficits over 43 years running.

Large trade deficits caused by the mobilization of cheap labor from Asian rice paddies and cheap energy from the sands of Arabia would have generated their own corrections.

U.S. current account deficits would have caused a painful outflow of that settlement asset, gold. In turn, interest rates would rise. Domestic credit would shrink. Prices, wages, and costs would deflate.

Imports would decline, but exports would increase. And the U.S. current account would return to sustainable equilibrium. That means a reflow of the settlement asset back to the U.S.

We don’t have to journey too far to see that “monetary inflation” is like an infectious disease. There’s plenty of evidence right here in North America. We can isolate it using NAFTA.

Mexico trashed its own currency in response to dollar inflation and the peso crisis in the early 1990s. The peso’s exchange rate has plunged from about three to one to about 20 to one. So, Mexico’s already cheap labor has become that much cheaper in dollar terms.

In 1991, U.S. exports to Mexico slightly exceeded imports. There was no bilateral deficit worth mentioning. In 2017, the U.S. incurred a $71 billion trade deficit. U.S. exports to Mexico were just $243 billion or 77% of the $314 billion of US imports from Mexico.

That huge imbalance had nothing to do with removal of tariffs and other barriers under NAFTA, which took effect on January 1, 1994. Nor was it about Mexico’s trade machinations.

It was and remains a “relative cost” phenomena. And that makes it monetary.

The evidence for that is with the Great White North.

The Canadians have played mercantilist games to promote individual commodities, such as forest and dairy products.

But the Canadian exchange rate is not much different today than it was in the early 1990s. Nor have its internal prices, wages, and costs changed much relative to the domestic U.S. economy.

And there’s been no trend change in the U.S. trade balance with Canada. Both imports and exports have grown by about four times compared to pre-NAFTA levels.

In 2017, U.S. exports to Canada totaled $282 billion, and imports from Canada were $300 billion. With exports at 95% of imports, that’s close enough for government work.

In other words, an all-around “bad” trade deal led to wholly different outcomes as between our partner to the north and our partner to the south.

Folks, the decline of the U.S. industrial economy is about bad money.

The only “bad deal” is the one Imperial Washington is selling us.

A “Model” Day…

Well, folks, how’s your Monday?

The Dow was off more than 500 points at its nadir today. The other major indexes followed suit, with losses between 1% and 2%. We’ve had what’s turning into the leitmotif of another multiple-hundred-point intraday rally, too…

Folks, the truth of “Trumponomics” is landing on Wall Street. “Normalization” is entirely its own thing. It’s happening, and its outcomes are perilous enough.

By “Trumponomics,” we’re talking an unpaid-for tax cut… and a $1.2 trillion debt-and-deficit busting budget… and a treacherous confrontation with China.

Tariffs are just the tip of the iceberg here. The Donald’s “Art of the Deal” approach to Xi Jinping is not working to MAGA. And he may have given away critical long-term negotiating leverage in the process.

That’s just another factor the market is trying to digest… we could be talking about more than just a trade war…

We explore some of the “second-order” issues regarding U.S.-China relations in the December issue of The Stockman Letterwhich you can download here.

It’s an important “Mother of All Yield Shocks” story – especially if you want to protect your wealth and profit when opportunities present…

Thousand-point intraday swings can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

Sincerely

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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan.MORE FROM AUTHOR