It’s the Inflation, Stupid

By David Stockman  |  March 4, 2019

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.

– John Maynard Keynes, The Economic Consequences of the Peace(1919)

It appears the market understands this Trade War was nonsense from the beginning.

It’s a fire the Donald set himself.

As it is, as we’ve often discussed, America’s $400 billion trade deficit with the Red Ponzi wasn’t caused by bad deals made by the Donald’s allegedly stupid predecessors.

Nor was it due to the nefarious actions of the Chinese state.

It reflects the metastasized economics of bad money.

The Federal Reserve has deliberately inflated the hell out of domestic prices, costs, and wages over the last several decades.

Our monetary central planners have driven production and good jobs offshore. And they put workers who managed to keep their jobs on a treadmill that hasn’t kept up with the Consumer Price Index.

The U.S. trade balance plunged into deep deficits from which it’s never recovered in 1979.

Since then, average hourly wages of production workers have risen 275% in nominal terms. But inflation-adjusted wages for full-time workers are 5% below where they were 40 years ago.

The Fed’s apologists insist that a 2% inflation target is good for everybody. It promotes optimum real economic growth and full employment. A relentless rise in the price level is no sweat because wages, prices, and living costs rise in lock-step.

That’s the argument. And it’s demented.

Wages, prices, and living costs do not rise in lock-step. It’s nonsense because it assumes the U.S. is a closed economy completely isolated from the cost and wage structure of the rest of the world.

Some Keynesian academics claim it all comes out in the exchange rate. If America inflates faster than competitors – China, for instance – the dollar will fall, making America more competitive, the Chinese yuan will rise, making China less competitive, and no one will be worse for the wear.

It’s a fine hypothesis. But it’s never been true in practice.

There’s just no evidence inflation is a growth tonic – at least not since Tricky Dick started the world down the path of fiat money, monetary central planning, and dirty floats way back in 1971.

In fact, bringing it all back home, the Chinese yuan exchange rate versus the U.S. dollar is weaker – not stronger – than it was in the early 1990s, after Deng Xiaoping’s slogan “to get rich is glorious!” had taken root in the Middle Kingdom.

Deng launched the massive mobilization of cheap labor and cheap capital that created withering competition in manufactures out of China’s impoverished Maoist economy.

Indeed, the Fed’s pro-inflation policy since Alan Greenspan’s arrival at the Eccles Building in August 1987 has been sheer folly.

Fully loaded manufacturing wage costs (including payroll taxes, health insurance, pensions, and other fringes) were about $12 per hour then. They’re more than $30 per hour now.

Chinese manufacturing wages in U.S. dollar equivalents have risen from under $1 per hour to around $5 per hour during the same 30-year period.

So, the absolute gap has widened. It’s gone from $10 per hour in the early 1990s to $25 or more today.

This systematic and persistent widening of the dollar-cost gap over the last three decades accounts for our massive trade deficit with China.

It’s not the World Trade Organization. Nor is it dumb trade deals. It’s not even cheating Chi-coms.

It’s bad monetary central planning.

A Good Plan for Bad Times

Everywhere you look, there are signs of weakness.

The Great Disruptor may indeed succeed in right-sizing the American Empire – but it’s through no intentional effort of his own.

You see, the world is tiring of the “Indispensable Nation.” It’s starting to suffer too much the costs of “Team America: World Police!”

That doesn’t mean, however, that Imperial Washington is on board to end Forever War… far from it. Neocons are ginning up the old martial spirit against Iran, and Very Serious People on both sides of the Duopoly are eyeing Venezuela for intervention.

The Warfare State will metastasize until something bigger stops it. AOC-and-MMT-style socialism plus the Green New Deal promise the same for the Welfare State.

What it does mean – and this is the short version – is “easy money as far as the eye can see.”

The inability of our monetary central planners to do anything but feed Leviathan and appease Wall Street is the focus of the March issue of The Stockman LetterYou can read it right here…

Appeasing Wall Street is, of course, critical to maintaining the status quo. The Fed is therefore merely an instrument of Imperial Washington.

So, we’re stuck abroad… And Main Street is stuck in stagflation… The fundamentals are terrible… All we have is debt to sustain us.

But our monetary central planners will test the absolute limits of U.S. hegemony – including the durability of the dollar as the global reserve currency – to nourish the Acela Corridor.

That’s the way it is in the March issue of The Stockman Letter.

As always, I’ve included “tactical” notes based on The Stockman Model throughout the issue.

The Model is built precisely for the type of disruption that comes with the ends of empires…

To common sense,

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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. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR