In 1971, after President Nixon relieved the U.S. of the burden of the gold exchange-standard he paraphrased Milton Friedman by proudly proclaiming, “We are all Keynesians NOW.” In preparing for the 1972 election, Nixon realized that Keynes provided the ability for a sitting president to throw fiscal responsibility to the side and open up the spigots of fiscal stimulus in order to PUMP PRIME the economy. Keynes is focused on demand management.
In the wonderful book, “Nixon’s Economy,” Allen Matusow chronicled the Nixonian political/economic agenda that promoted the robust economic boom that elevated President Nixon. It was at this time that Nixon also browbeat Fed Chairman Arthur Burns to leave monetary policy in a stimulative position, providing the liquidity to assure a healthy economy heading into the November 1972 election. Before the “we are all Keynesians now” mantra, Nixon positioned himself as a fiscal conservative.
On Wednesday, the airwaves were populated with two discussions: 1. The split in Congress will result in gridlock which will prevent any type of legislative action and the budget will just proceed with ongoing continuing resolutions; and 2. Pelosi and other democrats are in search of an infrastructure program of at least $1 trillion in an effort to REBUILD AMERICA. Trump perceives himself as master builder of all things American–LaGuardia Airport is an example–and would be impressed with himself by repairing America’s crumbling infrastructure. There are deals to me made and the Greatest Showman on Earth is anxious to create a backdrop for his reelection campaign. The question, of course, is will the Democrats cooperate with Trump or will they wait until they control more of the government after 2020?
In discussing this concept with Mr. K McCarthy (one smart dude), we concluded that the backdrop is ideal and the Nixon/Trump share a stigma: They were both detested by the east coast establishment. (Shunned by the self-anointed elite). If my THEORY is correct the initial reaction of the bond market today will be proved wrong. I think those who believe in budget stagnation will be proven wrong, especially if the tariffs negatively impact the economy. There are those who will argue that there are not enough construction workers for a full-throttle massive infrastructure build. Don’t let the facts get in the way of great political concepts.
Trump is not nearly as intelligent on global matters but he certainly knows how to spend borrowed money to make a name for himself. Did today’s stock market rally signal it know has bought into the idea promoted in NOTES FROM UNDERGROUND last week. Fiscal austerity is dead and so passé. Japan, Europe, China, Brazil, Africa all heading into massive infrastructure programs. If I had a hammer and virtually unlimited funds … wow! Healthcare is a mere bargaining chip in these Trumpian times. The cherry on the top for Trump is that the Democratic control of the House emasculated the Freedom Caucus, which has been the last bastion of fiscal rectitude, even though they were repugnant in the way they presented their desires. As Trump will surely tweet, “We are all Keynesians now.”
***The FED will release its statement tomorrow and consensus is for NO CHANGE, leaving the FED funds rate in its current target range of 2 percent to 2.25 percent. I will agree with consensus as the FED will not disrupt the market’s present predilection to believe that a December FOMC rate rise is inevitable, based on current probability measures. The market will be attentive to the stridency of the Powell Fed’s language to identify any increasing fears over rising inflationary pressures. Oil prices have been soft as have other commodity prices so look for words about the TRANSITORY nature of low input prices. Wages have picked up a bit but nothing outside of the last five-year norm.
Also, let’s see if the FOMC raises any concerns over the new rate of shrinkage in the Fed’s balance sheet (though we might not see that until the minutes are released on November 29). Simon Potter, head of the Fed’s SOMA operation recently gave a speech and maintained that the current operation of $50 billion in balance sheet reduction coupled with the rising FED FUNDS rate is being well controlled with no major disruptions to the market. Some analysts are not as sanguine as Potter and believe the increased stock market volatility in October may have been a result of a massive decrease in fed reserves. Just advising that we be attentive to any sense of concern over declining velocity of money as bank reserves decline.
This afternoon the Reserve Bank of New Zealand left the Overnight Cash Rate (OCR) unchanged at 1.75 percent. The RBNZ made two key points in maintaining its present policy: 1. “Core CPI remains below our 2 percent target; and 2. The level of the New Zealand dollar exchange rate will support export earnings.” The idea of a 2 percent inflation target is a ridiculous reason to set interest rates as Paul Volcker has been recently been ubiquitously criticizing.
In a recent Bloomberg article Mr. Volcker noted, “The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets. Ironically, the “easy money,” striving for a “little inflation” as a means of forestalling deflation, could, in the end,be what brings it about.
Coupled with concerns about continuing a “little inflation,” it is important to note that RBNZ Governor Orr is honest in noting that present weakened state (my opinion) will provide support for export earnings. Paul Volcker is spot on in sounding the warnings over the continued use of the nebulous construct of a 2 percent inflation target. ECB President Draghi has built a monstrous balance sheet adhering to the precepts of a questionable theory. Will the Fed monetize the Keynesian desires of President Trump by maintaining ultra low rates? Piles of debt as fiscal austerity is cast asunder. There are trades to be built on this concept.