So in Part I, i discussed the five main reasons why Trump was able to win the presidency. Here in Part II, i'll discuss why I remain firmly in the anti-Trump camp today.
It may be confusing to some as to why I'm against Trump after listing so many of those obvious good reasons to be in favor of him. If i could summarize why I'm still against him in one line, it would be this: Trump may not bring about the end of the world, but he will bring about the end of the world as we know it. I do think Trump will bring change, but i don't believe that most of it will be positive for the world.
Frankly, I didn't think Americans would be so desperate for change, that they'd willing to sell their whole future in exchange for pennies. I think electing Trump was a bad move, just like Brexit was. The issue with discussing topics like this is that people won't see the consequences of their choice until years after the choice was made. People think that because the sky didn't fall the day after, things are A okay. In the real world, these things always take time to play out, but when they do, it can have devastating results.
My hope going forward is that democrats in the house and senate give republicans the same respect that republicans gave democrats when Obama first took office. Fair right? Well with that standard, the obstructionism should essentially begin in short order, so im personally looking forward to that. There are several reasons why I'm still anti-Trump, but in this take I'll state one of my main reasons. (P.S. if i bold anything, those are typically good keywords to copy/paste into google so you can do your own homework)
Main Reason: He'll likely cause a US Treasury Bond/Dollar crisis which would destroy not only destroy the U.S. economy, but the international monetary system
Honestly, this is by far one of the biggest reasons why I'm against Trump. On the campaign trail, he clearly displayed that he has no idea how the international monetary system works, and what the consequences of certain actions would be. His flippant view of the U.S. defaulting on the national debt, as if the whole country was just another one of his many businesses that he filed for bankruptcy on, should put the fear of God into you. Why? Well, let me break this down for you into three parts.
First, I need to explain the history in order to provide context. Then I'll state what Trumps position on which direction the national debt should go, and lastly why his stance is a problem. This issue is important to me, largely as someone who invests for a living in stocks, bonds, commodities and derivatives. His views on this can have far-reaching effects, well beyond the borders of the USA.
So after WWII, the world was essentially in shambles. Most currencies had been destroyed via inflation that was brought about by everyones attempts to fund their war efforts. The world was on the brink of suffering another financial collapse, but America came in with the Bretton Woods Agreement in 1944 in order to stabilize exchange rates and allow currencies to regain their strength. The way they did it was by linking the U.S. dollar to gold, and linking all the major currencies of the world to the U.S. dollar, so think of it this way:
Gold -----> U.S. Dollar --------> All major currencies
The value and strength of the U.S. dollar was based on the intrinsic value of the gold bullion stored at Fort Knox and Federal Reserve in New York (some of which is still there to this day), and the value for all other currencies piggybacked off of the value of the U.S. dollar, which allowed them to regain and maintain their strength. Now in 1971, President Nixon took the U.S. dollar off of this link to gold for a number of reasons i won't go into now. But essentially, it meant this:
Nothing -------> U.S. Dollar -------> All major currencies
This decision in the 70's nearly destroyed the U.S. dollar and world currencies. If you've ever heard the phrase "beans in the teens", it was a phrase coined in the 1970's when the price of beans and other commodities skyrocketed in price, hitting double digit prices for the first time in history. Things got so bad by removing this link to gold, the U.S. started denominating U.S. bonds in swiss francs, because the U.S. Dollar had been so badly destroyed, swiss francs were one of the few currencies left on the planet that people would take (they were called Carter Bonds). The combination of two important moves saved the U.S. economy.
The first was done by Paul Volcker (Federal Reserve Chairman) jacking up interest rates on government bonds to 15% percent. At the time, the debt was low enough to make this a feasible option, and eventually the U.S. dollar/economy started stabilizing. Additionally, the U.S. cut a deal with Saudi Arabia and OPEC, creating what is now known as the Petrodollar. In short, this was a deal that made the large oil producing countries in the middle east price their oil in U.S. dollars.
Since every modern economy needs oil, oil is one of the most often purchased commodity internationally, and by pricing it in U.S. dollars, America's currency enjoys an artificial demand and hence a boost in its value. It's a sort of buoyancy that no other currency on the planet enjoys. This is partly why Americans enjoy such a low cost of gasoline at the pump compared to the rest of the world, despite how often Americans may complain about it:
So the combination of these two factors allowed for the new international monetary system, post Bretton Woods, to survive. The system now is based solely on confidence in the U.S. dollar. Without a tangible asset like gold backing the currency, the only thing backing the U.S. dollar is world confidence in U.S. treasury bonds and the petrodollar standard. Any sort of disruption in that confidence will not only crush the Dollar, it will crush the Yen, the Euro, the Yuan, the Pound, and pretty much all major currencies that exist.
Trump's Stance on the National Debt
So now that you've got the history as context, lets talk about what Trump plans on doing. The Trump plan is basically Reaganomics all over again. His plan, like Reagan's was, is to increase spending by A LOT, and to lower taxes by A LOT. On this issue, Hillary Clinton was, funnily enough, more honest than Trump was. If you're going to increase spending, its honest to tell your voters on the campaign trail that you're going to pay for it by increasing taxes.
Now you may not want to increase your taxes, but if you want to afford to buy things you need to get the money from somewhere, right? Well, Trump has repeatedly stated that he will basically do what Reagan did by reducing taxes and increasing spending. But don't take my word for it. Here it is from the horses mouth himself on Fox Business:
He begins the talk of lowered taxes and higher spending from 5:27 onwards
Politico also picked up on this same interview and did their own piece on it, where you can see what he said in written form, which I'll post here:
Trump on taxes:
Hillary’s gonna raise taxes very, very substantially. She’s gonna have one of the biggest tax increases ever,” Trump said. “And I’m doing the biggest tax decrease. So of all of the people running, including Republicans and Democrats, mine is the biggest.
Trump on spending:
“Her number is a fraction of what we’re talking about,” Trump said, referring to Clinton’s $275 billion rebuilding plan. “We need much more money than that to rebuild our infrastructure. I would say at least double her numbers and you’re gonna really need more than that. We have bridges that are falling down. I don’t know if you’ve ever seen the warning charts, but we have many, many bridges that are in danger of falling. They’re old. They haven’t been fixed.”
When people say he's not a traditional Republican, they aren't kidding. He wants to increase spending even more than the Democrat Hillary Clinton. But instead of paying for it via taxes like Hillary Clinton wanted to do, he wants to increase the national debt even more than it already is:
He added that there would be bonds, explaining that “these would be bonds and these would be sold as bonds. So we’d do infrastructure bonds from the country, from the United States. We would do infrastructure bonds. We have to fix our infrastructure.”
Those are treasury bonds folks. No way to wiggle around it. You have it here in writing, and you have it from the horses mouth himself. Reagan went this route too. What was the result? The Mises Institute lays it out succinctly:
The result has been unprecedented government debt. Reagan has tripled the Gross Federal Debt, from $900 billion to $2.7 trillion. Ford and Carter in their combined terms could only double it. It took 31 years to accomplish the first postwar debt tripling, yet Reagan did it in eight.
Why Trumps Stance is a Problem
Currently, the U.S. national debt sits at around twenty trillion dollars. Can the U.S. economy survive a doubling or a tripling of the national debt to 40 or 60 trillion dollars without causing a loss of confidence in Americas ability to actually repay it? Probably not. One of the reasons why i supported Hillary over Trump was that despite all her faults, she at least understood the importance of needing to raise taxes if you actually want to spend on infrastructure and keep the national debt from ballooning. But Trump wants to play this game of allowing people to have their cake and eat it too. As we all know, there are no free lunches in this world. If you don't pay for stuff via taxes, the only other option is to put it on the national tab.
At some point, no one knows exactly when, the amount of debt will grow to a level that becomes unacceptable to foreign holders of U.S. treasury bonds. If the world looses confidence in Americas ability to pay back its debt, the game is over. Period. When you start talking about potentially doubling or tripling the debt from an already crazy number of 20 trillion dollars, you start to creep into the realm of uncertainty.
But if that wasn't bad enough, there currently is very little the U.S. could do if it once again had a currency crisis caused by a loss of confidence. In the past as I noted, the U.S. was able to raise interest rates, and they were able to force the Saudi's to price oil in U.S. dollars creating the petrodollar. These two options are withering away. In terms of the petrodollar, China is kicking ass. Americans won't be able to rely on this for much longer:
In terms of raising interest rates, consider this: The U.S. takes in around three trillion dollars in taxes. Say Trump only doubles the debt to 40 Trillion dollars. Just to pay a 1% interest rate on 40 trillion, you're talking about 400 billion dollars. That's a huge chunk of the tax revenues which is going to simply servicing the debt. Of coarse, since Trump wants record low taxes, you wouldn't even have three trillion dollars available. Additionally, bond market crises tend to raise interest rates as investors pull out of your bonds.
So imagine a situation where something like 25 to 50 percent of your tax revenue is going to servicing the debt. its essentially a catch 22. In order to solve the problem, you would need to increase interest rates, but if you raise interest rates given how large the debt is and how low the revenues would be, the very act of raising interest rates would destroy the economy. America can't reverse its current trajectory without reducing spending, or at the very least increasing taxes to keep up with the spending:
The Chinese have seen this problem coming from a mile away. As Americas largest foreign creditor, China has been hedging its bets that the U.S. would likely have a currency crisis some time in its future. The now infamous Wikileaks reported on it some years ago, and was picked up by some mainstream media sources. China has been buying gold for years now in anticipation of the Dollar loosing world confidence
The Russians have been on board with this as well.
As a matter of fact, not too long ago, Putin had this to say (source):
The U.S. is endangering the global economy by abusing its dollar monopoly
If you've been wondering why Putin and Trump so unexpectedly became bedfellows...well one of the reasons is likely due to him understanding that Trump's economic plan will likely exacerbate Americas structural weaknesses in its debt situation, and bring about the kind of U.S. dollar currency destruction that will allow Russia to resurge as a global power once again. Putin has been a geopolitical chess player since taking office. Him and his foreign minister Lavrov are constantly thinking three or four steps ahead of the west. Putin played his cards well befriending Trump early.
I will say this though. Whatever ends up happening, it will be one hell of a show to watch. Analyzing how the pieces will end up falling will be a source of great intellectual stimulation for years to come.
The Silver Lining
So i just finished bashing Trump quite a bit there, and i believe its deserved. However, there is some silver lining to all of this. Trump, as clueless to a lot of this that i believe him to be, he has shown at least some passing interest in the past on gold and its value in comparison to the dollar. When he was still just an entrepreneur, he was approached by APMEX, a company that sells gold to millions of customers. When this happened, he decided to allow the company to leave a security depost with him in gold instead of with U.S. dollars
Most of you are probably unaware that this even happened, so i thought i'd share it. He's been made aware of gold and its value, which is good news. The problem is that where things stand now, his actual policies reflect a president that is playing right into the hands of the Russians and the Chinese. Just as with everything else, he seems to identify what the problems are quite well, but has no idea on what the actual solutions should be. That is my long term worry, and we'll see in the coming years how much he's able to accomplish, or destroy.