April 17, 2017
So the first one hundred days of Donald Trump have nearly passed and there seems to be a sense that, despite all his initial maverick positions, the country feels like it’s under a typical Republican President.
Russia is again the enemy number one; intervention in the Middle East is ongoing with the usual American “regime change” objective; and NATO, which was said to be obsolete a few weeks ago, is now an indispensable ally. At home, talk of the much more pleasant tax cuts has replaced the most extreme rhetoric of scrapping Obamacare and even corporate America and Wall Street — both implacable enemies during the campaign, now look set to be left alone.
So, normal service has been resumed. Or has it?
I don’t think so.
I believe that there is one massive populist battle coming up. It has not been picked up on, but it will be a struggle for the heart and soul of the US economy pitting the democratic White House against the technocratic Federal Reserve.
One enduring campaign objective remains and it is to “Make America Great Again”. This doesn’t mean firing rockets from ships into foreign countries, it means making the people who voted for Trump feel a bit richer by the time the next election comes around. The next election is the congressional election in September 2018 — which, in the world of politics, is not far off.
These congressional elections are really a referendum on the Presidency. They are one of the checks and balances of the US system. For Trump’s Republicans to win in sixteen months’ time, they have to make good on the election promise to make the average guy richer or at least feel richer.
People feel richer when (a) the economy grows and (b) the fruits of this growth are evenly spread. The problem in the US is the very force that drove Trump into the White House: the fruits of US growth are not spread evenly. The wealthy do so much better and the very wealthy do ridiculously well, while the average guy falls backwards. In the US, it is estimated that 50% of the population live paycheck to paycheck.
Trump told these people that he would make them more secure, more valued and a little bit richer.
But the only way he can do this quickly is to actually put money in their pockets. This means giving them jobs quickly, raising government spending very soon to expand programmes that employ people directly and giving tax cuts away right now. All these initiatives would increase the American government deficit immediately.
The alternative to all this would be for the Trump administration to follow the Obama administration and further cut interest rates. But rates are already low, and although cutting rates eventually causes incomes to rise because people borrow more over time, this all takes a long time. And Trump doesn’t have time. That’s the one thing he doesn’t have much of.
So how does a President engineer an electoral boom over the short term?
Well what he does is he tries to boost the economy immediately.
This is where the battle with the Federal Reserve comes in.
The Trump White House is on record as saying it thinks that the US economy can grow at between 3 and 4% per annum. If it was to grow that quickly, unemployment, which is now at 5%, would fall to close to 3% and the wages of those in work would rise too. This would make the average guy feel richer and would go some way to ensure that the Trump Presidency keeps its electoral promise to the average dude.
But the Federal Reserve believes that the US economy is already at full throttle at a rate of 2% and any further growth would simply lead to higher wages and prices. Traditionally, the Fed doesn’t tolerate rising inflation. So the thinking is that the Fed will raise interest rates (and it has already done so on one recent occasion) to choke off inflation and the higher interest rates would also choke off the White House’s desire to get the economy growing at 4%. This would extinguish Trump’s chances of getting re-elected.
Therefore, over the next few months, Trump will be thinking that the main obstacle to re-election is not the Democratic Party, but the Federal Reserve. The Fed becomes the enemy within. If he can bully the Fed into tolerating a higher growth rate, closer to his desired 4% rather than their stated 2%, he can deliver for his people.
Now here comes the politics of the situation.
Up to now the American economic community and the financial markets have assumed that the Fed will win this battle with the White House. The working assumption is that the White House always backed down in the face of the all-powerful Fed. But is this true of the Trump White House, populated by people like Steve Bannon, who see the world as a battle between the people and the elites?
There is no more explicit example of the technocratic elites than the Federal Reserve, populated as it is by academic, doctorate-holding, ivory tower economists. This is the ultimate expression of an unelected power base. On the other side of this battle you have the democratically elected Presidency, elected by the average guy to stand up for the average guy.
What happens if Trump bullies the Fed into accepting his higher growth rates which he achieves by boosting government spending and borrowing billions? Could it happen in the first place?
Yes it could. In the 1970s, Richard Nixon bullied the Fed into printing money so that he could win the 1972 election. It can happen because it has happened. This would mean that all the old rules go out the window. American wages would rise much quicker than they have in the past few decades. The average guy will feel richer and then he will be persuaded to vote for Trump again. Wall Street would wobble and the stock market fall, but the vast majority of people don’t own stocks, so they won’t care. And Trump will get his re-election and the only people who will squeal in the short term are rich bankers and investors on CNBC.
Sounds logical? That’s because it is. The Fed gets put in its technocratic place, the White House spins it as a victory for democracy over technocracy, and the Democratic Party is robbed of its electoral clothes.
From a Trumpian perspective, what’s not to love? That’s exactly why it’s likely.