A Threat to the Populist Economic Agenda?

A Threat to the Populist Economic Agenda?

The wealth of our middle class has been ripped from their homes and then redistributed all across the world.

-  POTUS Trump, Inaugural Address

By JM Hamilton (1-28-2017)

Like all executive branch office holders, the Trump presidency will certainly fall short in some areas, perhaps many, but keeping it interesting won’t be among them.

Among the avalanche of executive actions taken this week was scrapping TPP (or the Trans-Pacific Partnership), a free trade agreement, which was little more than multinational welfare.  The TPP, advocated strongly by POTUS Obama, would have further solidified the stranglehold of multinational sovereignty over the sovereignty of nation states (particularly, within the Pacific rim).  Instead, Mr. Trump appears to like bilateral trade agreements.  If he holds true to his campaign commitments, future trade agreements will favor working Americans as much, if not more, than the plutocracy.  The MSM is in such a lather over this, and other Trumpian developments, that the liberals have already forgotten that Senator Sanders, and former Secretary of State Clinton, also trashed the TPP free trade agreement, as dangerous to America’s and American’s interests. 

Mr. Trump, also by executive decree, stopped refugee immigration from several Muslim nations, many of them Shia or Shia led (Iraq, Iran and Syria, stand out on the list).  In doing so, Mr. Trump seemed to land on the side of U.S. commercial interests operating in the Middle East, such as Secretary of State nominee, Mr. Tillerson’s ExxonMobil. Omitted from the list, conveniently so, Mr. Trump left the door open to immigration from some the nastiest terror sponsoring states on the planet:  Saudi Arabia of 9-11 fame; the United Arab Emirates; and Qatar.  Hence, directly or indirectly, Mr. Trump seems to be signaling or weighing in on: the Sunni/Shia civil war being waged throughout the Middle East; and he very well maybe perpetuating the Washington foreign policy establishment’s errors of many decades, by not holding the oil rich monarchy states accountable for their terrorist actions. 

Or perhaps the MIC weighed in over at the White House, and didn’t want something like terror states, and terror sponsors, getting in the way of future arms sales?

Ironically, the aforementioned Sunni/Oil monarchy states are neck deep in ISIS funding & support… the very terror group, Mr. Trump vowed to “wipe off the face of the earth.”  If this executive action is an early Trump indicator of his Middle East foreign policy, it would seem to suggest more of the same.  That is, kowtowing to oil rich – Sunni – monarchies, and Israel’s agenda.  Left unsaid in the proceeding is the fact that excluding any person from entering the country, based upon their religion, would appear to be Un-American.

That’s really not the point of today’s piece however.  Today, we are going to write of Mr. Trump’s populist economic agenda and a possible direct threat to that agenda.  Mr. Trump has indicated that he would like to see a manufacturing renaissance w/in the United States, and he’d also like to rebuild America’s infrastructure.  And in doing so, place Americans back to work and crank up the American economy, perhaps by as much as a 4% growth rate.

Staring down Mr. Trump’s worthy agenda are the impediments of a strong dollar and possible future inflation.  Since winning the presidency, the dollar has grown progressively stronger, versus other currencies, in anticipation of the Trump administration deploying the Keynesian model of deficit spending (to spur the economy and the revival of the American middle class).  That is to say, infrastructure spending should increase the national debt, and barring the Federal Reserve engaging in additional balance sheet expansion/debt monetization, said increase in the national debt should lead to rising interest rates and debt service loads.

As a consequence, demand for the dollar is strong, so as to purchase dollar denominated investments in the stock market, and ultimately, w/in the bond market.  A stronger dollar, and slightly higher interests rates (spurred by expectations of incipient inflation) would be less of an issue if the U.S. debt to GDP ratio was significantly lower.  Given that the federal debt ratio has breached the century mark, it’s a problem for Mr. Trump’s agenda.

A strong dollar harms an American manufacturing renaissance by making more costly U.S. manufactured exports.  A strong dollar and higher interests rates, also crimps increased deficit, or infrastructure, spending by the Federal government, again, due to higher national debt and higher debt service loads.

In short, a strong dollar and higher interest rates could crush Mr. Trump’s domestic agenda. 

But what of inflation, which despite record and preternatural Federal Reserve actions – since the financial crisis, has shown up nowhere.  Ms. Yellen, a dove during the Obama presidency, is suddenly sounding hawkish alarms, now that Mr. Trump has entered the White House.  Ms. Yellen, and others at the Fed, have suggested incremental increases in interest rates are warranted and likely on the way in 2017, as a means to hold inflation in check and in order to cool an economy that is, allegedly, growing hotter.

Economic textbooks will tell you that inflation is either driven by demand-pull or cost-push scenarios.  Demand-pull inflation occurs when workers have too much money in their hands, and demand outstrips supply.  Hence driving up prices, and expectations of future price increases, for products and services.  But wages have stagnated in the United States, and Mr. Trump and his team aren’t even fans of a minimum wage, so where art thou demand-pull inflation?  In fact, one unemployment indicator or measurement, U6, actually suggests unemployment is much higher, closer to 9 to 10%.  Moreover, globalization has crushed labor’s wages and negotiation powers for higher benefits & wages.  So again, another strike against demand-pull inflation happening anytime soon.

As for cost-push inflation, this is where raw materials cannot keep up with demand from manufacturers, and finished product prices rise, due to an increase in the prices of the raw materials entering into the finished products.  Therefore, prices for finished goods rise on the supply side of the curve – along w/ future expectations, because of the higher cost of raw materials going into the finished products (under a cost-push inflation scenario).  Cost-push clearly isn’t a driver of inflation presently – either.  We know this to be true by the unprecedented fall in oil prices, the slowing of China’s economy, and the surfeit supply of steel, aluminum, and other raw materials.  In fact, the post-financial crash global economy has been characterized by too much excess capacity for the production of raw materials, and too much excess capacity for the production of finished goods (and inadequate aggregate demand). 

So if demand-pull and cost-push inflation is not a concern, what else could increase the price of products & services and drive nascent inflation?

Hmmm… what entity has the power, particularly for products and raw materials with relatively inelastic demand curves, to set prices?  That would be cartels, monopolies, and oligopolies. 

That’s right – in a world w/out cost-push or demand-pull inflation – the biggest threat to Mr. Trump’s domestic agenda comes from job-killing, economy killing, cartels and monopolies.  These government-sanctioned entities have no, or limited, competition, and, as long as demand is strong or strong enough, there are no restrictions on the prices they can charge.  With the ability to set price, and restrict supply, only cartels and monopolies have the power to create inflation out of thin air.

Doubt me?  Witness Big Pharma’s catastrophic price increases, from some of the biggest super-villains on the planet, like: Valeant, Martin Shkreli, and Mylan Pharmaceutical.

What we have seen in the last several decades, since the rise of Mr. Milken’s leveraged buyouts based upon junk debt… is a spectacular rise in M&A (i.e. mergers and acquisitions).  Wall Street banks, shadow banking, and particularly private equity have made exceptional fees and returns off M&A activity.

M&A has taken off to such an extent that the American economy, in nearly every sector, is now dominated by cartels and monopolies.  And as dictated by institutional investors, Wall Street banks, hedge/private equity funds, and in many instances, leveraged balance sheets – the pressure for cartels and monopolies to increase prices, while cutting costs/labor, is ever growing.

In short, increased pricing due to monopolies and M&A very well may give the Federal Reserve the excuse it needs to jack up interest rates… not because the economy is overheating, and certainly not due to demand-pull or cost-push inflation. Think about it!  Price increases, as a result of cartel/monopolistic pricing, also gives the Fed an opportunity to take a proactive stance against any number of bubbles the Fed/central banks have created over the last eight years (due to exceptional & extraordinary Fed monetary policy).

So what can the Trump administration do to hold – economy & job killing - cartels and monopolies in check?

·      For starters, Mr. Trump could declare a moratorium on all pending and future M&A activity, so as to prevent an even greater concentration of pricing power into too few hands (and to mitigate the Fed’s excuse to increase interest rates).

·      Mr. Trump – utilizing the Justice Department and the FTC – could also go after existing cartels and monopolies within the American economy, and seek to break up same.  Since the purpose of M&A is often to cut expense/labor, the reverse should be true if cartels and monopolies are broken up (that is to say, break up should create jobs & opportunity, as well as, additional opportunities for investors).

·      As Mr. Trump is fond of using taxes and tariffs as a means to incent corporations and businesses to keep jobs in the U.S., he could also use the tax code as a means to dis-incent M&A (by wiping out the loophole, or tax write off, for interest on debt).

·      The Trump administration could also attack our national debt itself, by instructing the Fed to contact its peers to study a global multilateral public debt write down.  If successful, a lower debt to GDP ratio would allow Mr. Trump to spend Federal money w/ far greater ease, a la Reagan.

·      And least desirable, the Trump administration could look to the Fed to engage in more debt monetization to finance yet another deficit spending round.  In essence, kicking the can further down the road.

At the end of the day, Mr. Trump’s mandate is thin enough… apparently, about as thin as his skin.  What a shame it would be if his economic agenda was strangled in the crib by an, allegedly, apolitical Federal Reserve, who now appears more interested in covering its hind quarters from the various bubbles it has created over the last decade.  

Mr. Trump does not strike one as a fall guy for the Federal Reserve's worst excesses, but if he's not careful, he could very well find himself - and his presidency - in that position.

Copyright JM Hamilton Publishing 2017

Davos

Davos

“Motto:  Committed to improving the state of the world.”

By J.M. Hamilton (1-15-2017)

Happy New Year!

It’s that time of year again.  Time for the elites of banking, multinationals, & the billionaire class to all come together at Davos, Switzerland, for its annual World Economic Forum confab.  This is where the globalist, Robber Barons, Ayn Rand devotees – and assorted hanger-ons & wannabees – come to offer up self-congratulatory praise, sound assurances, and more praise for the economic system they have developed around the globe, crony capitalism.  

Why it's a regular Superpredator's Ball.

One senses that this year the neoliberal fanfare, that is Davos, may be a little different.  Perhaps the elite haven’t been so shrewd after all?

A populist backlash - against laissez faire economics, multinationals, the international banking cartel, and the Western governments the billionaire class own and operate for their sole benefit – has grown beyond festering, but has metastasized into open revolt.

Seems that the billionaires have created a system that rewards: rent seekers; monopolist; crony capitalist; looters of countries & their economies, who then swoop in and buy private and public assets at fire sale prices; and assorted financial engineering practitioners.  This is as opposed to the global elite’s professed values (the standards they want everyone else to live by) of: innovation; industry & efficiency; competitiveness; entrepreneurial spirit; and recognition of capitalism’s moral supremacy, as the primary economic engine for the world’s economy.

To use a colloquial phrase: The chickens appear to be coming home to roost, at Davos 2017. 

To be sure, the multinationals & banksters not only own Western governments, but they play nation states off one another in a race to the bottom.  In short, many of the globe’s citizens are waking up to the fact that their true masters are not the democratic governments, they thought they elected, but rather, the billionaires & multinationals, who own the political parties, the vetting process, and the politicians.  If a local or national government dares get out of line, said plutocrat merely goes global, seeking to arbitrage: labor, rules & regulations, taxes, and free government lucre. 

Hell, why earn money the old fashioned way, when governments will give it to plutocrats for free?  The aforementioned arbitrage is also referred to as free trade.

And therein lies the problem.  Multinationals & billionaires have one overriding goal, stockholder and their personal enrichment (not necessarily in that order).  Having gone global in that pursuit - there is no planetary governmental authority to hold these behemoths in check.  And given that governments are easily corrupted by humans, who in their right mind would want to surrender national sovereignty to an international body? 

For further clarification see the European Union, and the European Central Bank.

Hence, the populist avalanche that is beginning to crash down upon the Davos’ playground, and is killing the plutocracy’s buzz.

Perhaps the most illustrative company, w/in the present world order, is Apple or Apple Inc.  Apple manufactures very fine products, possesses the world's largest market cap, and I’d be a liar & a hypocrite if I did not acknowledge up front my use of these products.   There are far worse multinationals out there, but the fact that Apple is held in such high regard by many acolytes & fans, makes the following example all the more revealing.

Apple is a notorious tax dodger, and uses legal loopholes in Europe & the US to avoid taxation.  As noted in a recent Bloomberg piece: 

In one of the more notable examples that’s drawn particular scrutiny, companies will book a disproportionate amount of revenue as “offshore” by claiming the underlying technologies are owned by their Irish units—even if the intellectual property originated in the U.S.

JMH has written extensively about how corporations, like Apple, leave a heavier tax burden on what remains of the American middle class, who cannot dodge taxes.  And what Americans cannot fund through taxation is a paid for with an ever growing debt & debt service load, and the diminution of government services.   In fact, the debt and debt service load has grown so large, that the Federal Reserve has engaged in all sorts of machinations – not the least of which is interest rate suppression and debt monetization, arguably both at the expense of the American public – so that Apple and other US multinationals can continue to avoid taxation.

Even in Europe, the E.U. recently called out Apple for its special tax arrangement with the Irish government: 

The company (Apple) is already in hot water with the European Union. Regulators ordered Apple to pay $14.5 billion in back taxes in August after concluding it paid an effective tax rate of 0.005 percent in 2014 because of preferential Irish treatment. Last week, Apple called the EU decision “seriously flawed.”

Adding insult to egregious behavior, Apple’s and other multinational’s “offshore earnings” really aren’t sitting offshore after all, but rather, are located w/in Wall Street banks in Manhattan, earning interest income courtesy of the U.S. Treasury and the American taxpayer. 

Dodging taxes is one thing, but instead of employing Americans and expanding the US tax base, Apple exploits Chinese labor, outsourced to a notorious company called Foxconn.  Foxconn, a Taiwanese company, and the largest private employer in China, is known for highly abusive labor practices.  Let’s let Forbes take it from here:

These deaths once again shine a light on Foxconn's harsh working conditions, in which poor factory workers are paid measly wages and forced to work overtime -- sometimes 14 hours a day, seven days a week -- to build Apple products that are then sold at high prices to consumers (like I've written before, the bargain value of Xiaomis and OnePluses makes it very hard to justify paying US$800 plus for Apple or Samsung phones).

Working conditions are so poor at Foxconn facilities that suicides and unexplained worker deaths are not uncommon.  Apple could never get away with these labor practices in the U.S., so Foxconn provides a convenient barrier between Apple’s squeaky clean image, and poorly paid/ill abused Chinese labor.

Sadly, a study done by an economist a few years back, and published in VOXEU.org, showed that Apple’s profit margins are extraordinary, due in part to Chinese labor exploitation (Apple’s profit margins are also a testament to how well their products are engineered, and to the inelasticity of demand for same); this same write up also pointed out that Apple assembly line jobs could return to the U.S. with little diminishment to Apple’s profits or bottom line.  My guess is that Apple's profit margins have only grown.

Due to lack of time, it is important that we bring up one more salient point about Apple and multinational behavior: Apple, and others, are in bed with - and do business with - some of the most repugnant/totalitarian/authoritarian regimes on the planet. 

China’s human rights record is abysmal, democracy is nonexistent, and China crushes free speech and communications from the outside world, daily.  On the heals of the NY Times writing a piece on how Apple, via Foxconn, receives billions in Chinese state aid, the NY Times app was pulled in China.

Both Salon and the NY Times, unless I missed something, assumed China’s government was behind Apple being forced to remove the NY Times app from their China app store.  But another thought crossed my mind…. Apple was not exactly portrayed in a favorable light in the NY Times story either.  Could have Apple approached their partner, The People’s Republic of China, and asked the government to order Apple to remove the NY Times app from their China app store (in an act of retaliation against the Times)?

Mr. Cook & Apple have become high-handed in recent years: in their dealings with the E.U. – and the United States – in regards Apple’s tax avoidance; in the exploitation of the developing world’s labor force, at the expense of the American workforce & the U.S. tax base; and in toadying up to one of the nastiest dictatorships on the planet, Communist China.

As such, Apple is not exceptional.  It’s just another member in the soulless pantheon of multinationals, who know no allegiance to anyone but to themselves.  Apple’s business practices are very much in sync w/ private equity, hedge funds, the very same business practices advocated by McKinsey, and the free trade practices lobbied for by the U.S. Chamber of Commerce.  That is to say, Apple’s business practices are employed by the Davos elite, daily.

Put another way, free trade, arbitrage, and crony capitalism advocated by the Davos elite - w/ a myopic view limited to the next quarter’s financial statements - has led to a growing populist revolt in many Western democracies.  Which raises the question: if billionaires and multinationals are running the planet, could CEOs and corporations - ultimately - be held accountable for crimes against humanity?  

If the almighty multinationals, and the billionaire class, want this degree of control over Western governments, and the lives of the 99%, they are going to have to begin to advocate and push for the very people that, up until now, have been an afterthought, if not outright collateral damage.

Ironically, the motto of the World Economic Forum is, “Committed to improving the state of the world.”   The Davos elite have a long ways to go before they can even come close to achieving their stated aim.  In fact, presently, the elite and billionaire class have only improved upon their own lot in life.

The Davos elite like to say that free trade has made products and services inexpensive and ubiquitous; but that’s hardly true given the number of cartels and monopolies that dominate Western economies, and the human misery surrounding a great deal of the emerging market's, and first world's, labor force.  

Moreover, when one is unemployed, one cannot dine upon iPhones - manufactured within China’s slave labor colonies.

P.S.  China is in deep.  They have a debt to GDP ratio, including the private sector (remember China’s private sector often consists of state owned enterprises), that is out of control.  They suffer massive capital outflows.  The per capita income of the average Chinese worker is less than $13,000.  China has failed to create a consumer economy, because to do so would require a state funded social safety next, and social services, such as Social Security and Medicare equivalents.  Instead, the Communist Party kills off its citizens/workers with heavily contaminated air, from coal burning power plants, and by the Sino government being one of the largest tobacco purveyors on the planet.

If Mr. Trump, and some European business/government leaders, are successful in bringing back a substantial number of jobs to the U.S. and Europe (or raise taxes/tariffs on China’s manufacturing exports), the affect and social upheaval w/in China could be very real.  Wars have been started for a lot less. 

Copyright JM Hamilton Publishing 2017