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

by David Stockman

  As it is, Amtrak’s current fare on this route is about 15 cents per passenger mile and apparently it cannot go much higher if it wishes to remain competitive with air.

  Yet why in the world should bus drivers in Minneapolis pay federal taxes in order to provide what amounts to a $600 subsidy per ticket on the 180,000 tickets that are sold annually on the Chicago-Los Angeles route? And the latter is only typical of most of the other routes outside the Northeast corridor.

  Obviously, there is no means test to get a $600 subsidy from Amtrak, or any other plausible criterion of public need. Like so much else which emanates from Washington, these Amtrak subsidies are distributed willy-nilly—in this case to retirees with enough time and money to see the country at leisure or to people with fear of flying who don’t wish to drive.

  SECRETARY DREW LEWIS AGAIN—A WOUNDED WHITE ELEPHANT, TOO

  So Amtrak is a white elephant as a matter of economics, but when it comes to public safety, it is actually a wounded one. That’s because when push comes to shove and Congress is faced with limited budget headroom, it always elects to short change the capital budget rather than reduce the scope of Amtrak’s far-flung operations and eliminate any of the 44 routes that crisscross the nation’s congressional districts.

  I actually learned that lesson during the so-called Reagan Revolution. My original plan was to eliminate Amtrak entirely, and it would have saved upward of $60 billion in the decades to come. At the get-go, the Gipper was all for it. Not a proper function of government, he nodded.

  Then his secretary of transportation and previously chief GOP fundraiser and governor of Pennsylvania explained that the Gipper was right—but not quite. The Northeast corridor (NEC) routes were an exception.

  They provided a valuable economic function—so by paring the system back to these high density routes the Amtrak budget could be cut in half. Moreover, after some up-front capital spending, the NEC could be transformed into a profitable business and eventually sold to the private sector in an IPO.

  That’s just the thing, said President Reagan.

  Then it got to Capitol Hill and the Republican politicians said we are all for cutting the Amtrak budget by 50 percent, but to get the votes we need to do it “our way.” Upon which the Gipper replied, yes, we are here first and foremost to shrink the runaway federal budget—so do what you must to get those savings.

  They did. They drastically pared back the capital budget and kept virtually all of the routes and operating subsidy costs in place. When Uncle Sam came up short, capital investment could be deferred, but the pork barrel had to be fed.

  In the bye and bye, of course, Amtrak’s budget was restored all the way back to Jimmy Carter’s “wasteful” levels and actually hit record amounts during the Republican governments of 2001–2008. But even then there was never enough appropriations to keep this giant white elephant properly fed—so capital investment was perennially short-changed and the system’s fixed assets steadily deteriorated.

  Whether last year’s disaster was caused by human error or not, the larger certainty is that the system has been chronically starved of capital. But the solution is not for a bankrupt government in Washington to pour more money down the Amtrak rat hole in the name of “infrastructure investment,” as the big spenders are now braying.

  Instead, Amtrak should be put out of its misery once and for all. Otherwise its longstanding hazard to the taxpayers is likely to be compounded by even more public safety disasters, too.

  THE INFRASTRUCTURE-BAILOUT DANGER AHEAD

  There is overwhelming evidence that private investment, productivity and enterprise is failing badly in Flyover America owing to three decades of Bubble Finance. The nation’s large corporations, in particular, are not growing because they are being strip-mined by their top executives in pursuit of a stifling spree of financial engineering and stock options harvesting.

  So the key to restoring Main Street prosperity is not launching an infrastructure financing bank as the Beltway bandits keep insisting and even Donald Trump has now advocated. That will result in waste of capital, malinvestments, reduced economic efficiency and an even more bloated public sector than we already have.

  The bank that needs addressing, in fact, is the nation’s central bank. Until the Fed’s massive intrusion in financial markets is eliminated via abolishing the Federal Open Market Committeeand government-debt purchases as described in Chapter 4, there is virtually no prospect of reigniting capitalist vigor and growth in the United States

  What that means, therefore, is that a half-trillion-dollar infrastructure spree like the one The Donald pulled out from under his comb-over represents a very dangerous idea.

  To wit, it would add measurably to the $35 trillion of public debt that is already baked into the cake, and put the politicians of the Imperial City knee-deep in the distribution of prodigious amounts of pork barrel. In fact, they desperately need to get on with the opposite—a painful process of fiscal retrenchment that is unavoidable if national bankruptcy is to be prevented.

  Worse still, adding to the nation’s monumental debt pile in the face of nominal GDP growth that is stuck under the 3 percent barrier, as documented earlier, would be nearly suicidal. It would raise the ratio of public debt to national income—which is already on a path toward 150 percent—to even more crushing levels.

  At the end of the day, Donald Trump knows a lot about debt, and its dangers when it gets out of hand, and almost nothing about the economics of growth and public infrastructure.

  Would that he sound the alarm about the former. The public infrastructure crusade, by contrast, is just another Beltway boondoggle of the kind that he has loudly condemned and which have already brought Flyover America to the brink of ruin.

  CHAPTER 12

  On the Impossibility of “Helicopter Money” and Why the Casino Will Crash

  AS THE STOCK MARKET REACHED ITS LUNATIC PEAK NEAR 2,200 IN August, the certainty that the Fed is out of dry powder and that the so-called economic recovery is out of runway gave rise to one more desperate pulse of hopium on Wall Street.

  Namely, that the central banks of the world were about to embark on outright “helicopter money”, thereby jolting back to life domestic economies that are sliding into deflation and recession virtually everywhere—from Japan to South Korea, China, Italy, France, England, Brazil, Canada and most places in-between.

  That latter area especially includes the United States. Despite Wall Street’s hoary tale that the domestic economy has “decoupled” from the rest of the world, the evidence that the so-called recovery is grinding to a halt is overwhelming.

  After all, the real GDP growth rate during the year ending in June was a miniscule 1.2%. It reflected the weakest four-quarter rate since the Great Recession.

  And even that was made possible only by an unsustainable build-up in business inventories and the shortchanging of inflation by the Washington statistical mills. Had even a semi-honest GDP deflator been used, the U.S. economy would have posted zero real GDP growth over the past year, at best.

  So the stock market’s 19% melt-up from the February 11 interim low of 1829 on the S&P 500 was positively surreal. There was not an iota of sustainability to it. In fact, “interim” is exactly the right word for a low that is going a lot lower, and soon.

  Indeed, the spring-summer rebound was the work of eyes-wide-shut day traders and robo-machines surfing on a thinner and thinner cushion of momentum. What must come next, in fact, is exactly what happens when you stop pedaling your bicycle. To wit, momentum gets exhausted, gravity takes over and the illusion of stability is painfully shattered.

  But these revelers are going to need something stronger than the hope for “helicopter money” to avoid annihilation when the long-running central bank con job finally collapses. Indeed, that denouement lies directly ahead because helicopter money is a bridge too far, while valuations are literally teetering in the nosebleed section of history.

  As to the latter point, the S
&P 500 companies posted Q2 2016 earnings for the latest 12 month period at $86.94 per share. So at the August bubble high, the market was being valued at a lunatic 25.2X reported earnings.

  Even in a healthy, growing economy that valuation level is on the extreme end of sanity. But actual circumstances are currently more nearly the opposite. That is, earnings have now been falling for six straight quarters in line with GDP growth that has slumped to what amounts to stall speed.

  In fact, reported earnings for the S&P 500 peaked at $106 per share in the 12 months ended in September 2014. That means that earnings had fallen by 19% since then, even as the stock market moved from 1950 to nearly 2,200, or 13% higher.

  This is called multiple expansion in the parlance of Wall Street, but it’s hard to find a more bubblicious example. Two years ago the market was trading at just 18.4X meaning that on the back of sharply falling earnings the PE multiple had risen by 37%!

  Valuation multiples are supposed to go up only when the economic and profits outlook is improving, not when it’s unmistakably deteriorating as at present. But during the 2016 spring-summer melt-up these faltering fundamentals were blithely ignored on the hopes of a second half growth spurt and, failing the latter, that the Fed would again pull the market’s chestnuts out of the fire.

  The growth spurt absolutely has not happened, and the recent sharp decline in the level of in-bound containers at the West Coast ports means that the U.S. retail sector is not provisioning for any rebound in sales during the coming fall and holiday seasons.

  That’s why the Wall Street gamblers are so desperately hoping for helicopter money. And that desperation is intensified by the fact that the Fed is out of dry powder via its current tool kit of “extraordinary” measures employed since the financial crisis.

  To wit, in the event the economy visibly drifts into recession, the Fed cannot go to sub-zero interest rates without triggering a Donald Trump–led domestic political conflagration. The long-abused savers and retirees of Flyover America would finally grab their torches and pitchforks.

  Nor can it abruptly shift to a huge new round of QE without confessing that $3.5 trillion of the same has been for naught.

  Yet “helicopter money” isn’t some kind of new wrinkle in monetary policy, at all. It’s an old-as-the-hills rationalization for monetization of the public debt—that is, purchase of government bonds with central bank credit conjured from thin air.

  It’s the ultimate in “something for nothing” economics. That’s because most assuredly those government bonds originally funded the purchase of real economic resources such as labor hours, contract services or dams and aircraft carriers.

  As a technical matter, helicopter money is exactly the same thing as QE. Nor does the journalistic confusion that it involves “direct” central bank purchases of public debt from the U.S. Treasury make a bit of difference.

  Instead of direct purchases, suppose Washington issues government debt to the 23 primary dealers on Wall Street in the regular manner. Further, assume that some or all of these dealers stick the bonds in inventory for three days, three months or even three years, and then sell them back to the Fed under QE (and most likely at a higher price).

  So what!

  The only thing different technically about “helicopter money” policy is that it would just circumvent the dwell time in dealer (or “investor”) inventories but result in exactly the same end state. In that event, of course, Wall Street wouldn’t get the skim.

  WHY HELICOPTER MONEY IS A MORTAL THREAT TO FISCAL DEMOCRACY

  But that’s not the real reason why helicopter money policy is so loathsome. The unstated essence of it is that our monetary politburo would overtly conspire and coordinate with the White House and Capitol Hill to bury future generations in crushing public debts.

  They would do this by agreeing to generate incremental fiscal deficits—as if Uncle Sam’s current $19 trillion isn’t enough debt—which would be matched dollar for dollar by an increase in the Fed’s bond-buying, or monetization rate. That amounts not only to teaching children how to play with matches; it’s tantamount to setting fiscal forest fires across the land.

  There are a few additional meaningless bells and whistles to the theory, but its essential crime against democracy and economic rationality should be made very explicit. To wit, it would amount to a central bank power grab like no other because it insinuates our unelected central bankers into the very heart of the fiscal process.

  Needless to say, the framers delegated the powers of the purse—spending, taxing and borrowing—to the elected branch of government, and not because they were wild-eyed idealists smitten by a naïve faith in the prudence of the demos.

  To the contrary, they did so because the decision to spend, tax and borrow is the very essence of state power. There is no possibility of democracy—for better or worse—if these fundamental powers are removed from popular control.

  Yet that’s exactly what helicopter money policy would do. Based on the Keynesian gobbledygook I debunked in Chapter 4 about the purported gap between full-employment or “potential GDP” and actual output and employment, the FOMC would essentially set a target for the federal deficit.

  In practice, it would also likely throw in some gratuitous advice about deficit composition between tax cuts, infrastructure spending and social betterment. The recommended mix would arise from an FOMC whim as to whether in their wisdom its 12 members thought household consumption or fixed-asset investment needed to be goosed more.

  At one level, of course, it is to be expected that the people’s elected representatives would relish this “expert” cover for ever-bigger deficits and the opportunity to wallow in the pork barrel allocation of the targeted tax cuts and spending increases.

  There is surely not a single hard-core New Dealer turning in his grave who could have imagined a better scheme for priming the pump.

  Yet helicopter money turns the inherently dangerous idea of fiscal borrowing in a democracy into an outright monetary fraud, and that prospect is sure to kindle vestigial fears of the public debt even among today’s politicians.

  Indeed, there is a long history on exactly that point. For example, even New Dealer FDR worried about the rising public debt, and “Fair Dealer” Harry Truman positively loathed it.

  Likewise, the power-mad Lyndon Johnson essentially voluntarily vacated the Oval Office when he finally agreed to a substantial tax hike in early 1968 order to stem the deficit hemorrhage from his guns and butter policies.

  Even the greatest deficit spender of his time—Ronald Reagan—thought the resulting explosion of the public debt was half Jimmy Carter’s fault and half due to defense spending increases, which didn’t count in his unique way of reckoning the national debt.

  Likewise, the clueless George W. Bush thought the Greenspan housing boom would last forever and thereby cause the nation’s fiscal accounts to come back into balance on their own. Similarly, Barack Obama has insisted that the $9 trillion of new public debt on his watch to date was owing to the Great Recession—a one-time impact that his policies have purportedly remedied.

  By contrast, the deliberate, wanton addition of trillions to the public debt just so that the Fed can print an equivalent amount of new credit out of thin air is a fish of an altogether different kettle. When push comes to shove, even today’s Beltway politicians are likely to find the underlying theory of helicopter money to be beyond the pale.

  And that’s especially true owing to the Bernanke fillip.

  It goes without saying, of course, that the Bernank is no hero whatsoever—notwithstanding his self-conferred glorification for the courage to print. In fact, he is a demented paint-by-the-numbers Keynesian who has a worse grasp on the real world than the typical astrologer.

  That’s why the crucial element in his helicopter-money scheme, as he explained in a recent Washington Post op-ed, will leave them scratching their heads even in the always credulous corridors of Capitol Hill.

  According to Be
rnanke, the secret sauce of helicopter money is an explicit and loud announcement by the Fed that the gobs of incremental public debt will be permanent. It will never, ever be repaid—not even in the fictional by-and-by of the distant future.

  But the reason for it is downright lunatic.

  To wit, unless current taxpayers are assured that future taxes will not rise owing to Washington’s helicopter-money handouts and tax breaks, says the Bernank, they won’t spend the government gifts they find strewn along the path of flight!

  That’s right. When a road-building boom from helicopter-money appropriations results in surging demand at the sand and gravel pits, the small-time businessman involved won’t buy any additional trucks or hire any additional drivers until Washington assures them that they won’t pay higher taxes 25 years hence!

  Only in the Eccles Building puzzle palace does such drivel not elicit uncontainable guffaws. Only in Sweden do they give Nobel Prizes for the academic obscurantism called “rational expectations theory” that is the basis for Bernanke’s whacky theories.

  WHY HELICOPTER MONEY WILL BE A GIANT DUD IF TRIED IN THE U.S.

  So at the end of the day, “helicopter money” is just a desperate scam emanating from the world’s tiny fraternity of central bankers who have walked the financial system to the brink, and are now trying to con the casino into believing they have one more magic rabbit to pull out of the hat.

  They don’t. That’s because helicopter money will not pass the laugh test even in the Imperial City, and, more importantly, because it takes two branches of the state to tango in the process of implementation.

  Unlike ZIRP and QE, helicopter money requires the peoples’ elected representatives to play, and to do so on an expedited basis. As described above, the Congress and White House must generate large incremental expansions of the fiscal deficit—so that the central bankers can buy it directly from the U.S. Treasury’s shelf, and then credit the government’s accounts at the Federal Reserve with funds conjured from thin air.