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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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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