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Thread: Trump's economic dilemma

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    tWebber
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    Trump's economic dilemma

    Peter Schiff is probably the only one I've heard that lays out all the issues in one video...



    Just to be clear, he voted for Trump. His actual economic analysis in relation to Trump is at around 9:00. It's a complex issue, so I'll try and summarize it as simply as I can later when I have time.

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    tWebber
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    Quote Originally Posted by seanD View Post
    Peter Schiff is probably the only one I've heard that lays out all the issues in one video...



    Just to be clear, he voted for Trump. His actual economic analysis in relation to Trump is at around 9:00. It's a complex issue, so I'll try and summarize it as simply as I can later when I have time.

    Please note that this isn't a pro-Trump or anti-Trump post, it's just a post pointing out the economic reality, the tools that are currently at Trump's disposal, and more importantly, the economic circumstances he walked into. To translate and simplify what Schiff is talking about the best I can, it goes like this:

    Trump wants to both cut taxes but increase government spending (i.e. build up defense, create infrastructure jobs, better care for vets, etc.) at the same time. This is impossible unless he does one of three things:

    A) Massively, and I mean massively, cut current government programs, including pensions and social security to free up enough money to fund his projects

    B) Default/restructure the existing debt

    C) Borrow the money


    A) The current deficit is just under 600 bil. Massive cuts would have to come from social security, government pensions, welfare programs, et al. Most presidents avoid this like the plaque for obvious reasons, and the economic situation in the US now has never been more volatile. Populace movements are on the rise, the common man and woman is struggling financially, income gaps have dramatically widened, government dependency is at all time highs, and society's on the edge of all out civil unrest (which we're seeing some manifestations of now), so massive cuts of this nature would just take the situation further over the edge. Also, the fact we have such massive debt now (our debt-to-GDP ratio is already 105%) essentially means he'd really just be shifting the funds from one area to other areas. Thus, it wouldn't solve our already mounting debt problem, and he will still have to deal with social unrest for the cuts on top of that.

    B) Trump sort of flirted with this idea, but then quickly backtracked when he got flak from the press. I don't think either political side, the left or right, would be on board with this move. Imagine a yuuuge corporation like GE going bankrupt and forcing shareholders to take massive haircuts on their investment. Now multiply that by 1000. I think we can pretty much guess what the repercussions of that would be on a global economic scale. After all, it was the default of a single bank that spun the markets and the global banking system into crisis in 2008. If America defaulted, even if they defaulted only a little, it would be nothing short of apocalyptic in scope, both for us and the world, especially considering the global derivative debt hedged against this are at levels never seen before in the history of banking. And after all that, we'd still have to start over again borrowing the money, which brings us to the next option.

    C) This is where it gets pretty complex. In order for US government to borrow money, they have to print bonds. They borrow money from private creditors in exchange for those bonds with a promise to pay back the principle with interest.

    In order to sell bonds in the private sector, you need people willing to buy those bonds. Even though US bonds are still "perceived" as the safest investment relative to anything else out there, demand for these bonds have been waning lately, evidence by the rising interest yield and drop in value on those bonds (the logic here is that when yield rises on an asset, it means the asset is more risky thus less valuable).

    You have to keep demand for these bonds high in order to keep the interest yields low by somehow convincing enough buyers that they're secure and that they'll eventually be paid in full, much less actually get the full interest they were promised. But this is rather tricky when you're already in a 20 trillion debt hole, your economy is barely chugging along as it is and you actually are promising to cut taxes on top of that. Where are they going to get the revenue for this monumental task? Would you loan money to a company barely keeping itself afloat, way over its head in debt and feel secure about getting that money back in return?

    This is where the federal reserve steps with quantitative easing (QE). In the event there are few buyers or no buyers for those bonds, the interest on those bonds will skyrocket, thus making it difficult if not impossible for government to service the debt (faithfully pay the interest on those bonds) they already have. Therefore, federal reserve steps in with QE, promises to give buyers (usually banks) money in exchange for those bonds.

    So the way Trump will be able to achieve (C) is to get the federal reserve to initiate more QE to compensate the reluctance of buyers of those bonds. If buyers (typically banks) know that when they purchase those bonds they'll have federal reserve backing, then the bonds are perceived by those buyers as less risky, thus the interest on those bonds will remain low.

    Here's the problem. The first problem is that any time a central bank has to intervene in this manner, it doesn't reflect positively on that government's economy because it reeks of desperation, and everyone knows this will inevitably cause inflation (which I'll get to in a bit), which can cause jitters in both the bond and stock markets. What underscores this and makes it worse is that the federal reserve was assuring everyone the economy was doing well and that they were set to raise interest rates sometime in 2016 to prove this to be the case. Imagine what it will look like to the markets if the Fed reverses that and starts another QE program.

    Secondly, the federal reserve already has 4.5 trillion of these assets (95% in government debt) on its balance sheet from QE programs in the past (their balance sheet was under 1 trillion in 2007). The issue has always been what the Fed will finally do with these assets and how they'll get rid of them and the potential problems trying to do so (interest rate spikes, etc.). Obviously, increasing these holdings with another stimulus program will only increase this problem for the Fed.

    Thirdly, in order for the Fed to buy these bonds, they need to print the money which increases the money supply, and we all know what that means... inflation. The only difference this time is that, since Trump is promising the money to go directly into the hands of the working people, the money will actually flow into the mainstream economy rather than flowing into the stock market and creating the hyper-inflated asset bubble we see now. Thus, this time the inflation will be in the real economy.

    Though Trump has rightly criticized the federal reserve and their monetary policies for helping the Obama admin and his economy... which of the three options do you think Trump is going to fall back on in order to achieve his goals?

    Schiff argues the latter is the inevitable choice.

    Personally, I feel for Trump, but I don't know why anyone would have wanted to be POTUS in this current climate. I sort of wished it had been Hillary to take the brunt of the economic mess to come. It's not really about partisan politics here, it's about reality of federal reserve policy. Even if Trump were a miracle worker, it's not possible he'll do much better than Obama because of the circumstances, which are far worse for Trump now than it was for Obama. Obama had far less debt to deal with, a much lower inflation rate, and a fresh slate for the federal reserve to work its magic that no one expected. They were able to barely sustain the economy for 8 years and only because of the federal reserve's unprecedented monetary actions never before done in the history of central banks, all the while masking the inflation by keeping all that liquidity creation in the stock market. No one could have seen that coming in 2008, and yet, even though wallstreet reaped the benefits with market record highs, the real economy barely chugged along with an employment participation rate at all time lows, stagnant wages, GDP never reaching passed 3% annual growth during Obama's entire admin, 10 trillion added to the national debt in the process, and a very angry populace uprising to show for it. On top of all this, Trump has to deal with a whole lot more public cynicism. Obama was falsely perceived as a savior in the beginning of his admin, contrary to how Trump is perceived now. The reality is that those are Trump's only three options, and that there's only so far central bank manipulation of the economy can continue in this manner without things becoming unraveled.

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    Dept. of Redundancy Dept. Cow Poke's Avatar
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    Related only because it's "economics" related to Trump....

    I told my wife early Wednesday morning that, although we got the result we wanted -- Hillary is NOT the President -- it looks like our 401(k) is going to take a pretty big hit for a while, but that's OK, it will come back. Overnight futures, of course, looked pretty bleak.

    HOWEVER....

    The 'yuge' Donald Trump market rally continues

    My 401(k) (actually a 403(b)), apparently invested pretty well, is doing even better than the market.

    1 Tim 2:5 For there is one God, and one mediator between God and men, the man Christ Jesus.

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    tWebber
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    I take it you didn't watch the video.

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    Dept. of Redundancy Dept. Cow Poke's Avatar
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    Quote Originally Posted by seanD View Post
    I take it you didn't watch the video.
    Not yet, but I'm gonna.

    1 Tim 2:5 For there is one God, and one mediator between God and men, the man Christ Jesus.

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    Dept. of Redundancy Dept. Cow Poke's Avatar
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    OK, watched it.

    1 Tim 2:5 For there is one God, and one mediator between God and men, the man Christ Jesus.

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    Troll Magnet Sparko's Avatar
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    yeah my investments went up too. After watching election night and them claiming the Dow falling by over 800 and all that. Not true.

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    Evolution is God's ID rogue06's Avatar
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    Quote Originally Posted by Sparko View Post
    yeah my investments went up too. After watching election night and them claiming the Dow falling by over 800 and all that. Not true.
    Actually at first it did drop 800 some points only to turn around and end up regaining those loses and even gaining over 200 points.

    I'm always still in trouble again

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    Troll Magnet Sparko's Avatar
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    I have been wondering how Trump plans to pay for all of his plans too while giving us a tax break. I think he is planning on creating so many more jobs that the taxes will come from that. Who knows? We should at least wait till he is in office to see what he does before second guessing him. Can't be worse than Obama's trillion dollar deficit. Well maybe it could be. gotta wait and see

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    Evolution is God's ID rogue06's Avatar
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    Quote Originally Posted by seanD View Post
    Peter Schiff is probably the only one I've heard that lays out all the issues in one video...



    Just to be clear, he voted for Trump. His actual economic analysis in relation to Trump is at around 9:00. It's a complex issue, so I'll try and summarize it as simply as I can later when I have time.
    Of course it is always easier to destroy something than it is to build it back up

    I'm always still in trouble again

  11. Amen Jedidiah amen'd this post.

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