Understanding the Trump/Sanders Phenomena

trumpsandersLet us travel back in time only 12 months.  America was starting to focus on the next potential President.  There was seeming certainty over the choices.  For Republicans, Jeb Bush was anointed the chosen one with a campaign war-chest that was unrivaled.  Similarly for Democrats, Hillary Clinton was to be anointed, being the next person up.  What was certain twelve months ago has since evaporated, ushering in a paradigm shift in American politics.

There is much in common between Donald Trump and Hillary Clinton and their supporters.  Historically, Donald Trump’s politics have had more in common with Democrat platforms.  Until recently Trump not only donated to Democratic candidates, but also hobnobbed with many of its elites including the Clintons.  Like Trump, Hillary has led a protected life, enjoying the benefits of the top 1% and with access to and being a powerbroker in Washington.

It is ironic that given the many similarities between Hillary and Donald, that Hillary is considered an insider and Donald the insurgent.  Both in fact are consummate insiders.

Trumps ascendancy to being the presumptive Republican nominee is remarkable.  He defeated 16 Republicans in the primaries, some who had been quite formable candidates.  Trump has since broken the spirit of the Republican establishment, who were powerless against his insurgent appeal.

Bernie Sanders, who has near zero chance of becoming the Democratic Party’s nominee, has encountered remarkable success against the Party’s anointed one, Hillary Clinton.  Hillary has the backing of nearly every Party leader, has had a significant funding advantage, yet has had difficulty competing against the 73 year old socialist.  With a bit of luck and a more sophisticated campaign early on, Sanders could have won the Party’s nomination.

Ignoring policies proposed by Sanders and Trump, there are similarities behind their successes.  Both are seen as outsiders to voters who are disenchanted in the direction the Country has taken, even though their support comes from opposite ends of the political spectrum.  Understanding the reasons behind this disenchantment by is more important than who wins in November.

Economist John Mauldin recently published a piece titled “Life on the Edge” that goes a long way towards explaining American’s radically switched politics.  While Mauldin shows compassion and understanding of the plight many less fortunate Americans, his economic background helps explain the difficulty in problem resolution.  Mauldin’s comments/conclusions include:

  • He castigates both political parties for giving us the choice of, as Peggy Noonan states, “Crazy Man vs. Criminal ”, concluding that: “People have real problems, and increasingly they don’t trust traditional leaders to solve them.”
  • Sanders is supported by left-leaning Americans who are “living on the edge, vulnerable and unprotected”.  Trump is being supported by another portion of Americans who believe they are being marginalized.
  • Mauldin divides Americans into the “protected” and “unprotected”.  He makes the important conclusion that the protected make public policy, but it is the unprotected who must live with the results.  The protected that create public policy are not subject to the penalties of these policies with Mauldin including “Because they are protected they feel they can do pretty much anything, impose any reality. They’re insulated from many of the effects of their own decisions.”  The unprotected are now saying enough is enough.
  • The protected Mauldin refers to are both Republicans and Democrats.  So too are the unprotected.  Party affiliation has become meaningless in this discussion.
  • A Federal Reserve survey found that nearly 50% of Americans could not cover an unexpected $400 expense.  No wonder voters are scared.  No wonder they have lost faith in politicians who not only promised so much, but whose policies helped create the economic problems the Country now faces.

There are many examples of policies created by the protected that inflict pain on the unprotected.  Progressives propose open borders for immigration.  These immigrants are mainly unskilled and compete for the lower skilled jobs in the United States.  This increased competition hurts poorer Americans.  It also benefits businesses that have access to cheaper labor.  In an effort to fix the damage done by the ill-conceived immigration policies, the protected then promote increasing the minimum wage.  This too hurts poorer Americans who lose their jobs to machines that are made still cheaper by the artificially low cost of capital.  A higher minimum wage also benefits larger corporations who are better equipped to pay higher wages than startups, their potential competitors.

Obamacare is another example of Progressive policies damaging the unprotected.  While many Americans now face doctor shortages and increasing healthcare premiums caused by Obamacare, the protected have access to concierge doctor services.  They also have access to accountants and lawyers who can take advantage of the ever-increasing regulatory and tax environments that average Americans do not have access to.

Finally, there is the rigged government numbers.  Unemployment is supposedly down to 5%.  However, this number does not take into account those Americans who have quit looking for jobs.  It also does not take into account less hours available for workers or the quality of jobs available.  Similarly, the government’s inflation numbers are rigged, removing from the calculation must-have goods and services whose costs have increased.  As a result, many Americans feel they are being left out of a supposedly improving economy.

We are eight years after the beginning of the Great Recession.  While various government stimulus programs and artificially low interest rates created bubbles that increased the wealth of the protected, it damaged the unprotected, increasing the wealth gap.  This led to the popularity of Sanders and Trump.  The fact that a Socialist and a bully have become so popular indicates how deep the frustrations are.  While this trend favors Donald Trump in the upcoming election, it blocks intellectual discussion concerning realistic policies that could actually improve the plight of middle Americans.

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Increasing Minimum Wage Killing Jobs

Discussions relating to raising the minimum wage inevitably include to the issue of “fairness”.  Those in favor of raising it point out that the minimum wage is not a “fair wage”.  Once this emotional claim is made, those who oppose increasing in the minimum wage are pegged as unenlightened and against allowing the lowest wage earners the opportunity to make a reasonable living.  Economic realities tell a different story.

Wendy’s is a large fast food chain with approximately 6,000 restaurants nationwide.  They have historically started employees at the minimum wage.  They recently announced steps to offset the cost increase due to the increased minimum wage and it is not good for workers.

According to Investors Business Daily, Wendy’s is replacing many of its order takers with an automatic kiosk system.  This action should surprise no one with a basic understanding of economics.  Not only does the new minimum wage increase the cost the labor, but with government inflicted artificially low interest rates, the cost of capital has decreased.  This decreases the cost of capital equipment at the same time the new minimum wage will increase the cost the labor.  Wendy’s response to the increased minimum wage will be duplicated by many in the service industry across the Country.

The political elitists who are behind the increased minimum wage will not be negatively impacted by the coming loss of lower paid jobs in America.  Their political positions could even improve with the additional votes they likely will receive from those who believe the increased minimum wage helps the working poor.  Further, with more Americans being unemployed these same political elitists can then offer handouts in exchange for future votes.  It’s a nice, but unholy, gig if you can get it.

There is another group of crony capitalists who will benefit from the increased minimum wage.   Large corporations who do not employee lower paid American workers will benefit by the increased wage pressures placed on upstart competitors who might try to make a better mousetrap.

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ECB Continues Cheap Money Policies

The Wall Street Journal reported that the European Central Bank (ECB) intends to continue with its loose monetary policies.  ECB President Mario Draghi held a news conference this week and stated that the Bank intends to continue to do whatever is necessary to fight deflation, including more interest rate cuts.  This followed the ECB’s decision last month to again cut interest rates and increase its bond purchases.

To put the ECB policies in context, the current ECB base interest rate is 0% with depositors actually paying 0.4% to keep money in banks.  This is a radical effort that continues central bank policies to stimulate the economy.  However, the policies have failed to promote growth.  In fact, there is a growing school of thought that the policies themselves have constrained growth due to the imbalances created.

The fact that central bank stimulative efforts have not worked have not curbed banker enthusiasm for more of the same.  For eight years artificially low interest rates have been the backbone of central bank policy.  After it becomes apparent that the policies did not work, bankers respond by calling for more of the same.  Wow, speaking of insanity!

At the news conference Draghi was questioned about even more radical future steps such as “helicopter money”.  With this approach, the nuclear option indeed, central banks basically hand out money to consumers to fight deflation, i.e. create inflation.  Draghi’s response was that the ECB has not officially discussed at the tactic.  Translation of central banker doubletalk: the approach is being considered. Continue reading

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Western Capitalism Morphs into Socialism

There is an unholy and symbiotic relationship between government and those who benefit from its largess. Those receiving entitlements believe the benefits are holy and guaranteed forever. Those employed by the government become beholden to it. In addition, through crony capitalism corporations become dependent on government for sales and earnings.

The relationship between government and those dependent on it creates a “positive” feedback loop that has the most negative consequences. Those dependent on government continue to vote into power politicians that will increase their benefits, whether entitlements, salary, or government contracts. This then creates still larger government and payouts. It then becomes nearly impossible to stop the cycle until an economy reaches the tipping point where the expenses become too great for income or borrowing to continue the payouts.

Crony capitalism and government dependence growth has been accelerating for decades. Those that believe it will result in bad consequences are now outliers. Still, the results are clear. The United States debt is now approaching $20 trillion, with much greater debt kept off books.

Americans and many Westerners have become immune to one side of capitalism; its inherent ability to ultimately balance supply and demand, as well as assets and liabilities. A recent article by investor Vitaliy Katsenelson explains the efficiency of capitalist markets and specifically its “invisible hand”, as republished below. The markets will have their day!

Whatever Happened to the Invisible Hand of Capitalism? By Vitaliy Katsenelson

When I was growing up in the Soviet Union, our local grocery store had two types of sugar: the cheap one was priced at 96 kopecks (Russian cents) a kilo and the expensive one at 104 kopecks. I vividly remember these prices because they didn’t change for a decade. The prices were not set by sugar supply and demand but were determined by a well-meaning bureaucrat (who may even have been an economist) a thousand miles away. If all Russian housewives (and househusbands) had decided to go on an apple pie diet and started baking pies for breakfast, lunch and dinner, sugar demand would have increased but the prices still would have been 96 and 104 kopecks. As a result, we would have had a shortage of sugar — a very common occurrence in the Soviet era. Continue reading

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Housing Market Showing Weakness

We are now nearly eight years into the great experiment.  Following the economic meltdown of 2008, governments worldwide  embarked on the largest economic interventions ever attempted.  While the central banks and politicians promised wonders from these elixirs, the results have been quite different.

Tony Sagami, editor of the Rational Bear at Mauldin Economics recently published an article titled 4 Signs That the Lights May Be About to Go Out in the Housing Market that paints a disturbing picture of one of the more important parts of the US economy, housing.  Sagami shares the following data:

  • Currently the homeownership rate is back down to 1993 levels.
  • The Wall Street Journal reported that pending US home sales dropped by 2.5% in January, as compared to December, and had a rather insignificant gain for the year of less than 1.5%.
  • New home sales for January dropped by over 9%, according to the Investor’s Business Daily.
  • The medium sales price for new homes dropped by 4.5% in January, following drops of 3.7% and .3% respectively in December and November.

A further indictor of the weakness in the housing market is the return of creative mortgage financing, the same type of gimmickry that helped create the original meltdown.  Equifax reports an increase of the mortgages given to people with credit scores of less than 620.  In addition, during the first nine months of 2015, over $50 billion in mortgages were of the sub-prime variety, a substantial growth in this risky lending practice.

The housing figures are troubling on their own.  However, when taken in the context of the massive governmental interventions of the past 8 years, they are more problematic.  These interventions included a massive stimulus program, running up the US debt to over $19 trillion dollars and keeping interest rates near 0% for nearly eight years (and now threatening to go negative).

Housing is not the only major part of the economy showing weakness.  Sagami reports on weakness in manufacturing, corporate earnings, and restaurants.

It is evident to any with the most basic knowledge in economics that the governmental interventions and central banks fiscal policies have utterly failed to stimulate economic growth, as we were promised when implementing these radical programs.  Now the question turns to whether or not these policies actually have led to economies worldwide heading toward recession. But do not expect the governments or central banks to accept responsibility.  In fact they are doubly down on the failed policies by sending interest rates into unchartered territory, negative.  These are challenging times indeed.

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Government is the Problem

The Left and Right both believe they have the answers to America’s economic downward spiral.  Those on the Left are sure the problems relate to income inequality, racism and/or too much spending on the military.  My friends on the Right are just as strong in their convictions that the problems are caused by an efficient tax system, excess entitlement programs, illegal immigrants, and of course the Left itself.

To this Blogger the cause America’s economic issues, as well as those of the greater world, is government itself, the world’s largest special-interest group.  The video below share some facts proffering the danger of the growing government elites and their minions that includes:

  • During the past 10 years the number of private sector jobs in America has grown by only 1% while during the same period the number of federal government employees has grown by 15%.
  • Prior to the economic meltdown approximately eight years ago, the US Department of Transportation had only one employee earning over $170,000 annually.  That number is now about 1,700.
  • At the beginning of the economic meltdown the US Department of Defense had approximately 1,700 employees making $150,000 or more annually.  That number is now over 10,000.
  • During the first two years after the beginning of the economic meltdown the number of federal employees earning in excess of $100,000 annually doubled.
  • In 2009 the average compensation package including salary and benefits in the private sector was approximately $61,000 per employee.  During that year the average total compensation package for federal employees was over double that or $123,000.

There are currently about 21 million government employees in the United States, approximately 16% of potential voters.  This is a huge voting-block, especially considering how few votes often separate winners and losers in important elections. However, add to this number families of government workers and the potential influence this voting-block rose enormously.

There is a growing anger and disillusionment among American voters that has not been seen in many decades.  On the Left this is expressed by the surprising strength of Socialist Bernie Sanders in the Democratic primaries.  On the Right this is seen through the strength that Donald Trump has within the Republican primaries, even though his views have historically been in conflict with basic Republican ideology.

The electorate’s growing disillusionment has occurred during a time of historic growth in government power and spending.  Those who believe that giving more power to government or allowing them to spend more money change this direction ignore historical precedent.

Many Democrats are on enthused by their likely candidate, Hillary Clinton.  Similarly, many Republicans are aghast at the thought of Donald Trump being their party’s standard-bearer.  Here’s a consolation for both: Not to worry, the special interests groups, including those who make a living on the public payroll, will ensure that the Country continues in the same direction that it has been taking for the last 50 years no matter who is president.  Yikes!

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Bernie Sanders and Wealth Redistribution

Much has been made by the fact that the second most popular candidate running in the Democratic presidential primary is not even a Democrat, but instead an admitted Socialist.  While some moderate Democrats may be troubled by this, the fact is that the Party has morphed from being merely Progressive to supporting Socialism long ago.

Socialism, and for that matter crony-capitalism from the Right, are a natural progression of a corrupt political system.  The political class in essence buys votes by taking money from certain members of society and handing it out to others, their constituents.  As time goes on the amount of payouts grow as involves embraces more constituents that will then vote for one political party or the other.  Socialism is the natural end to this progression where everybody supposedly becomes economically equal (except for the political elites), although at the aggregate level, society becomes much poor.  This tune has been played many times in countries that tried this utopian experiment.

During a recent interplay (video posted below) between Fox Business host Stuart Varney and Erin Bilbray, a supporter of Sen. Bernie Sanders, the goal of Socialists is unveiled.  Ms. Bilbray indicates her belief that when some in society encounter hard times, it is the government’s job to resolve their problems.  That feel-good approach to problem resolution does not work in nature, parenting, education, or economics.  So why do Socialists promote this agenda?  In the case of some, it is naivety and it is likely that Ms. Bilbray falls within this category.  For others including the political elites, it is but a method to gain power and wealth.

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European Progressives Never Learn

Thomas Piketty , a renowned economist from France who posted an op-ed in the New York Times titled “A New Deal for Europe”.  While Piketty’s topic is important, his conclusions are misplaced.  His logic shows just how unapologetic Progressives are for the problems their policies have inflicted on the world.

Piketty expresses concern for the growth of the far Right in Europe.  This Blog has been concerned for some time with the potential for fascism to once again rear its head in Europe.  This concern stems from Europe’s unsustainable economic path that has led to the large sections of its population being negatively impacted, creating a breeding ground for discontent.  This path started long before the meltdown of 2008 that Piketty refers to.  Its roots stem from the Left’s Progressive policies that have dominated European politics for decades.

Piketty blames mismanagement by European governments for not only poorly creating the EU, but also managing their economic policies.  While true, the EU’s creation was so poorly done that it guaranteed the current result, as economist Milton Friedman predicted in 1997: Continue reading

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Federal Reserve is Getting Nervous

President Barack Obama often touts his administration’s achievements relating to the economy. Often the President uses the decreasing unemployment figure and the strength of the equities’ markets as proof statements.  Both are red herrings.

The unemployment figures are ginned-up by the government to back a chosen narrative.  In recent years of this rate has been reduced mainly by Americans dropping out of the workforce and therefore not counted as unemployed.  In addition, Americans have been forced to take less than full-time work.

As stock prices have shown in recent weeks, what goes up will come down.  The Dow Jones Industrial Average is down this year by 1,800 points or approximately 10%.  This significant drop has occurred even though the Federal Reserve has maintained historically low interest rates for nearly 8 years.

The Federal Reserve today released a statement indicating that it too was concerned with the direction of the economy.  In a statement released today, the Fed said: “The [Fed] is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”  This typical Fed gibberish that in simple English means the economy is shaky.

The Federal Reserve’s near zero interest rate policies created an economy that is out of balance.  Cheap interest rates have not fueled real economic growth, but instead created financial bubbles, as exemplified by equity valuations.  This has placed the Fed in a quandary.  If the economy weakens, the Federal Reserve will either have to allow the forces of supply and demand to correct the imbalances; i.e. a significant recession, or use even more radical easy money policies to keep the party going.  Realistically, the only ammo left in the Fed’s arsenal is negative interest rates.  The implications of banks requiring payments from depositors for savings deposits are hard to imagine.

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Economic Growth Anemic Despite Governmental Interventions

When the economic meltdown occurred eight years ago the government used the crisis as an excuse for interventions that included huge bailouts and significantly increased deficit spending.  These radical interventions were justified by the threat without them significantly greater economic damage would occur.  While even in hindsight it is difficult to determine the validity of those claims, there is enough history to understand that the interventions created long-term negative consequences to the economy.

A recent posting by Van R. Hoisington, Lacy H. Hunt, Ph.D. titled A Weak Finish to a Disappointing Year shares details about some of the consequences from the governmental and Federal Reserve’s interventions.  They include:

  • “Surely the economy would be kick-started by: three rounds of quantitative easing and forward guidance; a record Federal Reserve balance sheet; and an unprecedented increase in federal debt from $9.99 trillion in 2008 to $18.63 trillion in 2015, a jump of 86%. Further, stock prices had gained sufficiently over the past several years, thus the so-called wealth effect would boost consumer spending.”
  • “The broadest and most reliable measure of economic performance – nominal GDP – decelerated. The 3% estimated gain registered in 2015, measured by the year ending quarter, was down from 3.9% and 4.1%, respectively, in 2014 and 2013.  In fact the gain in nominal GDP in 2015 was less than the gain for any year since the recession.”  ….. “All of the above economic measures were expanding at, or near, their weakest yearly growth rates in the final quarter of 2015, indicating that the economy possessed little forward momentum moving into 2016.”
  • “Personal consumption, the largest category of nominal GDP, decelerated to an estimated 3% rise in the latest twelve months, down from 4% at year-end 2014, the smallest year end annual increase since immediately after the 2008-09 recession.”
  • “The percentage of total auto loans in the subprime category hit a ten-year pre-crisis high in the third quarter, according to the New York Fed”
  • “Industrial production slumped 1.4% over the first eleven months of 2015, with a drop of 2% outside of the automotive sector.”
  • Real per capita GDP grew only 1.3% in the current expansion that began in mid-2009; this is less than one half the growth rate in the expansions since 1790.”

As Hoisington and Hunt point out, the evidence points to the failure of the massive spending, bailouts and other unconventional monetary policies including Quantitative Easing (QE).  QE has been used multiple times by the United States Europe and Japan. The failure of these policies is evident. Continue reading

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