Trumped! A Nation on the Brink of Ruin... And How to Bring It Back

by David Stockman

Needless to say, the Keynesian academics who dominate the Fed and the monetary policy narrative cannot even fathom that possibility because they are enthrall to the ancient texts of JM Keynes. The latter proclaimed that nominal wages are inherently “sticky” and can’t adjust downward like other economic prices.

  That was pure claptrap during the 1930s and ever more so today. “Sticky wages” only happen when there are state enforced union monopolies and employers are precluded upon penalty of jail from offering lower nominal rates to any willing takers.

  Stated differently, the “sticky” wages hypothesis is a purely political proposition, not an economic truth. It was opportunistically embraced by statist redistributionists and the union movement alike.

  For the latter it was a rationale for pure labor law protectionism. For the former is was a justification for workplace originated income redistribution, and then for Washington based monetary intervention to counter-act the loss of jobs and production that is the inherent result of artificially high labor prices.

  In truth, there is endless evidence that wages aren’t sticky—notwithstanding the rearguard action of unions and labor law protectionism. For instance, the North American auto industry cut fully loaded auto plant wages from $60 per hour to $30 per hour when Toyota and the rest of the transplants established production in Kentucky, Alabama and other right-to-work states in the South.

  Indeed, in the absence of NLRB protectionism and labor practice harassment, and then the $85 billion taxpayer bailout of the UAW auto plants in 2008–2009, the lion’s share of the U.S. auto industry would have moved from the Rust Belt to the South. Nominal wages would have been sharply reduced in the process.

  The same is true with high-wage, unionized grocery stores. A huge share of the grocery store business has now migrated to the far lower nonunion hourly rates at Wal-Mart. Ditto for the migration of construction work from building trades union dominated firms to nonunion competitors.

  At the end of the day, “sticky wages” is a euphemism for labor protectionism and the resulting state-enabled “sticky” and inefficient allocation of production and resources.

  Nevertheless, from Greenspan forward the Fed was busy fueling domestic inflation on the false theory that rising nominal wages had to be “accommodated.” So doing, the nation’s central bank fatally undermined the competitiveness of domestic production and jobs on the basis of a theory that belongs in the Museum of Academic Crackpottery.

  In Chapter 5 we will develop more fully the true rationale behind Donald Trump’s apparent crude protectionism. But suffice to say that he is correct in insisting that Washington policy caused the massive off shoring of jobs and the resulting descent of real wages over the last 25 years.

  For the most part and contrary to The Donald, however, that wasn’t owing to bad trade deals. Instead, it was the inherent result of inflationary monetary policies that drove nominal wages to uncompetitive levels.

  Moreover, even as Fed policies were off-shoring good paying jobs they generated a double whammy in Flyover America. That is, cheap interest rates enabled domestic households and business to borrow at deeply subsidized, uneconomic rates and spend the proceeds on even more imports—foreign purchases that were not being earned by American exports.

  THE KEYNESIAN 2.00% FOOLISHNESS—WHY INFLATION IS BAD FOR FLYOVER AMERICA

  In this context, there is another reason why the elites who make and communicate national policy couldn’t be more wrong. Their wrong-headed Keynesian model not only embodies a bogus theory about wage rates, but actually postulates that domestic inflation is a good thing.

  We refer here to the Fed’s 2.00% inflation target and the spurious claim from the Eccles Building and its Wall Street megaphones that there is actually a deficiency of inflation. In a world of the “China price” that is just plain asinine.

  Worse still, it’s based on the myth propagated by Bernanke and other modern Keynesians that nominal incomes among economic agents all march higher in lockstep as the central bank pursues its spurious 2.00% annual inflation targets.

  In fact, there is no lockstep march or equitable inflation at all. The incomes and wealth of the bicoastal elites gain far more from financialization and asset inflation than they lose to the CPI, while slowly rising nominal wages in the flyover zones are relentlessly squeezed by too much inflation in the cost of daily living.

  So Wall Street is winning and Flyover America is losing. There is a reason Donald Trump is resonating with the latter—and it’s not just red neck racism and xenophobia, either.

  It’s the handiwork of the Washington/Wall Street corridor. Capitalist growth, dynamism and prosperity is being extinguished in America because it is being betrayed by a rogue central bank and the Washington politicians, Wall Street gamblers and tech sector bubble riders who prosper from it.

  PEAK DEBT—WHY THE MAIN STREET PARTY IS OVER

  Since the financial crisis there has been another significant jolt to household spending capacity in addition to the implicit shrinkage of real wages suggested above. Namely, most Main Street households have hit Peak Debt, meaning that their spending capacity is no longer being supplemented with incremental borrowings.

  Needless to say, that is a dramatic change from the pattern of the previous 30 years as displayed in the graph below. In effect, the easy money policies of the Fed—especially between Greenspan’s arrival in August 1987 and the 2008 financial crisis—induced the household sector to perform a giant LBO on itself.

  So doing, it ratcheted up its leverage ratio from a historically stable rate of about 75–80% of wage and salary income prior to the 1980s to nearly 220% by the peak in 2007.

  Since then, the ratio has dropped significantly, but still remain far above what had been healthy levels prior to the post-1987 household-borrowing binge. This has been called “deleveraging” by the commentariat, but its true import has been totally obfuscated by the “all is awesome” meme.

  Still, the untoward implication is hard to miss if you focus on something other than the monthly deltas. To wit, during the household sector’s LBO between 1987 and 2008, total credit market debt outstanding erupted from $2.7 trillion to $14.2 trillion on the eve of the financial crisis or by 5.4X.

  Since then, it has not increased by a single dime!

  What that means is that we have a Say’s-law economy, not the Keynesian one jabbered about by our monetary politburo and the mainstream financial media. Household consumption is now 100% dependent upon current production and income, and growth of the former depends upon expansion of the latter.

  Needless to say, when the one time anomaly of bloated consumption based on rising leverage ratio comes to an end and the 70% of GDP represented by household consumption has to be currently earned, you have fish of an entirely different kettle.

  Stated differently, money pumping and artificially cheap credit no longer stimulates household spending because the latter are tapped out. A potent indicator of that truth is the fact that housing construction still remains in the sub-basement of history, notwithstanding the lowest real mortgage rates ever recorded.

  Indeed, new starts of single-family housing units after all of this alleged “recovery” are still lower than at any time in the last 33 years, save for four months in the 1990–91 recession and during the recent financial crisis. Yet, historically the whole point of Keynesian money pumping was to stimulate mortgage borrowing and new housing construction.

  The same lack of monetary stimulus efficacy holds true with respect to labor hours employed in the nonfarm business sector. And in this context, it needs be emphasized that in a gig and contract-worker based economy, the only meaningful measure of the quantity of labor employed is hours, not “jobs.”

  As we will thoroughly document in a later chapter, in fact, traditional headcount based labor indicators, such as the monthly establishment survey’s nonfarm payroll count, are essentially meaningless white noise.

  By contrast, since the turn of the century labor hours in
the nonfarm economy have advanced at an anemic rate of just 0.4% annually. That is only one-fourth of the 2.0% rate, which prevailed during the prior 16 years.

  Needless to say, this radical growth downshift is not due to demographics. The adult population has actually grown from 212 million in 2000 to 253 million at present. And even when you set aside an additional 11 million retirees on Social Security, there are an additional 30 million potential workers, representing upwards of 60 billion labor hours on a standard work year basis.

  In short, the chart below puts the lie to the alleged virtuous circle of Keynesian stimulus. There has been no pump-priming of consumption spending, production, jobs, income, and more of the same.

  Indeed, the Fed’s balance sheet has grown by 900% during the last 16 years—from $500 billion to $4.5 trillion. By contrast, labor hours have risen by only 6.7% on a cumulative basis.

  There is self-evidently a big time blockage in the transmission mechanism.

  The same is true for business investment spending, which is the vital building block for Main Street productivity and true gains in living standards.

  The classic argument for Keynesian stimulus, of course, has always included the notion that businessmen are somewhat slow-witted. Therefore they are chronically in need of government inducements to increase capital spending. Apparently, the monetary central planners in the Eccles Building can espy opportunities for future profit that ordinary businessmen are too stupid to see.

  Low interest rates were supposed to sharpen their vision. Presumably the record low rates on corporate loans and bonds during recent years should have accomplished that turbo-charging effect in spades.

  But it hasn’t. Bubblevision is always telling us about whatever tiny change in nonresidential business investment occurred or didn’t occur during the most recent quarter. What it never reports is the trend line of real net business investment after current period depreciation.

  The latter, of course, measures the capital resources consumed in the production of current GDP. Owing to the laws of arithmetic, this crucial measure of business sector health and growth—real net investment–—cannot rise unless current period CapEx exceeds current capital consumption.

  As shown on the next page, that has not remotely been happening since the turn of the century.

  In fact, real capital consumption has risen by 53% over the last 16-years, while real net investment is down by 17%.

  SUPPLY-SIDE DEFICIENCY VERSUS FINANCIAL ASSET INFLATION

  There is plenty more evidence where these examples came from, but the larger point is clear. The U.S. economy has a giant supply-side problem that can’t be alleviated by demand-side stimulus. Accordingly, the economy of Flyover America continues to falter even as the ruling elites bask in the glow of rampant financial asset inflation.

  As we have demonstrated repeatedly, monetary stimulus is a one-time parlor trick. It only works when there is business and household balance sheet space left to leverage, thereby permitting spending derived from current production and income in the manner of Say’s law to be boosted with spending derived from incremental borrowings.

  Under conditions of Peak Debt, therefore, the Keynesian credit magic ceases to “stimulate” the Main Street economy. Instead, it never leaves the canyons of Wall Street, where it cycles in an incendiary spiral of leveraged speculation and the systematic inflation of financial assets.

  The graph on the next page summarizes that story succinctly. The broadest measure of the stock market—Wilshire 5000 index—has risen by 125% since 1999.

  The real median family income, by contrast, has fallen by 7% as calculated by the Washington statistics mills. And by 21% when an adjusted for the true 3% per year cost of living rise is accounted for.

  Stated differently, the bicoastal elites, who own most of the nation’s financial assets or who feed off the financial system and a debt-swollen central state in Washington, believe themselves to be in the pink of prosperity. They do not understand, of course, that this is all a giant bubble, which at length will burst, in spectacular fashion, causing their own unearned windfalls to shrink in the process.

  In the meanwhile, they may at least start to appreciate that the flyover zone of America has been left behind. The Main Street insurgency fueling Donald Trump’s shocking rise to the top of the presidential race proves that much in spades.

  CHAPTER 3

  The Warren Buffett Economy: How Central Bank-Enabled Financialization Has Divided America

  DURING THE 29 YEARS AFTER ALAN GREENSPAN BECAME FED CHAIRMAN in August 1987, the balance sheet of the Fed exploded from $200 billion to $4.5 trillion. Call that a 23X gain.

  That’s a pretty massive increase—so let’s see what else happened over that three-decade span. Well, according to Forbes, Warren Buffett’s net worth was $2.1 billion back in 1987 and it is now about $73 billion. Call that 35X.

  During those same years, the value of nonfinancial U.S. corporate equities rose from $2.6 trillion to $36.6 trillion. That’s on the hefty side, too.

  Call it 14X and take the hint about the idea of financialization. The value of these corporate equities rose from 44% to 205% of GDP during that 29-year interval.

  Needless to say, when we move to the underlying economy, which purportedly gave rise to these fabulous financial gains, the X-factor is not so generous. As shown above, nominal GDP rose from $5 trillion to $18 trillion during the same 29-year period. But that was only 3.6X.

  Next we have wage and salary disbursements, which rose from $2.5 trillion to $7.5 trillion over the period. Make that 3.0X.

  Then comes the median nominal income of U.S. households. That measurement increased from $26,000 to $54,000 over the period. Call it 2.0X.

  Digging deeper, we have the sum of aggregate labor hours supplied to the nonfarm economy. That fairly precise metric of real work by real people rose from 185 billion hours to 240 billion hours during those same 29 years. Call it 1.27X.

  Further down the Greenspan era rabbit hole, we have the average weekly wage of full-time workers in inflation-adjusted dollars. In constant 1982 dollars, as calculated by the BLS’s short ruler, that figure was $330 per week in 1987 and is currently $340. Call that 1.03X.

  Finally, we have real median family income. At about $54,000 then and now, call it a three decade long trip to nowhere if you credit the BLS inflation data.

  But when you deflate nominal household income by our more accurate Flyover CPI per the last chapter, you end up at the very bottom of the Maestro’s rabbit hole.

  Median real household income went backwards! It now stands at just 0.8X of its starting level.

  So 35X for Warren Buffett and 0.8X for working people. That is some kind of divide.

  OK, it’s not entirely fair to compare Warren Buffet’s $70 billion gain to the median household’s actual 21% loss of real income. There is some “inflation” in the Oracle’s wealth tabulation, as reflected in the GDP deflator’s rise from 60 to 108 during this period.

  So in today’s constant dollars, Buffett started with $3.8 billion in 1987. Call his inflation-adjusted gain 19X then, and be done with it.

  And you can make the same adjustment to the market value of total nonfinancial equity. In constant 2015 dollars of purchasing power, today’s aggregate value of $36.7 trillion compares to $4.5 trillion back in 1987. Call it 8X.

  Here’s the thing. In the context of a 0.8X Main Street economy, Buffett isn’t any kind of 19X genius nor are investors as a whole 8X versions of the same.

  The real truth is that Alan Greenspan and his successors turned a whole generation of financial gamblers into the greatest lottery winners in recorded history. They turned redistribution upside down—sending unspeakable amounts of windfall wealth to the tippy-top of the economic ladder.

  ZIRP FUNDS WALL STREET GAMBLERS AND INFLATES FINANCIAL ASSETS, NOT THE MAIN STREET ECONOMY

  These capricious windfalls to the 1% happened because the Fed grotesquely distorted and financialized the U.S. econom
y in the name of Keynesian management of the purported “business cycle.” The most visible instrument of that misguided campaign, of course, was the “fed-funds,” or money market, rate, which has been pinned virtually at the zero bound for the last 93 months.

  Never before in the history of the world prior to 1995 had any central bank decreed that overnight money shall be indefinitely free to carry trade gamblers. Nor had any monetary authority commanded that the hard earned wealth of liquid savers be chronically confiscated by negative returns after inflation and taxes. And, needless to say, never had savers and borrowers in a free market struck a bargain on interest rates night after night at a yield of virtually 0.0% for seven years running.

  Not only did the Fed spend 29 years marching toward the zero bound, but in the process it became addicted to it. During the last 300 months, it has either cut or kept flat the money market rate 80% of the time. And until the token bump of December 2015, it had been 114 months since the foolish denizens of the Eccles Building last raised interest rates by even 25 bps!

  The simple truth is, the Fed’s long-running interest rare repression policies have caused systematic, persistent and massive falsification of prices all along the yield curve and throughout all sectors of the financial market.

  The single most important price in all of capitalism is the money market rate of interest. It sets the cost of carry in all asset markets and in options and futures pricing. It therefore indirectly fuels the bid for debt, equity and derivative securities of every kind in the entire global financial system.

  Needless to say, when the cost of money is set at—and frozen at—zero in nominal terms, and driven deeply negative in after-inflation and after-tax terms, it becomes the mother’s milk of speculation.