Friday, November 9, 2018

The Nation's Fiscal Doomsday Machine is Now Unstoppable

By David Stockman

Earlier this year the Donald provoked a bleep-hole moment per the Fox "family channel" or what was otherwise known as the shit-hole moment across the rest of the MSM.

But whatever you called the contretemps spurred by the president's crude utterance with regard to certain countries domiciled on the African continent, the claim this was evidence that he's an incorrigible racist was risible. Actually, we already knew that the Donald is a semi-literate bully, who never got (read) the memo on racial comity---to say nothing of political correctness.

 Still, there is a not inconsiderable share of Washington's preening, self-important ruling class that indulges in that very same kind of gutter talk on a regular basis when puffing their chests and marking the objects of their displeasure. That's why the shaming chorus which sprung up from all corners of the Swamp was enough to give hypocrisy a bad name.

 But if we have to have a shaming of politicians, there is a far better reason for it than that unfortunate presidential slur.

To wit, Trump and the GOP deserve everlasting ignominy for literally shit-canning fiscal rectitude. So doing, they have completely abandoned the GOP's fundamental reason for being--- watch-dogging the US Treasury---in favor of immigrant-bashing, border hysteria and what boils down to crude nativism by any other name.

You do not drain the Swamp and shackle Leviathan, however, by obsessing on and demogoguing about a non-problem that requires muscling up the state's internal control apparatus and wasting tens of billions more on Mexican Walls, border enforcement armies and deportation dragnets across the length and breadth of the land.

The fact is, five pro-liberty and pro-free market steps would make the whole trumped up border "invasion" bunkum and balderdash go away in a heartbeat. These would include:

• Legalizing all drugs and turning the distribution job over to nonviolent operators like, say, Phillip Morris;

• Freely handing out guest worker permits at the 48 border control stations and regularly renewing them upon demonstration of gainful employment (W-2 forms);

• Denying any and all forms of Federal welfare to non-citizens;

• Providing guest workers a ten-year route to citizenship if they hold a steady job, don't break the criminal law (speeding tickets ok) and pay an admission fee based on a modest percentage of their cumulative W-2 wages; and

• Permitting all so-called illegals already here to obtain a guest worker permit at the nearest Federal courthouse and to embark on a 10-year route to citizenship if they hold a job,

 observe the law, pay the admission fee and also a reasonable fine for their original misdemeanor (crossing the border illegally).

That would end the drug-cartel related violence at the border once and for all and bring America what it desperately needs: Namely, more strong backs to supplement what is a declining pool of native born workers, and, to put it crudely, more young tax-mules to help fund the crushing Welfare State burden implicit in the tsunami of Baby Boom retirements, which will double the benefit rolls from 55 million to 100 million over the next several decades.

And that brings us to the true bleep-hole moment of the Trump presidency: Namely, the fact that he and the Congressional GOP have spent 20-months literally desecrating every principal that the once and former party of fiscal responsibility, balanced budgets and minimal public debt ever stood for.

Yes, the GOP had been straying from its philosophical north star for decades--- ever since Ronald Reagan broke the taboo and massively increased the Federal deficit on purpose in the absence of a WW II type emergency. But last winter's one-two punch of a $2 trillion unpaid for tax cut and the $400 billion two-year spending spree embodied in the Horribus appropriations bill truly broke the glass.

That's because the offense far transcended just the magnitude of the incremental red-ink attributable to these measures, which we would put at about $5 trillion over the next decade.

The truly unforgiveable sin was to do it in the specific years 2017-2018, which represented the top of a long business cycle expansion, not the recessionary bottom; and, more importantly, the foreground of a new decade which is guaranteed to experience the next debt-swelling

 recession, soaring interest expense on a massive and growing public debt and the aforementioned demographically driven explosion of social security, medical and other transfer payment spending.

Stated differently, these two years actually represented the last train out of the legislative station ahead of the 2020s' fiscal cataclysm that was already baked-into-the-cake. And also the last chance ahead of the coming two years of absolute Washington dysfunction and nasty partisan warfare in preparation for the mother of all presidential donnybrooks in 2020.

Accordingly, the entire mission of a Republican president and Congress should have been focused on entitlement reform, sweeping domestic spending cuts and draining the swamp of waste on the Pentagon side of the Potomac. Given today's baleful fiscal circumstances, the very idea of piling more borrowings on top of the inherited structural deficit of $700 billion for the current year (FY 2019) should have been treated as rank heresy.

So what has actually transpired through it all is that the Donald has dropped the equivalent of a neutron bomb on the GOP. Its edifice is still standing but what used to be inside is dead to the world.

Worse still, those now departed legions of budget hawks have been replaced by an unseemly coalition of militant border patrollers, neocon blood-lusters and military pork barrel servitors of the Warfare State. That is to say, a predatory gang of self-serving swamp-dwellers who couldn't defend the taxpayers or the nation's solvency if their lives depended upon it.

So American fiscal governance is now absolutely dead as a doornail. The Great Disrupter came to Washington to monkey-hammer the status quo and spark breakdowns and crises. And on the fiscal front, at least, he has succeeded beyond all expectations.

For reasons which are not hard to grasp and which are laid out below, the nation's Fiscal Doomsday Machine is now unstoppable; and most especially because the post-midterm Trump White House will have zero legislative power and therefore maximum inclination to barnstorm Red State America in behalf of Trade Wars and Border Wars, which can be prosecuted to a considerable extent under executive authority.

In that context, the untoward effect of the Trade War piece of it is obvious enough. The fact is, China's $526 billion of imports to the US are the marginal price-setter for roughly $1.7 trillion of goods in the categories they supply, with the balance provided by domestic producers and other exporters.

But when it comes to pricing, China's got the conn. By both hook and crook it is the low-cost supplier. The Donald's 25% tariff on its share of the $1.7 trillion, therefore, will create an immediate price umbrella under which the balance of suppliers will be able to lift their offers significantly---and yet still capture market share if they don't raise all the way to the landed Chinese price plus 25%.

 So consider a 15% lift on what might be termed the China goods aisle of the US supermarket, which happens to account for 40% of the entire $4.2 trillion of annual goods consumption in the US from all sources. That would equate to a $250 billion inflationary bow-wave, which, in turn, would force the Fed to stay its normalization campaign, even if it otherwise wanted to chicken out.

By taking the wrong fiscal path in 2017-2018, therefore, the Trumpite/GOP has set up a perfect storm in the bond pits.

To wit, a $1.2 trillion new borrowing requirement for the current fiscal year is fixing to slam hard upon the $600 billion of old debt the Fed will be dumping---along with hundreds of billions more of homeless treasury paper that will be on offer from carry trade speculators getting whacked by rapidly increasing repo rates and by foreign investors getting clipped by the rising dollar and prohibitive currency hedging costs.

Financial repression sure looked easy, of course, when our monetary central planners had their Big Fat Thumbs on the scales during the last 14 years during which they collectively scooped up $21 trillion of government bonds and other paper and salted it away on their cost free balance sheets. But if the economic gods had a son, perhaps he too would look to the heavens and ask they be forgiven on the grounds that "they know not what they do".

That is, these fools have so bludgeoned and distorted the bond markets that the latter have mutated into a coiled spring of instability. In hundreds of different ways, speculators have been buying on leverage what the central banks have been buying, and now that the latter--led by the Fed---are pivoting to QT, they will be selling what the central banks are selling in what will amount to a global margin call.

That's the coiled spring that has been implanted in the bond markets by the foolish attempts of Keynesian central bankers to improve upon the natural growth propensity of market capitalism by systematically and deeply falsifying interest rates.

So when that coiled spring of mis-pricing up-chucks the benchmark 10-year Treasury note toward the 4.00% marker, it will be all over except the shouting.

By that we mean the Everything Bubble will splatter in the casino, bringing on a fierce new onslaught of "restructuring" campaigns from the corporate C-suites as they desperately heave workers, inventories and impaired assets overboard---like they did in the fall and winter of 2008- 09---to appease the trading gods and rescue their immolating stock options.

The outcome is otherwise known as "recession', Bubble Finance style. And once the recessionary red ink starts flowing on top of the already hideous Trumpite/GOP Fiscal Debauch, Washington's fiscal veins will be opened for the terminal blood-letting.

A recession-driven deficit will quickly breach the $2 trillion per annum level, and from there it's just the dismal math of soaring debt and interest compounding upon themselves.

 What's worse, even as this forbidding scenario is unfolding in plain sight---10-year yields are up 90 basis points in the past year----the Donald has taken the GOP off the deep-end of xenophobic militancy. They won't even notice the fiscal typhoon coming until they are engulfed by it, and then the "low interest" man in the Oval Office will launch an all-out war on the Fed, which will only make the conflagration worse.

Meanwhile, it might well be asked what the great immigration bogeyman was that the conservative party jettisoned its core principals and policy mission to take on.

But its not crime and violence. The latter was legislated in Washington and is nurtured by its ludicrous War on Drugs. It needs be fought on the floor of the H0use and Senate in the form of prohibition repeal legislation, not on the borders where it begets law enforcement violence in response to the inherently violent drug cartels which exist only due to the high prices and economics of prohibition.

And its not that we have too many immigrants-legal, illegal and otherwise. The 44 million current immigrants in the US, in fact, constitute a lower ratio to the population than the 15% which prevailed during the heyday of American growth and prosperity in the second half of the 19th century.

And please don't say they take Americans jobs. It's possible that even Nancy Pelosi knows better than that trade-union canard; and, besides, vibrant capitalism can employ any and all workers who volunteer their labor if the state doesn't throw up obstacles or block the way with unreasonable minimum wage laws.

 Finally, don't play the "they broke the law" card to get here, either. For crying out loud, it's a misdemeanor, not an anti-social criminal act. If commission of a misdemeanor were a universal basis for deportation, the American Indians would soon have their empty continent back.

So, obviously, there is no immigration threat that requires the US military on the border, the rolling out of trainloads of razor-wire, the wasting of $40 billion or more on the Donald's idiotic wall or the vast mobilization of border security operations which are now driving the budget of the Homeland Security Department sky-high.

There is another basis for the Donald's Border Wars and the GOP's anti-immigration crusade, of course, and its really not hard to figure. It's not about the 800,000 dreamers, chain migration, the diversity lottery, MS-13 gangs, the Mexican Wall and now the caravans of destitute and desperate "invaders" allegedly threatening our borders.

Underneath all these alleged immigration issues, in fact, is a bare-knuckled political war between the partisan apparatus and vote getting machines of the two political parties.

The sundry Dem caucuses want more immigrants, and the browner the better, because they see it as their only route to electoral dominance. But that's actually a good sign not a threat because it underscores that the modern Dem party has nothing to offer except a friendly demeanor and the hackneyed rhetoric of identify politics.

By contrast, the hard core GOP immigrant-thumpers are desperately attempting to hang-on to Red State rule in the face of the forbidding demographic math of the dwindling white and ruralish population---and the fact that not many Norwegians want to come to America, anyway.

But they are dead-wrong about this kind of Alamo politics. The 50-years of GOP dominance from William McKinley through Teddy Roosevelt, Taft, Harding, Coolidge and Herbert Hoover, too, was built on the support of immigrants who voted for the full lunch pail economics of the old GOP.

Donald Trump wouldn't have been nominated for dog-catcher in that Republican party; and he would have found the congressional nativists, immigrant-bashers and Klansman to support his agenda mainly on the back benches of the Democrat side of the aisle.

Alas, the Donald's Border Wars agenda and related tweet-storms, unhinged stadium rhetoric and stunts like sending 15,000 regular army forces to the Mexican border would be bad enough in terms of supplanting and displacing the GOP's traditional fiscal agenda.

But now the whole misbegotten agenda has been completely Foxified with Sean Hannity, Laura Ingram and even Tucker Carlson competing to propagate the most shrill daily rendition of the Trumpian rage against a Fake Immigration Threat.

So the bottom line is this: When it comes to the nation's fiscal governance there is absolutely no one home in Washington. The upcoming deluge of red ink will meet with no resistance at all.

David Stockman was 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.

The above originally appeared at David Stockman's Contra Corner.


  1. Who said anything about stopping immigration?Trump is stopping illegal immigration.
    Stop being an idiot.

  2. You spell it out as clearly as you can David and this may be the most succinctly put version of solving this hot button issue that isnt one.

    Of course you solve an issue like this in ways the left wont agree with and that may supplant the left in popularity with the illegal immigrants they want to control and they may lose their mind more than they already have.

    It would be a masterstroke for that reason alone.

  3. It's all an ac for the sheeple.