Populist Revolution

The Unpredictable Presidency of Donald Trump

By Gordon Repinski and Holger Stark

 Photo Gallery: America's Populist President

Donald Trump's election as the 45th president of the United States was not the product of his strength, but of Hillary Clinton's weakness. His victory has plunged the US into a deep crisis -- and nobody knows how he might govern, perhaps not even Trump himself.

In the moment of his triumph, when Donald Trump began making his way to the Hilton Hotel in Manhattan in the early morning hours of Wednesday, the chanting started -- aggressive and loud, bellowed out by a group of frenzied men. It spread through the crowd and was aimed at Trump's erstwhile opponent, Hillary Clinton. "Lock her up! Lock her up!"

Trump, after all, had promised to do just that -- to throw his political adversary in prison as soon as he had taken the oath of office on January 20, not unlike the way Vladimir Putin deals with his enemies in Moscow or Recep Tayyip Erdogan in Ankara. And thus, the zero hour of the new American era began just as the campaign had ended: with a threat that contained little in the way of reconciliation and was reminiscent of distant dictatorships -- even as Trump later sought to rein in the chants by speaking of "binding the wounds of division" and of coming "together as one united people."

His followers saw his victory as a signal, as the beginning and not as the end. They bared their teeth and cheered as the Empire State Building radiated red in the night sky with a gigantic image of their leader projected onto the facade.

On that evening, America experienced a revolution. The successful postwar Western model, rooted in mobility, enlightenment and inclusion has been convulsed by this angry protest vote.

It was a vote of no-confidence in globalized capitalism, an expression of America's partition into liberal cities and backward rural areas. With this election, the country's white majority has sought to affirm and protect its identity.

The political system has experienced a delegitimization of democracy that makes it impossible to simply carry on as before. It is a delegitimization aimed primarily at the elite, Hillary Clinton first and foremost -- a woman who represents this system more than any other politician.

This election was about more than simply a change in government. It completed an epochal shift. The Trumpian revolution is an overthrow of the neoliberal conservatism of the Republicans, of the faith in free trade and of the advantages of a multicultural society. On Tuesday evening, aggressive nationalism returned to the White House.

The President of the Defeated

Trump is the president of the defeated: the white middle- and working classes who are among the economic losers of globalization -- and among the cultural losers of the demographic change that is making the US more diverse. Many of these "forgotten men and women," as Trump described his supporters on election night, are from the lower middle classes and are driven by fears of losing their jobs and their places in society. They rose up with the anger of desperation to take back their country, which they believe Obama and the country's minorities had sought to take away from them.

In Trump, they have found a charismatic and callous leader. He was unable to win the popular vote, but he won the electoral vote, which is enough. The voices of his voters have united in a cry for change.

And it is true: Many in America have the feeling that the system no longer serves the citizens of the country, instead promoting the interests of a clique that controls power and prosperity.

That is true of politics and even more so of the economy. Those who have visited the ghost towns of the Rust Belt in the northeast -- where the death of American industry can be observed, where Trump's core voters live -- can hardly be surprised that the people there would ultimately rise up.

What is surprising, however, is how and when it happened. And that it was a person like Trump who was able to profit from their deep disappointment -- a vulgar billionaire who plays people off against each other. Still, the search for reasons as to why voters backed Trump should not gloss over the fact that around 60 million Americans elected a racist and a chauvinist to the White House. He is a man who unabashedly courts neo-fascist elements. After three brutal TV debates and Trump's announcement he would prevent Muslims from traveling to the US, nobody can say they didn't know the kind of person they chose to be the 45th president of the United States.

Even Trump himself seemed in disbelief on Thursday as he sat down next to Barack Obama in the Oval Office. Slightly slumped, he sat next to the president, his arms resting in his lap as Obama spoke. When it was Trump's turn, he was no longer full of bravado, indeed, he sounded almost submissive. "I have great respect" for the president, he said, adding about the meeting: "As far as I'm concerned, it could have gone on for a lot longer." Obama had called Trump at around 3:30 in the morning on election night to invite him to the White House.

Now, a man is set to take on the country's highest office who directed his entire campaign against the establishment and who presented himself as an outsider until the very end. "Drain the swamp" was one of his maxims, a reference to Washington, DC. How much of this populist campaign will he attempt to transform into reality in the coming months. What will his presidency look like?

"Presidencies are like a gas tank," says Jeffrey Lord. "You start full, but then it lowers. Trump has to start implementing his plans immediately, just like Ronald Reagan did in 1981."

Lord served as associate political director in the Reagan White House and is among Trump's earliest supporters. At a recent appearance in Pennsylvania, Trump even called his friend Lord up on stage and they chatted extensively once the event had ended. Lord believes that Trump could ultimately end up on Reagan's level, a man who was initially an outsider and vociferously reviled but who today is counted by many as among the best presidents in recent US history.

The greatest challenge facing Trump is that of shifting from campaign-style attack mode to the day-to-day business of running the government, says Dan McAdams, a professor of psychology at Northwestern University in Illinois. McAdams specializes in analyzing presidents and in the spring, he spent three months taking a close look at Trump's psyche. He believes Trump is highly unstable and considers him to be a neurotic narcissist. "It's the hunt that I believe I love," Trump once said.

And that is how he ran his campaign -- politics as a hunting expedition, chasing down adversaries like Jeb Bush and Marco Rubio and, later, Hillary Clinton. And Trump got them all. The question is whether someone like him can suddenly stop hunting and start governing.

A Political Counter-Revolution

Lord believes that Trump has changed. "He has become more mature and has learned. He has understood that he is leading a movement of millions of people who support him passionately.

He won't disappoint them." But that could be easier said than done. The expectations of his followers are immense. The eight liberal years under President Obama have changed the country and Trump supporters want more than simply a change in direction. They are seeking a political counter-revolution.

Mike Pence, Trump's designated vice president who hails from the party's evangelical wing, has already said he wants to see a tightening of abortion regulations. Arch-conservatives see the more than 40-year-old right to abortion as a betrayal of Creation, and Trump promised to abolish that right along with one of the central achievements of the Obama presidency: that of making healthcare available to all.

But what kind of a president will Donald Trump really be? In the past, he has also voiced approval of more liberal abortion laws and he once demanded health insurance for all Americans himself. Over the years, he has held all manner of contradictory opinions on many different political issues, sometimes at the same time.

Those who think they know what Donald Trump will do as president are likely overestimating their own intelligence. Trump will be the most unpredictable president that America has ever had. That holds true of his thin-skinned personality just as it does for his political positions.

Anything, really anything, is possible. And that is the most disturbing thing.

The American Hugo Chávez?

It is possible that Trump will turn out to be the US version of the late Venezuelan President Hugo Chávez -- that he will appease and divert Americans while at the same time dramatically eroding the country's institutions and politicizing the judiciary, the CIA and the FBI. And that he, as he indicated he would, will allow for the return of torture. And that he will build the promised wall on the border to Mexico, impede people from Muslim countries from coming to the US, turn up the volume on bigotry and use the presidency to personally enrich himself. It could mean the end of NATO -- but it could also be that his bromance with Putin will cool and turn hostile.

It is equally possible, though, that Trump will turn over the governing of the country to experienced Republican politicians and will preside over proceedings as a kind of CEO. It is possible that he will build his wall as a sop to his supporters but will quickly realize that his announced intention to deport 11 million illegal immigrants makes no economic sense. It is possible that he will service the yearnings for a resurgent white identity primarily with rhetoric, that he will seek to stimulate the economy with billions in investments and that his foreign policy will simply be a continuation of the American withdrawal that began under Obama.

We simply don't know.

The only thing we know -- from his statements, his campaign and his personality -- is that he will be a president unlike any that has come before.
A Danger to Democracy?

That is another reason why Trump's opponents have found it so difficult to find the correct response to him. Should they give him "the chance to lead," as Hillary Clinton suggested in her almost uncannily magnanimous concession speech delivered the day after the election? Or would doing so be akin to normalizing a presidency that is anything but normal and which many see as a danger to American democracy?

It is certain that Trump's approaching Supreme Court appointment will have far-reaching consequences. The post of the late Justice Antonin Scalia has been vacant for months, with the Senate declining to even hold hearings for Barack Obama's compromise candidate Merrick Garland. Leading Republicans like Ted Cruz are demanding that Trump appoint an archconservative candidate to ensure that gun laws remain permissive and that the right to same-sex marriage, established just a-year-and-a-half ago, be overturned. In contrast to Cruz, Trump is not an archconservative, but he is flexible enough to service the extreme right wing of his movement.

But will Trump really launch trade wars with China and Mexico? That seems doubtful because it would be bad for business. There is much to indicate that Trump's economic policy will be a kind of ersatz foreign policy, with a president who sees international diplomacy as being not unlike the negotiations surrounding a construction contract. Beyond that, it remains unclear what the new president's foreign policy will look like. From the very beginning, Trump presented himself as a candidate who had a national focus and he has shown no interest thus far in consensus-based international alliances. He sees NATO primarily as a financial drain and as an alliance from which America's tight-fisted European allies profit. His advisors had to work long and hard to prevent him from flirting with leaving NATO during the campaign.

There is likewise still no convincing explanation for Trump and his team's strange closeness to Moscow. On Thursday, Russia's deputy foreign minister, Sergei Ryabkov, announced that the Russians had maintained contact to Trump's people. Not all, he said, "but quite a few have been staying in touch with Russian representatives." Nobody in Washington is willing to predict just how the remote bromance between Trump and Russian President Putin might affect relations between the two countries. Nor is anyone venturing a guess as to what strategy Trump might employ in the fight against Islamic State. As such, Trump's foreign policy ambitions remain a great unknown.

Among the decisive questions facing his tenure will be whether Trump can break the power of multinational corporations, as he promised to do in the campaign. And what his relationship to free trade will be. On the campaign trail, he promised that within 48 hours of entering the White House, he would force Ford to bring its factories back to the US. He also wants to force Apple to cease producing the iPhone in Shenzhen, China and bring production to America.

And he wants to renegotiate the North American Free Trade Agreement (NAFTA) in addition to blocking ratification of TPP and TTIP, trade agreements with Pacific Rim countries and with Europe, respectively. He has indicated he will use protectionism to warm the hearts of his unsettled followers.

Dazed Washington

Trump knows that a significant measure of his success will be whether he is able to create jobs -- and he is likely to present an investment program for the country's aging infrastructure.

Because he is certainly right about one thing: America is a dilapidated country where wealth is private but the potholes belong to everyone. When it comes to the daily needs of Americans, the state has failed.

An infrastructure project would create jobs and stimulate the economy in the spirit of Franklin D. Roosevelt's New Deal. With such a show of strength, Trump could appease those who have been forced to stand aside helplessly in recent years as jobs have migrated abroad to places like China, Malaysia and Mexico.

But it would also stand in direct contradiction to Republican dogma, which has long been intent on shrinking the state. Indeed, Trump will likely face significant opposition from within his own party should he seek to transgress GOP gospel. And would the Republicans also oppose him if he were to use the office of president to threaten the guarantees inherent in the constitution?

In the days following the election, a dazed Washington sought to convince itself that things won't get that bad. Government institutions, people insisted, would limit what the president would be able to do. But Trump is being presented with an unusually favorable opportunity: Not only does the GOP control both houses of Congress, but once Trump has made his appointment, the Supreme Court will likely be conservative as well. The fact that the Republicans don't have a two-thirds majority in the Senate is the only thing preventing Trump from pushing through constitutional amendments as well.

All of that means that Trump will have significant latitude for at least the first two years of his term.

Furthermore, Obama demonstrated just how efficiently a president can circumvent Congress by way of executive orders -- and Trump wouldn't even need the support of his own party to issue them. He could theoretically use the strategy to sidestep all those lawmakers who harbor grave doubts about the constitutionality of mass deportations of foreigners and of banning Muslims from entering the country. Trump can lure his party to his side with appointments and by including them in the decision-making process -- he knows that he will need them.

Birth of a Populist Movement

Speaker of the House Paul Ryan -- a man who spent months waffling back and forth between rejecting Trump and capitulating to him -- is likely to play a key role. It is still unclear what his relationship to the new president will ultimately look like.

The Republicans of the future, believes Trump's friend Jeffrey Lord, could be the party of the white working class, grassroots conservatives, libertarians and populists while following hardline positions on free trade and immigration. That would mark the end of Abraham Lincoln's Grand Old Party, but it would be a political apparatus to Trump's liking. It would mark the end of traditional conservatism and the birth of a new populist movement.

Trump's entire life has been defined by not adapting to his surroundings, but by adapting his surroundings to himself. He is surrounded by advisors who pursue a similar agenda, led by his campaign manager Stephen Bannon, who used to lead the right-wing populist website Breitbart News.

In the White House, Trump could surround himself with a mixture of experienced political professionals and outsiders, who represent a new beginning. Those in the running for cabinet positions include: Senator Jeff Sessions, who is among Trump's closest advisors; New Jersey Governor Chris Christie; and the chairman of the Republican National Committee Reince Priebus.

Mike Flynn, former director of the military intelligence service DIA, is under consideration for defense secretary or national security advisor.

Trump is also likely to include businessmen in his cabinet, people similar to himself. Forrest Lucas, head of Lucas Oil, could become secretary of the interior while Steven Mnuchin, an investment banker with Goldman Sachs, has been mentioned as a candidate for treasury secretary. For secretary of state, the archconservative former Speaker of the House Newt Gingrich is in the running as is Senator Bob Corker. And right-wing journalist Stephen Bannon is actually under consideration for White House chief of staff.

"Trump has always surrounded himself with people who reinforce his worldview," says Tony Schwartz, who ghost wrote Trump's book "The Art of the Deal." And he has also understood the message sent by the voters in this election: People are extremely forgiving of newcomers as long as they aren't part of the establishment.

Hillary Clinton embodied that establishment. That was well known and choosing her as the party's candidate -- capitulating to the Clinton clan -- will go down in history as the Democrats' fatal error.

The Clinton's power within the party led to possible candidates like Senator Elizabeth Warren refraining from running in the first place. It is said in Washington that Vice President Joe Biden elected not to run because it was clear early on that the Hillary Clinton network was too strong. Many believe that Trump wouldn't have had a chance against Biden -- and the socialist Bernie Sanders may have done better as well.

Her lack of a connection with the electorate should have been clear to Clinton when, for example, she made a campaign visit to Flint, Michigan, a state she would go on to lose. The largely poor, largely black city was once a symbol of America's industrial strength and was home to the auto industry.

Now, places like Flint stand as symbols of political failure: When the municipal government privatized the water supply in 2014, residents suddenly couldn't even rely on clean water. The city is decaying.

The American Clash of Cultures

Clinton wanted to show solidarity with the people of Flint, but when she visited a black church congregation in the northern part of the city, when her fleet of a dozen dark-colored sedans drove up, it felt more like an invasion. Many people in Flint still feel that they were merely being used as a backdrop for Clinton's campaign and that the visit had very little to do with their own concerns. The pastor of the church speaks of the cross-armed resistance that confronted Clinton. The people, he says, no longer believe that anyone can really do anything for them anymore.

In recent elections, the Democrats managed to win states like Michigan and Pennsylvania, with the Rust Belt emerging as an important source of support for Obama. This time around, though, they went to Trump.

Indeed, Trump didn't just win the election, Clinton lost it. Low voter turnout led to her defeat in some states. But the Democrats must also take a close look at why a large number of Americans who voted for Barack Obama four years ago decided to support Trump this time around.

Trump now finds himself the leader of a deeply divided country that is experiencing a clash of cultures: white America against diversity; urban against rural; modernity against anti-modernity. The America of tomorrow will include a growing number of blacks and Hispanics: Trump's victory was the last major rearguard battle of the whites.

American society will only slowly recover from the shock of this "American tragedy," as the New Yorker has branded it. And it's not yet clear if the country might be facing an even deeper crisis of democracy.

'We Were Wrong'

Donald Trump has made a new political culture acceptable and it is one that will be copied by future candidates, says John Hudak of the Brookings Institution. "They have seen that it pays to say unacceptable things." The challenge facing the political system in the coming years is that of making compromise possible again, he says. The entire world is watching with bated breath to see how a cosmopolitan society will react to having elected the leader of a nationalist, populist movement to its highest position of power.

"We thought that the great majority of Americans valued democratic norms and the rule of law," economist and New York Times columnist Paul Krugman wrote this week. "It turns out that we were wrong." On the day after the election, Krugman tweeted in horror that it wasn't just the "immense damage Trump will surely do. There's also a vast disillusionment that as of now I think of as the end of the romantic vision of America (which I still love)."

Not much is left of the American optimism that always defined this proud nation. Trump has transformed this powerful, divided country to a greater degree than even his most bitter opponents thought possible. He has introduced a level of crudity and callousness that had seemed impossible in the otherwise so polite American society. "Once you inject hyper-anger into civil society, it is almost impossible to undo," wrote Republican pollster Frank Luntz in a Tuesday New York Times op-ed.

In a furious essay written on election night, David Remnick, the editor-in-chief of the New Yorker, wrote, "this is surely the way fascism can begin." The future he described in the piece was dark. "We will be asked to count on the stability of American institutions, the tendency of even the most radical politicians to rein themselves in when admitted to office…. There is no reason to believe this palaver."

Heidi Beirich of the Southern Poverty Law Center, which keeps close tabs on right-wing extremism, says that until Trump's candidacy, "there had been a democratic consensus to steer clear of white racists. But this stigma doesn't exist anymore. Trump is the fulfillment of many hopes of the radical right."

The campaign may now have come to an end, but the clash of cultures that Trump is leading will occupy America for quite some time to come. The country needs nothing so much as a therapist, but that is not a role that the new president is equipped to play. Seldom has a presidency begun with such a weight on its shoulders as that of Donald Trump.

Shortly before the election, four out of 10 Trump supporters said in a survey that they were not prepared to accept the election results in the event of a defeat. A country whose people are no longer willing to accept the outcome of free and fair elections is a country in decline. A country where women can no longer decide if they want to give birth to a child, where there are no equal rights for homosexuals and whose president has announced his intention to ban the entry of Muslims is no longer open.

Psychologist McAdams believes that Trump will be unable to develop any kind of sensitivity for the concerns of his opponents because he grew up in an artificial world. McAdams' hope is not based on the future president's policies, but on his psyche: "People who have very strong narcissistic agendas like Trump can be very charismatic," he says, "But sooner or later people get tired and lose interest in them."

Sooner. Or later.

The Taming of Trump

Nouriel Roubini

Trump meets with Obama

NEW YORK – Now that Donald Trump has unexpectedly won the US presidency, it is an open question whether he will govern in accordance with his campaign’s radical populism, or adopt a pragmatic, centrist approach.
If Trump governs in accordance with the campaign that got him elected, we can expect market scares in the United States and around the world, as well as potentially significant economic damage. But there is good reason to expect that he will govern very differently.
A radical populist Trump would scrap the Trans-Pacific Partnership (TPP), repeal the North American Free Trade Agreement (NAFTA), and impose high tariffs on Chinese imports. He would also build his promised US-Mexico border wall; deport millions of undocumented workers; restrict H1B visas for the skilled workers needed in the tech sector; and fully repeal the Affordable Care Act (Obamacare), which would leave millions of people without health insurance.
Overall, a radical Trump would significantly increase the US budget deficit. He would sharply reduce income taxes on corporations and wealthy individuals. And while he would broaden the tax base, increase the carried-interest tax, and encourage companies to repatriate foreign profits, his plan would not be revenue-neutral. He would increase military and public-sector spending in areas such as infrastructure, and his tax cuts for the rich would reduce government revenue by $9 trillion over a decade.
A radical Trump would also drastically change the current monetary-policy approach – first by replacing US Federal Reserve Chair Janet Yellen with a monetarist hawk, and then by filling current and upcoming Fed Board vacancies with more of the same. Moreover, he would repeal what he could of the 2010 Dodd-Frank financial reforms; gut the Consumer Financial Protection Bureau; cut alternative-energy subsidies and environmental regulations; and slash any other regulations that supposedly hurt big business.
Finally, a radical Trump’s foreign policy would destabilize America’s alliances and escalate tensions with rivals. His protectionist stance could incite a global trade war, and his insistence that allies pay for their own defense could lead to dangerous nuclear proliferation, while diminishing American leadership on the world stage.
But it is actually more likely that Trump will pursue pragmatic, centrist policies. For starters, Trump is a businessman who relishes the “art of the deal,” so he is by definition more of a pragmatist than a blinkered ideologue. His choice to run as a populist was tactical, and does not necessarily reflect deep-seated beliefs.
Indeed, Trump is a wealthy real-estate mogul who has lived his entire life among other rich businessmen. He is a savvy marketer who tapped into the political zeitgeist by pandering to working-class Republicans and “Reagan Democrats,” some of whom may have supported Vermont Senator Bernie Sanders in the Democratic primary. This allowed him to stand out in a crowded field of traditional pro-business, pro-Wall Street, and pro-globalization politicians.
Once in office, Trump will throw symbolic red meat to his supporters while reverting to the traditional supply-side, trickle-down economic policies that Republicans have favored for decades. Trump’s vice-presidential choice, Mike Pence, is an establishment GOP politician, and his campaign’s economic advisers were wealthy businessmen, financiers, real-estate developers, and supply-side economists. What’s more, he is reportedly already considering mainstream Republicans for his cabinet, including former Speaker of the House Newt Gingrich, Tennessee Senator Bob Corker, Alabama Senator Jess Sessions, and former Goldman Sachs executive Steven Mnuchin (who also advised his campaign).
The traditional Republicans and business leaders Trump will likely appoint will then shape his policies. The executive branch adheres to a decision-making process whereby relevant departments and agencies determine the risks and rewards of given scenarios, and then furnish the president with a limited menu of policy options from which to choose. And, given Trump’s inexperience, he will be all the more dependent on his advisers, just as former Presidents Ronald Reagan and George W. Bush were.
Trump will also be pushed more to the center by Congress, with which he will have to work to pass any legislation. House Speaker Paul Ryan and the Republican leadership in the Senate have more mainstream GOP views than Trump on trade, migration, and budget deficits.
Meanwhile, the Democratic minority in the Senate will be able to filibuster any radical reforms that Trump proposes, especially if they touch the third rail of American politics: Social Security and Medicare.
Trump will also be checked by the American political system’s separation of powers, relatively independent government agencies such as the Fed, and a free and vibrant press.
But the market itself will be Trump’s biggest constraint. If he tries to pursue radical populist policies, the response will be swift and punishing: stocks will plummet, the dollar will fall, investors will flee to US Treasury bonds, gold prices will spike, and so forth. If, however, Trump blends more benign populist policies with mainstream pro-business ones, he will not face a market fallout. Now that he has won the election, there is little reason for him to choose populism over safety.
The effects of a pragmatic Trump presidency would be far more limited than in the radical scenario. First, he would still ditch the TPP; but so would Hillary Clinton. He claimed that he would repeal NAFTA, but he will more likely try to tweak it as a nod to American blue-collar workers. And even if a pragmatic Trump wanted to limit imports from China, his options would be constrained by a recent World Trade Organization ruling against “targeted dumping” tariffs on Chinese goods. Outsider candidates often bash China during their election campaigns, but quickly realize once in office that cooperation is in their own interest.
Trump probably will build his wall on the Mexican border, even though fewer new immigrants are arriving than in the past. But he will likely crack down only on undocumented immigrants who commit violent crimes, rather than trying to deport 5-10 million people. Meanwhile, he may still limit visas for high-skill workers, which would deplete some of the tech sector’s dynamism.
A pragmatic Trump would still generate fiscal deficits, though smaller than in the radical scenario. If he follows the Congressional Republicans’ proposed tax plan, for example, revenue would be reduced only by $2 trillion over a decade.
To be sure, the policy mix under a pragmatic Trump administration would be ideologically inconsistent and moderately bad for growth. But it would be far more acceptable to investors – and the world – than the radical agenda he promised his voters.

As Exciting as the 1930s

Doug Nolan

“One trouble with every inflationary creation of credit is that it acts like a delayed time bomb. 
There is an interval of indefinite and sometimes considerable length between the injection of the stimulant and the resulting speculation. Likewise, there is an interval of a similarly indefinite length of time between the injection of the remedial serum and the lowering of the speculative fever. Once the fever gets under way it generates its own toxics.” “The Memoirs of Herbert Hoover - The Great Depression 1929-1941”

There are few apt comparisons to today’s extraordinary backdrop. Late in the “Roaring Twenties” period offers the closest parallel – the global nature of vulnerabilities and the faltering boom; policymaker confusion and increasing ineffectiveness; fundamental deterioration in the face of impenetrable speculative impulses. It was by 1929 deeply embedded in speculator psyche that the enlightened Federal Reserve would never allow a market or economic collapse.

Top Federal Reserve officials (Yellen, Dudley, Bullard) this week suggested that Trump policies specifically target productivity. It must be a tough pill to swallow for the Fed to admit that their policies have succeeded in stimulating Credit growth and record securities prices, while coming up dreadfully short with respect to productivity gains.

By the late 1920s it had become an objective of the Federal Reserve to stimulate productive Credit. While there was deepening concern for market speculation, the weakened economic backdrop had the Fed determined to support ongoing Credit expansion.

An increasingly entrenched speculative Bubble had over years fomented financial and economic fragilities. Meanwhile, the Federal Reserve’s focus on the increasingly vulnerable economy worked to underpin speculator enthusiasm. Even as the fundamental backdrop turned alarming, a manic inflationary psychology grew only more powerful entrenched in the marketplace. In the end, efforts to promote productive Credit fatefully prolonged the life of “Terminal Phase” Bubble excess.

November 13 – Bloomberg: “China’s new home sales growth slowed in October from a year earlier, suggesting the push by policy makers to rein in runaway prices is getting traction. The value of homes sold rose 38% to 941 billion yuan ($138bn) last month from a year earlier… The increase compares with a 61% gain the previous month. Slower home sales have helped moderate credit growth. New medium- and long-term household loans, mostly residential mortgages, stood at 489.1 billion yuan in October, down from 571.3 billion yuan in September…”
Chinese policymaking – confronting the Fed’s late-twenties (Japan’s late-eighties) dilemma – badly flounders. Timid efforts to rein in its apartment Bubble were ineffective. This led to bolder moves to tighten mortgage Credit, which ironically spurred a speculative rotation and resulting equities Bubble. When the stock market Bubble burst, reflationary efforts then stoked spectacular real estate (mortgage Credit and prices) inflation. More recent efforts to cool the housing Bubble fueled major blow-off speculative excess throughout the Chinese bond market. Efforts to bolster a waning economic boom will see record Credit expansion this year approaching $3.0 TN.

It’s this global perspective of ongoing rapid Credit and unwieldy liquidity expansion in the face of waning economic prospects that helps explain the Trump Market Phenomenon. Only time will tell if President Trump is the second coming of Ronald Reagan. It’s worth noting that 10-year Treasury yields were around 12% for the Reagan inauguration (on the way to almost 16% by Sept. ’81). While starting to trend lower, CPI was still running about 10%. The S&P500 was trading at 135, just starting to crawl out of a prolonged bear market.

I’m all for responsible deregulation in the real economy. The financial sector is a different story. Count me skeptical that there will be some incredible wave of financial deregulation that will spur the golden age of financial stocks and a prosperity renascence. The Reagan era of deregulation coincided with momentous financial innovation.

We’re now into the third decade of what has been a period of monumental financial innovation. 
It’s worth noting some key sector metrics from the now multi-decade financial inflation. When President Reagan came into office, the Fed’s balance sheet (from Z.1) was at $174 billion – compared to Q2 2016’s $4.524 TN. Money Market fund assets were only $76 billion (vs. $2.703 TN); Mutual Funds $656 billion (vs. $13.209 TN); Closed-End & Exchange-Trade Funds $7 billion (vs. $2.491 TN); GSE’s assets $175 billion (vs. $6.568 TN); Agency- & GSE-Backed Mortgage Pools $100 billion (vs. $1.844 TN); Asset-backed Securities $0 (vs. $1.285 TN); REITs $3 billion (vs. $1.021 TN); Security Brokers/Dealers $78 billion (vs. $3.117 TN); Funding Corps $3 billion (vs. $1.618 TN); Fed Funds & Security Repos $152 billion (vs. $3.769 TN).

Even more amazingly, Total Debt Securities have inflated from $2.0 TN to $40.581 TN. Outstanding Treasury Securities have grown from $736 billion to $15.385 TN. Agency- and GSE-Backed Securities from $191 billion to $8.324 TN. Total Mortgages have increased from $1.458 TN to $13.974 TN. Corporate & Foreign Bonds have expanded from $511 billion to $12.030 TN, with Corporate Equities ballooning from $1.495 TN to $36.112 TN.

Notably, Household Net Worth stood at $8.9 TN, or about 300% of GDP, to end 1980. By the end of Q2 2016, Household Net Worth had inflated to $85.3 TN, or near a record 463% of GDP. While continued craziness can be expected to dominate the prolonged Terminal Phase of this multi-decade Bubble, I highly doubt we’re at the cusp of some deregulation-induced financial resurgence. Been there; done that.

When analyzing today’s markets, we need to keep some things in perspective. One, global central bankers continue to provide market liquidity (QE) to the tune of about $2.0 TN annualized. Second, Chinese Credit is expanding at a record pace of about $3.0 TN annualized, with significant ongoing “capital” flight. Years of this unprecedented liquidity backdrop have fundamentally altered the way markets function (as we’ve again been reminded).

Over the past three months, 10-year Treasury yields have surged 82 bps (to 2.36%). UK yields have jumped 90 bps, and Canadian yields have advanced 54 bps (1.57%). German yields have risen 35 bps (27 bps), while French yield have jumped 62 bps (75bps). Italian yields have surged 102 bps (2.09%).

In the face of surging yields, U.S. stocks have run to record highs. Most global equities indices rallied as bond prices sank. However, without $2.0 TN of ongoing QE the world would be much less hospitable. Instead of the typical bond-induced de-risking/de-leveraging episode pressuring stocks and risk assets more generally, a very different dynamic has evolved: Rising bond yields instead spur a frantic rotation into equities. QE has numbed fear, while impelling speculation.

Let’s take this one step further. When it became apparent that a Trump win would not trigger the anticipated intense bout of “Risk Off,” markets immediately erupted into a speculative melee. Where were the shorts trapped? What stocks, sectors and markets? Where were the hedge funds over- and underweight? How were the long/short funds positioned? What about the quants and CTAs? Risk parity? What ETFs would be liquidated? Most importantly, how to quickly get in front of the wave of (self-reinforcing) finance that would be rotating out of the old favorites and into newly fashionable sector ETFs?

November 14 – CNBC (Jeff Cox): “On the day Donald Trump won the presidency and the two days after last week, investors poured the most money into stock-based exchange-traded funds that they have in nine years… In the week leading up to the election, short-term money was scrambling to hedge for a Trump victory, and the momentum hit a crescendo after the election and in the immediate aftermath. Equity-based ETFs took in $22.6 billion, or about 1.6% of total assets, from Tuesday through Thursday, according to… TrimTabs.”
November 16 – Bloomberg (Luke Kawa): “In the week following the election, the Financial Select Sector SPDR exchange-traded fund amassed $4.9 billion of inflows — a record, and more than it accumulated in the past three years. This ETF has stakes in major U.S. financial institutions… President-elect Donald Trump's victory has spurred a steepening of the yield curve fueled by rising term and inflation premiums, as investors move to price-in both his fiscal policies and the vast amount of uncertainty surrounding them.”
There’s an astounding amount of “money” on the move throughout the now colossal ETF complex. Inflows of $22.6 billion in three days? Three years of flows into a popular financial ETF in a single week? And the bull story holds that after Trillions flowed into bond funds (and bond proxies), the great rotation will now see at least a Trillion flow into popular equity ETFs. Buy now to ensure one gets ahead of the great wall of liquidity about to inundate the market.

Incredibly, weak bond prices have become key to the equities bull story. And with equities bubbling, monetary policy now arouses little angst. The market almost celebrates that the Fed will raise rates next month. Fears of a Fed-rate hike induced EM tantrum are these days nonexistent.

With $2.0 Trillion of QE greasing the wheels of speculation, market participants glare at faltering EM bonds and see a more terrific rotation to “core” (king dollar) equities. Yields are recently up more than 100 bps in Mexico and Brazil, and only somewhat less in Turkey, Malaysia, Indonesia, Poland, Hungary and elsewhere. Yields were up another 20 bps this week in Malaysia, 28 bps in the Philippines and 13 bps in Mexico. EM currencies have been under intense pressure. This week saw the Colombian peso drop 4.7%, the Turkish lira 3.6%, the Polish zloty 2.9%, the Malaysian ringgit 2.8%, the Czech Koruna 2.5%, the Hungarian forint 2.5%, the Bulgarian lev 2.5% and the Romanian leu 2.4%. And few these days see any reason not to pile into U.S. financial and industrial stocks.

Not only have U.S. equities become firmly detached from reality, market participants are clearly in the mood to disregard risk. Look beyond the near-term and one sees a very different world upon the conclusion of the QE experiment. At the minimum, it’s a highly uncertain global financial and economic backdrop. Not only will bubbling equities be pulling “money” from faltering bond funds. Booming stocks would also likely accelerate what has been a slow-motion “tightening” cycle. In the meantime, king dollar will spur the next phase of the EM bursting Bubble. There is simply way too much complacency with regard to troubling developments unfolding in global bond markets, China, Japan, Europe and EM.

November 18 – CNBC (Berkeley Lovelace Jr.): “Donald Trump's controversial top advisor Steve Bannon said the Trump administration would build an entirely new political movement, one greater than the ‘Reagan revolution’… ‘The conservatives are going to go crazy,’ Bannon said. ‘I'm the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it's the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We're just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement
If “negative interest rates throughout the world” is the key to the new Administration’s plans, they’d better not waste any time. Many would surely like to call a mulligan on the previous eight years of experimental QE. There’s endless things to spend near-zero interest borrowings on – new infrastructure among them. Rebuild everything – like China.

But too much was borrowed and spent on stock buybacks, M&A and all varieties of financial engineering. The experiment has left the global economy maladjusted and vulnerable. Bonds have been the centerpiece of a historic speculative Bubble throughout global securities markets. It would be comforting to believe that inflation is dead and buried, and that global QE can expand $2.0 TN annually forever, and that Chinese Credit expansion can grow year-after-year to eternity.

Yet that’s just not the way unsound finance works. We’ve experienced a multi-decade Credit inflation of epic proportions. At this juncture, I would bet on consequences coming home to roost - rather than unending free money (to finance economic renaissance) as far as the eye can see. And, while we’re pondering the future, let’s hope for something other than “as exciting as the 1930s.” 

Trump’s world

The new nationalism

With his call to put “America First”, Donald Trump is the latest recruit to a dangerous nationalism

WHEN Donald Trump vowed to “Make America Great Again!” he was echoing the campaign of Ronald Reagan in 1980. Back then voters sought renewal after the failures of the Carter presidency. This month they elected Mr Trump because he, too, promised them a “historic once-in-a-lifetime” change.

But there is a difference. On the eve of the vote, Reagan described America as a shining “city on a hill”. Listing all that America could contribute to keep the world safe, he dreamed of a country that “is not turned inward, but outward—toward others”. Mr Trump, by contrast, has sworn to put America First. Demanding respect from a freeloading world that takes leaders in Washington for fools, he says he will “no longer surrender this country or its people to the false song of globalism”. Reagan’s America was optimistic: Mr Trump’s is angry.

Welcome to the new nationalism. For the first time since the second world war, the great and rising powers are simultaneously in thrall to various sorts of chauvinism. Like Mr Trump, leaders of countries such as Russia, China and Turkey embrace a pessimistic view that foreign affairs are often a zero-sum game in which global interests compete with national ones. It is a big change that makes for a more dangerous world.

My country right or left
Nationalism is a slippery concept, which is why politicians find it so easy to manipulate. At its best, it unites the country around common values to accomplish things that people could never manage alone. This “civic nationalism” is conciliatory and forward-looking—the nationalism of the Peace Corps, say, or Canada’s inclusive patriotism or German support for the home team as hosts of the 2006 World Cup. Civic nationalism appeals to universal values, such as freedom and equality. It contrasts with “ethnic nationalism”, which is zero-sum, aggressive and nostalgic and which draws on race or history to set the nation apart. In its darkest hour in the first half of the 20th century ethnic nationalism led to war.

Mr Trump’s populism is a blow to civic nationalism. Nobody could doubt the patriotism of his post-war predecessors, yet every one of them endorsed America’s universal values and promoted them abroad. Even if a sense of exceptionalism stopped presidents signing up to outfits like the International Criminal Court (ICC) and the UN Convention on the Law of the Sea (UNCLOS), America has supported the rules-based order. By backing global institutions that staved off a dog-eat-dog world, the United States has made itself and the world safer and more prosperous.

Mr Trump threatens to weaken that commitment even as ethnic nationalism is strengthening elsewhere. In Russia Vladimir Putin has shunned cosmopolitan liberal values for a distinctly Russian mix of Slavic tradition and Orthodox Christianity. In Turkey Recep Tayyip Erdogan has turned away from the European Union and from peace talks with the Kurdish minority, in favour of a strident, Islamic nationalism that is quick to detect insults and threats from abroad.

In India Narendra Modi remains outward-looking and modernising, but he has ties to radical ethnic-nationalist Hindu groups that preach chauvinism and intolerance.

Meanwhile, Chinese nationalism has become so angry and vengeful that the party struggles to control it. True, the country depends upon open markets, embraces some global institutions and wants to be close to America. But from the 1990s onwards schoolchildren have received a daily dose of “patriotic” education setting out the mission to erase a century of humiliating occupation. And, to count as properly Chinese you have in practice to belong to the Han people: everyone else is a second-class citizen.

Even as ethnic nationalism has prospered, the world’s greatest experiment in “post-nationalism” has foundered. The architects of what was to become the EU believed that nationalism, which had dragged Europe into two ruinous world wars, would wither and die.

The EU would transcend national rivalries with a series of nested identities in which you could be Catholic, Alsatian, French and European all at once.

However, in large parts of the EU this never happened. The British have voted to leave and in former communist countries, such as Poland and Hungary, power has passed to xenophobic ultranationalists. There is even a small but growing threat that France might quit—and so destroy—the EU.

The last time America turned inward was after the first world war and the consequences were calamitous. You do not have to foresee anything so dire to fear Mr Trump’s new nationalism today. At home it tends to produce intolerance and to feed doubts about the virtue and loyalties of minorities. It is no accident that allegations of anti-Semitism have infected the bloodstream of American politics for the first time in decades.

Abroad, as other countries take their cue from a more inward-looking United States, regional and global problems will become harder to solve. The ICC’s annual assembly this week was overshadowed by the departure of three African countries. China’s territorial claims in the South China Sea are incompatible with UNCLOS. If Mr Trump enacts even a fraction of his mercantilist rhetoric, he risks neutering the World Trade Organisation. If he thinks that America’s allies are failing to pay for the security they receive, he has threatened to walk away from them. The result—especially for small countries that today are protected by global rules—will be a harsher and more unstable world.

Isolationists unite
Mr Trump needs to realise that his policies will unfold in the context of other countries’ jealous nationalism. Disengaging will not cut America off from the world so much as leave it vulnerable to the turmoil and strife that the new nationalism engenders. As global politics is poisoned, America will be impoverished and its own anger will grow, which risks trapping Mr Trump in a vicious circle of reprisals and hostility. It is not too late for him to abandon his dark vision.

For the sake of his country and the world he urgently needs to reclaim the enlightened patriotism of the presidents who went before him.

Getting Technical

Is Inflation Returning? Don’t Hold Your Breath

The movement of stocks, bonds and commodities since the election suggests inflation will remain muted.

By Michael Kahn    

I will let the dismal scientists ponder what the Trump Administration will mean for inflation expectations but there are a few clues we can glean from the markets. while interest rate sensitive areas such as bonds, utilities and high dividend paying stocks are indeed weak the performance of selected commodities barely suggest that inflation is on the horizon.
Let’s start with the gorilla in the markets, the U.S. Treasury bond. Charting its proxy, the iShares exchange-traded fund (ticker: TLT), we can see that the bears went wild after the election results came in (see Chart 1). However, it is important to note that the ETF was already in decline since July. At that time, the polls, the pundits and a good deal of the population still doubted that Donald Trump would win.

Chart 1

iShares 20+ Year Treasury Bond ETF

Despite nearly everyone being wrong (Jeffrey Gundlach predicted a Trump win in January), the market already sniffed something that it did not like. Perhaps it was simply a technical condition of being overbought on long-term charts and at a resistance line trading back to the financial crisis. Fortunately, a chartist does not have to know the reason behind any move, only that the market reacted.
And that reaction of falling prices tells us that interest rates are rising as price and rates move inversely to one another. The question is how low will the ETF fall? The chart shows a supporting trendline in the $118 area (the ETF traded at $121.90 Monday afternoon). There is also horizontal or regular chart support in that area from the middle and late 2015 lows so the current decline is still well within the realm of a normal correction in a rising market.
For interest rates, that suggests the current spike up is also not the start of a runaway increase in interest rates. A long-term chart of 30-year Treasury yields shows the major trendline coming into view in the 3.5% area and I expect it to be near 3.4% by the time the market reaches it. The yield Monday was just a hair under 3%.
While rates back up, we should look at commodities and the most obvious change is in copper.

Although some now doubt the metal’s continued ability to act as an economic barometer, the sharp rise we’ve seen in the past three weeks was nothing short of spectacular (see Chart 2).

Using the iPath Bloomberg Copper Subindex total return exchange-traded note (JJC) it is easy to spot the bullish change.

Chart 2

iPath Bloomberg Copper ETN

The question is whether it is a long-lasting change and this is where chartists will argue. A regular linearly scaled chart shows a long-term trendline breakout while a logarithmically scaled chart does not. Given the amount of time and tremendous percentage price change since the 2010 peak I will defer to the latter style.

And that, in turn, suggests some sort of temporary awakening, not a sea change from bear to bull.
Again, the rally began weeks before the election so something was already in the air. Or maybe it was a simple case of a bear market that ran its course, forewarned by a bullish divergence in momentum indicators. The simple explanation is usually the best both inside and outside the markets.
That brings us to gold, the traditional hedge against inflation. Judging by how the SPDR Gold Shares Trust GLD (GLD) tanked after the election it would be easy to say that the market does not consider coming presidential policies to be inflationary (see Chart 3). The initial knee-jerk was higher but by the close of trading the day after the election the entire gain was gone.

Chart 3

SPDR Gold Shares Trust

As with Treasury bonds, gold peaked in the summer and was already in a long-decline before.
Curiously, bonds and the yellow metal were fairly well correlated over the past year so seeing both react this way now should not be a surprise.
But since I last covered gold here the technicals have changed for the worse. In August, I wrote that gold bulls should be patient as that market pulls back from long-term resistance. I also wrote that the 200-day moving average – and corresponding 40-week average – provided resistance in last bull market and support in the last bear market. At the time, the averages were not in jeopardy.
They were broken in earnest last week. I have no choice to put my optimism back on the shelf. While I still believe the bear market from 2011 is over we need a raft of new technical evidence to suggest the 2016 pullback is over. 

The first bit may already be in place as the gold ETF reached a decent chart support Monday.

But for now, I would expect more sideways action than a new bull market.

The second is a soaring U.S. dollar. Since most commodities are priced in dollars, they tend to move in opposite directions and that could be the reason for recent weakness. Gold priced in euros does not look as weak as gold priced in dollars.

The bottom line is that a flat to weak gold market suggests inflation expectations are still rather low. If the dollar rally stalls – and the dollar index itself is fast approaching major chart resistance – then gold might get a chance to recover more.

As with everything in the wake of this most historic election, conditions seem to be very fluid. If copper continues to rally and gold manages to turn itself around, then perhaps the markets will see inflation. For now, weak bond and interest rate sensitive markets do not seem to be enough of a reason to expect inflation for quite some time.

The Electoral College

It has attracted criticism, but the system was designed to hold the country together.

By George Friedman

The final irony in an election filled with irony is the refusal of some voters to accept President-elect Donald Trump’s victory. This group doesn’t simply include demonstrators but a movement of some size to persuade the electoral college to vote for Hillary Clinton instead of Trump. The irony is that it was Trump who threatened to refuse to accept the results of the election, while the Clinton camp charged that Trump was violating the sanctity of democracy. Now each has adopted the other’s position. Although, Clinton herself has not sought to overturn the election.

Protesters demonstrate against President-elect Donald Trump on Nov. 13, 2016 in Philadelphia, Pennsylvania. The Republican candidate lost the popular vote by more than a million votes, but won the electoral college. (Photo by Mark Makela/Getty Images)

Irony aside, it should be borne in mind that asking electors to vote differently than they had pledged to is completely legitimate. The president of the United States is not elected either by popular vote or even by the mathematics of electoral votes. Presidents are elected by electors – these are the people voters actually cast their ballots for on election day. All electors are selected by the parties to whom it is assumed they will be loyal. But legally, their vote is theirs and they are empowered by the constitution to use their judgement as they see fit.

The founders chose this method, and I think it is a pretty good one for a number of reasons. First, it has to be remembered that the United States was not founded as a democracy. Leaving out all those who originally were unable to vote (slaves, women, men without property in many states), the founders created a republic. A republic is a system in which voters do not govern directly, but select representatives to speak for them. The representatives are not bound to slavishly uphold public opinion, but to exercise their own judgment. They face periodic elections, every six years in the Senate and every two years in the House of Representatives. Initially there was another layer — he state legislators selected senators. State legislators were elected by the people and answerable come next election day. The people’s voice was intended to be heard, but moderated by passing through filters.

The founders wanted filters because they feared that passions could arouse the public, and national policy could become hostage to these passions. Therefore, they wanted men (always men) mediating between public opinion and national policy. They also expected these men to be of substance and property, with much to lose from error and also more difficult to corrupt. This mirrors Trump’s argument that he is less corruptible because of this wealth. In addition, such men would not see public service as a career, and could act without fear of being voted out of office. Their livelihood was not to depend on election. They were answerable to the public, but did not fear or worship public opinion. Therefore, the founders did not believe in direct democracy at all. They founded a republic, a very different creature.

The electoral college is derived from this original conception of republicanism. The founders were trying to solve a serious problem with this system. They did not want a parliamentary system. Parliaments made the executive and the legislature one. They wanted the executive and Congress to check and balance each other (and do they ever). Therefore, having the legislature pick the president wouldn’t work. They needed another institution.

The founders didn’t want political parties as they feared factionalism. They never anticipated the two party system, which presents voters with basically a binary choice and minor parties on the margins. What could have occurred, and what might yet occur, is complete gridlock — a situation with many viable candidates, none with the majority of the popular vote or the majority of electoral votes. Who could solve this problem? An entity was needed that could negotiate, compromise and create a coalition to elect a president by majority. These people had to be free to change their votes in the course of negotiations. If even then no decision could be made, the election would be decided in the House of Representatives, as it was in 1824. This would mean that one branch of government would be selecting the other branch, but this is only a last resort, since it was the last thing the founders wanted. The electoral college was created to solve political deadlocks without making the president a prisoner of the House of Representatives.

The founders did not opt for direct election of presidents because they opposed direct democracy and supported representative government. But there was another reason as well.

The United States was a coalition of sovereign states. That’s why it is called the United States.

Each state is required to have a republican government, but the United States is not a direct compact with the people. “We the people” are the foundation of the Republic, but the states are the legal foundation. The states wanted to be assured that one state would not override the interests of the others and no state would be completely excluded from consideration. Assume for a moment that one state had developed tremendously and contained over half the population of the United States. Assuming for this argument that they would all vote for the same candidate for president, the smaller states would be disenfranchised. Larger states could ride roughshod over smaller ones.

The states wanted to make certain that they would not be excluded. Therefore, each state was given two senators, regardless of size, and in one house of Congress all states were equally powerful. In the other house, representatives would be apportioned by the size of the population. The House of Representatives, elected every two years, would represent public opinion. The Senate would represent the interests of the states (regardless of population), limit the passions of the people by blocking the House, and make it difficult for the president to propose measures, make treaties and ratify appointments. The Senate was supposed to impose barriers and limits on the president and House. In the European Union, equality and unanimity between members is critical, but the United States chose a much more sophisticated system, combining a deep democratic process, with mediating layers to limit or block public passions.

The electoral college gives each state electors equal to their two senators and the number of representatives apportioned to them. No state has less than three electors, and therefore any state potentially can determine an election, and all regions, no matter how lightly settled, must be considered. Since any state might make the difference in the electoral vote, every candidate must consider each state’s interests.

The United States is a vast nation with highly differentiated interests. From the beginning, the founders were forced to face the fact that holding the nation together required concern for the interests of all states, and not only for those densely settled. A pure democracy would consider the nation’s interests as a whole. The founders were aware that the nation was not a whole, although all regions were needed. Assume, for example, one state holds the country’s entire reserves of a crucial resource, but has a small population. In a direct democracy, its resources could be distributed to other states and compensation ignored. That would breed hostility and secessionism, perhaps even civil war. In any event, in a nation of united states, where all states are needed for geopolitical reasons, their interests have to be recognized.

The system the founders produced compels all candidates to pay serious attention to underpopulated states. In this election, highly populated states like California, Texas and New York overwhelmingly supported Clinton or Trump from the beginning. Smaller states like Nevada or New Hampshire became important. Without the electoral college, the idiosyncratic interests of small states would receive little notice, while a broad national marketing campaign, insensitive to significant regional differences, would decide the result. The centers of population along the two highly populated coasts, where many dismiss “flyover” states, would never have to face the realities of Michigan, Wisconsin or Nevada. In this election, flyover states were able to stun coastal America. They could not do that without the electoral college.

The United States is a geopolitical invention. The 13 original colonies were very different from each other. As the nation expanded westward, even more exotic states became part of the union. Constantly alienating smaller states through indifference could undermine the national interest. The Senate and the electoral college both stop that from happening, or at least limit it. Any state can matter in any election.

You might charge that this is undemocratic. It is. It was intended to be. The founders did not create a direct democracy for a good reason. It would have prevented the United States from emerging as a stable union. They created a republican form of government based on representation and a federal system based on sovereign states. Because of that, a candidate who ignores or insults the “flyover” states is likely to be writing memoirs instead of governing.

The end of the era of central bank independence

Trump and May will start subverting system by appointing politically compliant governors

by: Wolfgang Münchau

At this stage we do not really know what the presidency of Donald Trump will mean. We do not even know exactly what Brexit means. But there are two closely related consequences of both events: the approaching end of the age of central bank independence; and, as a concomitant, the loss of influence of academic macroeconomists.

Central bank independence is premised on two conditions. The first, and more important, is that there is a broad consensus on the goals of monetary policy. The second is that an independent central bank board, usually staffed by professional economists, can deliver those goals. The first of these conditions is broken. The second is under a cloud.

The consensus of 1989-2016 — the golden age of financial globalisation — held that central banks should target a low positive rate of inflation. This was supported by macroeconomic theories developed since the 1980s. It seemed natural that a new breed of economists, trained in a newer generation of economic models, would deliver the goals society wants them to deliver, free from the pressures of day-to-day politics.
Mr Trump has openly challenged that consensus. His economic advisers have told the Financial Times that the US Federal Reserve had created a “false economy”, and that the president-elect wants to see someone at the top of the Fed who reflected his own views.

Theresa May, UK prime minister, made an almost identical argument with her criticisms of the Bank of England when she warned of “bad side effects”. In both cases politicians are seeking a change in the fiscal-monetary mix: looser fiscal policy, harder monetary policy. But how can you achieve this if your counterparty is independent?

In the eurozone, the consensus in favour of the European Central Bank policy target of just under 2 per cent inflation has become fragile, too, albeit for different reasons. The German economic establishment never believed in it. Jürgen Stark, a former member of the ECB’s executive committee, says the European treaties only talked about the need to maintain price stability; they did not empower the ECB to translate this mandate into a numeric inflation target. His argument is that an inflation rate of 0-1 per cent, as at present, is perfectly consistent with the notion of price stability. As a result there is no case for negative interest rates to boost inflation, let alone for quantitative easing and other unconventional policies.

I predict that once the economy recovers and the ECB is forced to raise rates, Italian economists will call on the central bank to prioritise financial stability over price stability, given the fragility of Italy’s financial sector and the high level of public debt. In the eurozone, too, we lack consensus.

The important point is not whether those who challenge the policy consensus are right or wrong. The view of the economic establishment is that central bank independence is a good thing — not surprising since economists benefit personally from the system. I myself agree with those who argue that central bank independence is neither necessary nor sufficient for price stability.
But what really matters is that the consensus has broken down. If a sufficiently large number of people want the central bank to target the stock market, a happiness index or the weather instead of some measure of inflation, the argument for independence is lost. That alone means that monetary policy can no longer be relegated to independent experts. It should, and will, revert to what it was in many countries before the 1990s: an integrated function of a government’s broader economic policy.

I do not expect the end of independence over night or even in full. The eurozone will be most resistant because independence is written into European law and it is hard to see everybody agreeing to treaty change. A monetary union has no government for a central bank to be dependent on. The ECB will be the central banking equivalent of the last man standing.

The US and UK have weaker forms of central bank independence so change could come sooner.

The first stage would be the appointment of politically compliant governors, and members of monetary policy boards more political than the current academic crop. This is how Mr Trump and Mrs May will subvert the system, not necessarily through the formal abolition of the concept of the independent central bank.

The period of financial globalisation transformed the academic economist into an active policymaker — as central banker and even as finance minister. The next decade will flush up an altogether different set of characters and institutional mechanisms.