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“Trumpflation is coming. Everyone knows it- MN Gordon

5440002785_7b1ed0ac3e_bby MN Gordon

Economic Prism

Bad Monday

Some Monday mornings are better than others.  Others are worse than some.  For one Amazon employee, this past Monday morning was particularly bad.

No doubt, the poor fellow would have been better off he’d called in sick to work.  Such a simple decision would have saved him from extreme agony.  But, unfortunately, he showed up to Amazon’s Seattle headquarters and put on a public and painful display of madness.

From what we gather, upon arrival, he blasted out an email to hundreds of coworkers, including Chief Executive Officer Jeff Bezos, outlining several reservations he had with the terms of his ‘Performance Improvement Plan.’  After that, he executed a flawless swan dive off Amazon’s 12-story Apollo building, presumably to his death.

Yet, somehow, he didn’t die.  He lived.  What now?

Quite frankly, we don’t quite know what this has to do with the economy by and large.  But we have an inkling there’s some relevance.  Perhaps it has something to do with an economy that’s approaching self-destruct velocity, where every action has a far more negative reaction.

Trump!

President elect Donald Trump was blessed with a stout sounding last name.  An onomatopoeia, of sorts.  Various synonyms for Trump include winner, decider, trump card, outdo, undermine, outmaneuver, outplay, surpass, beat, go one better, and the like.

Throughout his life, Trump has always lived up to his name.  As a reality TV star, for example, the stout man with a stout name made millions of dollars telling people, “You’re fired!”  People loved it.  They couldn’t get enough of it.

However, as President, Trump will inherit a steaming hot pile from his predecessors.  After a combined 16 years of George Dubya and Barry Big Ears, the U.S. National Debt has jumped from approximately $5.5 trillion to about $20 trillion.  That amounts to a 363 percent increase.

Yet, over this same time, U.S. GDP has only increased roughly 77 percent from about $10.5 trillion to about $18.6 trillion.  In other words, debt is increasing 4.7 times faster than GDP.  Similarly, the percentage of debt to GDP has more than doubled from about 52 percent to over 107 percent.

As President, part of Trump’s stated vision is to “create a dynamic booming economy that will create 25 million new jobs over the next decade.”  To do this, Trump intends to run massive deficits.  To finance the massive deficits, Treasury Secretary nominee Steven Mnuchin may have to issue 100 Year Treasury notes.

But what if this just accelerates the trend of rapid debt growth and lethargic GDP growth?  Wouldn’t that, in a sense, be a policy of economic self-destruction?

Attaining Self-Destruct Velocity

One popular literary device of headline editors across the western world of late is to fuse the name Trump with another word.  Just this week, for instance, we discovered that Bernie Sanders – the socialist with a grumpy face – is an expert on Trumpism.  We also learned about the effects of Trumpflation and Trumpnado on the bond market.

Here Forbes clarifies the landscape with unequivocal certainty:

“Trumpflation is coming.  Everyone knows it.  It means higher interest rates in the U.S.  It means the end of QE, negative and zero interest rates in Europe and Japan.  It potentially means tariffs that will make prices of goods imported into the U.S. more expensive.  And, if president elect Donald Trump gets his fiscal stimulus pass the deficit hawks in congress, it means more money for the economy which could lead to wage inflation.  No American worker will complain about that.

“But what do fixed income investors do now?  Especially after sitting on lousy yielding U.S. Treasury bonds for years?  Imagine those guys in Europe, holding negative yielding debt.  How on Earth do you sell that stuff?”

Since the election, the approach to selling Treasuries has been to sell them.  Hence, yields have gone up, prices have come down.  For example, since the election the yield on the 10 Year Treasury note has risen from 1.86 percent to 2.44 percent.

Of course, rising interest rates will make financing the national debt more expensive.  Moreover, as deficit spending ramps up – maybe even to $2 trillion per year – the cost to finance the debt will compound.

One popular rationale for deficit spending by economic policy makers is that the effects of the fiscal stimulus will allow the economy to achieve escape velocity.  Under such a scenario, the economy would, somehow, be able to grow its way out of debt; the percentage of debt to GDP would come down.

However, over the last sixteen years, and even more so over the past eight, the grasp for escape velocity has come up empty handed.  Debt has mushroomed while GDP has stagnated.  Yet, regrettably, the effects of Trumpflation and Trumpnado will likely accelerate this trend.

Thus, rather than attaining escape velocity, like the Amazon jumper, the economy would attain self-destruct velocity.  Prepare accordingly for the extreme pain and agony that are coming.

[MN Gordon is the editor of the Economic Prism.  Visit Economic Prism.  Subscribe to the Economic Prism E-Newsletter at http://www.economicprismletter.com]

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