Now that Orange Man Gone is a reality, it is worth recalling why Trumpism was such a misbegotten ideological deformation —one which woefully upended the balance of American governance.
That is to say, the Dems have been the Government Party since to the New Deal. They have perennially promoted the aggrandizement of the state via economic redistribution, welfare, so-called social justice and now identify politics at the expense of private economic prosperity and personal liberty.
By contrast, the GOP had long-functioned—-often unfaithfully—as the Opposition Party. As such it has been the tribune of capitalist prosperity and private rights and the ideological home of fiscal rectitude, sound money, limited government and constitutional restraints on the aggrandizing impulses of the state.
No more. The Republican party after Ronald Reagan was already well down the road to morphing into a me-to Government Party, run by careerist harvesters of beltway power and pelf like Mitch McConnell and Kevin McCarthy today and John McCain, Trent Lott, Paul Ryan and John Boehner before them.
But Donald Trump supplied the coup d’ grace.
It was his misguided agenda of Trade and Border Wars, Fiscal Debauchery and Easy Money that has now monkey-hammered the fragile foundation of two-party competition that has kept Big Government at bay for all these decades.
Stated differently, Trump’s ersatz populism fit well the role of Great Disrupter, but it never had a prayer of making MAGA.
Even though that will become ever more evident as the great post-Trump unraveling gathers momentum, it is worth dissecting again why and how the Donald got the GOP so far off base.
On that score, we think the arrival and subsequent departure of Steve Bannon from the White House inner circle provides an illuminating window on why it all went to wrong.
Needless to say, the last thing America needed was a conservative/populist/statist/nativist alternative to the Welfare State/Warfare State/Bailout State status quo. Yet what Bannonism boiled down to was essentially acquiescence to the latter—even as it drove politicization deeper into the sphere of culture, communications and commerce.
Stated differently, the heavy hand of the Imperial City in traditional domestic, foreign and financial matters was already bad enough. Bannonism just gave a thin veneer of ersatz nationalism to what was otherwise the Donald’s own dogs’ breakfast of protectionism, nativism, jingoism and strong-man bombast.
By the latter, of course, we mean Trump’s essentially content free notion that America was falling from greatness mainly due to stupidity, corruption and a penchant for bad deals among Washington pols; and that the undeniable economic malaise, if not decline, of Flyover America was due to some kind of global grand theft from America.
That is, what rightly belonged to America was being stolen by immigrants, imports and the nefarious doings of foreign governments and globalist elites. What was needed to make America Great Again (MAGA), therefore, was a Washington-erected moat to hold back the tide of bad people (immigrants and refugees) and unfair foreign economic assaults (unfair trade and foreign ownership of US companies)—all orchestrated by a new sheriff in the Oval Office with the “smarts” (with which he believed himself amply endowed) to start “winning” again.
In truth, the Donald had it upside down from the beginning. The unfortunate arrival of Steve Bannon to his campaign in August 2016 only served to give the Donald’s disheveled basket of bromides, braggadocio and bile a rightist political edge and proto-intellectual rationalization.
The real problem, in fact, was not the evil flowing into the American homeland from abroad—whether imports, illegals or terrorists. Rather, it was the outward flow of Washington’s monetary and military imperialism that was gutting capitalist prosperity domestically and generating terrorist blowback abroad.
Bannonism Never Identified The Real Culprits Behind Flyover America’s Malaise
Needless to say, Bannonism never identified the real culprits: Namely, the Wall Street-enriching Bubble Finance policies of the Fed, which forced foreign central banks to buy dollars and trash their own currencies to keep their exports “competitive”; the military-industrial-intelligence-foreign aid complex of the Empire, which massively drained America’s fiscal and moral resources; the hugely insolvent institutions of the Welfare State social insurance system (Social Security and Medicare); and the prodigious level of Federal spending on means-tested entitlements (Medicaid, food stamps EITC, etc.).
Consequently, the Bannonized agenda had no inkling, either, that fiscal catastrophe was imminent. And that the Trump administration had no real choice except the politically unpalatable path of cutting spending and/or raising taxes. Or, in the alternative, eventually bequeathing the nation a drastically worsened tide of red ink and debt, which it has, in fact, now done.
Nor did the Donald in all of his Bannonist bombast ever grasp that the real cause of Flyover America’s distress is the Fed’s multi-decade regime of financial repression and Wall Street price-keeping policies which:
- deplete the real pay of workers and send jobs abroad via the FOMC’s absurd 2% inflation target;
- savage the bank balances of savers and retirees via ZIRP;
- gut jobs, investment and real pay in the business sector via the C-suites’ strip-mining of corporate balance sheets and cash flows to fund Wall Street-pleasing stock buybacks, fatter dividends and M&A empire building; and
- impale the bottom 80% of households on a unrepayable treadmill of (temporarily) cheap debt in order to sustain a simulacrum of middle class living standards.
At the same time, these pernicious monetary central planning policies did fuel the greatest (unsustainable) financial asset inflation in recorded history, thereby showering the top 1% and 20% with upwards of $50 trillion of windfall wealth (on paper).
At bottom, the Fed’s financial repression and wealth effects policies amounted to an egregious variation of the old “trickle-down” theory—sponsored and endorsed by the beltway bipartisan consensus and administered with malice aforethought.
It is no wonder, therefore, that back during the freakish election of 2016 Trump’s flawed candidacy and pastiche of palliatives and pettifoggery appealed to the left-behind working classes of western Pennsylvania, Ohio, Michigan, Wisconsin and Iowa—as well as to the retirees of Florida and culturally-threatened main streeters domiciled in the small towns and countryside of Red State America.
In these precincts, the election was not especially won by Trump. Rather, the electoral college was essentially defaulted to him by a lifetime denizen of the Imperial City. Clinton had no clue that war, welfare and windfalls to the wealthy were no longer selling in Flyover America.
Then again, Bannon’s raw nationalism and the Donald’s walls and trademark xenophobic expostulations were not remotely up to the task of ameliorating America’s economic, fiscal and financial ailments. That’s because it was not bad trade deals and thieving foreigners that accounted for the post-2000 stagnation of median household incomes, huge loss of middle-income jobs and the actual decline of real net investment by the private sector.
To the contrary, the vast off-shoring of American production and breadwinner jobs was due to wage arbitrage—-fueled and exacerbated by the Fed’s chronic and increasingly profligate easy money policies. The latter resulted in an explosion of household borrowing that sucked in cheaper foreign goods and the continuous inflation of domestic costs, wages and prices, thereby curtailing US exports and encouraging massive import substitution.
The chart below is worth a thousand words and nullifies all the econometric equations they have stuffed away in the Eccles Building computers. To wit, since June 1987 (right before America got Greenspaned), nominal wages per hour for the private sector as a whole have risen by 175% and real wages by just 12.5%!
That’s right. On a compound annual basis over the last 33 years, nominal wages have risen smartly by 3.1% per annum, but in terms of real purchasing power the gain amounted to an anemic 0.36% per year.
That juxtaposition is a flat-out, screaming indictment of Keynesian central banking. The academic fools who man the printing presses at the Fed and its global counterparts pretend that domestic inflation is symmetrical. That is, wages and prices all march in lock-step over any reasonable period of time to the beat of the 2.00% inflation drummer-boy at the central bank—-meaning that nobody looses as the price level steadily rises.
Our PhD geniuses also seem to argue that deliberate pursuit of 2.00% inflation doesn’t matter internationally. That’s because either FX rates compensate (i.e. if the CPI and nominal wages goes up the dollar goes down) or it doesn’t matter because the so-called savings/investment equation always balances. (i.e. if we have a huge current account deficit we get an off-setting inflow of foreign investment).
But this is all destructive poppycock. The impact of inflation domestically is anything but symmetrical. All workers face the same CPI on the cost of living side, but highly differentiated wage inflation, depending whether their employer competes with China Price for goods, the India Price for services, the Mexico Price for assembly, the Pilates Instructor Price for services or the Civil Service Price for government output.
For example, while cumulative hourly wage increase between 1987 and 2020 for all production and non-supervisory workers was the aforementioned 175% (blue line below), the increase for manufacturing workers during that period was only 137% (orange line), while for health and education workers it was 206% (purple line).
Obviously, manufacturing workers got hammered by the China Price in world trade whereas health and education workers were more or less shielded by government monopolies and provider cartels. As a consequence, the Fed’s pro-inflation policy hurt manufacturing workers a lot more than health and education workers.
The Fed’s 2.00% Inflation Target—-Economic Crime Of The Century
But the real economic crime of the 2.00% inflation target happens in the globally traded space, which is a lot larger than is often recognized. That’s because internet enabled services, such as call centers and financial processing, essentially face the India Price.
For example, as IBM has transitioned from a hardware company to a technology services provider its employment in India has grown from zero in 1993 to 130,000 at present. By contrast, its domestic payroll has shrunk from 150,000 to less than 90,000 during the same 25 year period.
More importantly, the supposed FX adjustment for domestic inflation only works in Keynesian textbooks and in the imagination of the late professor Milton Friedman. The latter more than anyone else convinced Nixon to trash the Breton Woods gold exchange standard in favor of fiat money and free market based FX rates.
Except since August 1971 there has never been a free market in currencies—-just massive, nasty “dirty floats”, representing central bank manipulation of exchange rates in the service of mercantilist trade policies.
Consequently, when US manufacturing wages rose by 137% in virtual lock-step with the CPI over 1987-2020 (132%), the dollar didn’t drop relative to the currencies of low wage competitors like China, India and Mexico. That was supposed to happen on an honest free market in currencies, thereby nullifying some of the adverse competitive impact of the huge rise in nominal US wages.
As shown below, however, the dollar FX rate went in the opposite direction, appreciating considerably against these currencies. That is, owing to the mercantilist monetary policies of these low-wage countries, the actual FX movement completely contradicted what the text books prescribe.
Needless to say, in a Dirty Float world chronically rising nominal wages in US tradable goods and services industries just meant wage arbitrage and massive off-shoring of production. In a word, the Fed’s idiotic 2.00% inflation policy is the greatest destroyer of American job and real wages ever imagined.
By contrast, under a sound money regime on the free market, interest rates would have risen to premium levels after 1987. That would have triggered, in turn, a systematic deflation of domestic prices, wages and costs, thereby minimizing the gap between domestic production and the China Price for consumer goods, the Mexican Price for assembly labor and the India Price for back-office services.
Stated differently, rather than a 132% increase in the price level since 1987, the US would have experienced a persistent but benign deflationary trend over the past quarter century—much like it did during the booming growth times of the later 19th century.
Moreover, there are some advantages to domestic production including far lower transportation costs, much simpler, speedier and more flexible supply chains and generally higher productivity per hour in the US. Accordingly, in the context of a deflating domestic economy and falling nominal wage rates (but rising purchasing power) the considerable economic costs of off-shoring would have weighed much more heavily in corporate production and sourcing decisions.
Nominal Versus Real Wage Growth Since 1987
Indeed, you cannot emphasize enough the monetary cause of America’s massive trade deficits and hollowed-out productive sector. As we have frequently reminded, during the Greenspan era America’s #1 export has been a tsunami of Fed created excess dollar liabilities.
In turn, this threat essentially house-trained the other central banks of the world—but especially those of the so-called emerging markets and resource economies—-to run their central banks based on exchange rate targeting, not on old fashioned criteria of sound money.
In fact, in a dollar-based global monetary system, the post-1987 Fed turned the entire convoy of worldwide central banks into money printing machines by virtue of constant and heavy-handed intervention in FX markets to keep their exchange rates down and their export factories humming.
As a consequence, the ballyhooed saving/investment identify got bollixed because foreign central banks purchased US debt at far higher prices (lower yields) than would have occurred on a free market. This meant that part of the “investment” that balanced the US accounts was simply fiat credits issued by foreign central banks to buy in dollars and sequester them on their balance sheets.
Needless to say, that essentially fraudulent financing of the US current account enabled chronic US deficits to remain uncorrected. Since the last surplus in 1974, in fact, the cumulative current account deficit in 2018 dollars has been about $20 trillion—much of that financed directly or indirectly by foreign central banks.
Worse still, once the global central banking system had essentially been transformed into a beggar-thy-neighbor FX management and manipulation racket, it didn’t take long for many foreign central banks to basically adopt a “see and raise” posture. That is, not only did their pegging operations aim to keep their exchange rates from appreciating against the dollar, they actually attempted to push their FX rates lower.
The chart below indexes the Mexican peso, Chinese yuan and Indian rupee to a 1987 value of 100. During the next 30 years, the US CPI rose by 132%—so according to the textbooks, one USD should have bought few and few pesos, yuan and rupee over time. That means the index lines in the chart should have been going down from a starting point of 100.
In fact, just the opposite happened. Today, the US dollar will buy 2X more yuan than in 1987, 5X more rupee and 6.4X more pesos. And, in turn, that meant more off-shoring to these low-wage economies because rather than offsetting the 175% average rise in nominal US wages shown above with currency appreciation, currency depreciation actually widened the gap.
In other words, Greenspan and his heirs and assigns have unleashed a monster. They have universalized the bad money disease—essentially have made it contagious owing to the overwhelming role of the dollar in global trade and finance. So doing, they have turned Flyover America into a wasteland economically and into a hot bed for Trumpite protectionism, nationalism and Bannonist Bile politically.
Transmission of the Fed’s Bad Money Disease
In short, the free trade theory of comparative advantage and universal societal welfare gains does work under a regime of hard money and free market pricing of money, debt and other capital assets.
But under the Fed’s Bubble Finance regime, domestic inflation and subsidized debt-financed consumption simply result in the hollowing-out of the domestic economy; and also an alienated flyover electorate that, at length, apparently had no use for the nostrums of a wizened beltway lifer.