What Donald Trump gets right about the US economy
The president understands monetary policy has done more for the markets than Main Street
Rana Foroohar
It is amazing how adept Donald Trump is at identifying something important in the felt experience of the American public and then exploiting it for his own gain. So it has been with his suggestion that businessman and former presidential aspirant Herman Cain should be on the board of the US Federal Reserve. Just when we thought it couldn’t get any worse than pundit Stephen Moore, Mr Trump presents the Pizza King.
It is easy to dismiss the suggestion as the latest example of the president’s economic cluelessness — as four Republican senators have done this week, making it unlikely that Mr Cain will secure a seat on the Fed board.
But we shouldn’t be dismissive. It is true that Mr Cain has no idea how financial markets work. This is a man who, along with Trump nominee Mr Moore, wanted interest rates to rise right after the 2008 crisis. But the president’s defence of Mr Cain is that he is not a policy wonk, but rather a job creator who understands Main Street. Mr Trump cares only about packing the Fed with political lackeys. However, he has nevertheless hit on an important truth — that monetary policy over the past decade has done much more for the markets than the real economy.
Consider that since the beginning of 2010, real hourly wages in the US have grown by only 6 per cent, while real housing prices have grown by over 20 per cent and inflation-adjusted stock market valuations have doubled. Household incomes have grown quicker than wages, thanks to employment growth. They are up 10 per cent from 2010 to 2017, though they still lag behind asset price growth. Meanwhile, the period 2007 to 2016 saw the largest increase in wealth inequality in the US on record.
This, along with record levels of corporate indebtedness relative to gross domestic product, were unintended consequences of the Fed’s efforts. The central bank could bolster asset prices, but couldn’t remove the principal drags on the economy. These do not stem from a lack of money, but from deeper challenges that monetary policy can’t solve — from a skills and jobs mismatch, through an ageing workforce, declining geographic mobility and greater corporate concentration, to technology-driven labour market disruptions.
You can’t fix those things with low interest rates and quantitative easing alone. You need fiscal policy decided on by elected officials, not technocrats. But polarised governments cannot deliver it. This is a conundrum not only for the US, but also in Europe, where arguments rage about the effectiveness of the European Central Bank’s monetary firepower and the merits of a co-ordinated programme of fiscal easing across the eurozone.
I worry a lot about this overdependence on central bankers. It amazes me that many of the same people who worried about too much easy money causing hyperinflation after the crisis (Messrs Moore and Cain among them) now argue for lower rates — not because they care about ordinary people particularly, but because it suits their political aims. We should call this exactly what it is: buck-passing — the kind that has happened many times before when presidents have wanted to paper over their problems with cheap debt.
It is not only Republicans who want to have it both ways, either. The current popularity on the left of “modern monetary theory,” or MMT, is driven by the idea that it holds out the prospect of a “people’s QE” of the sort proposed in 2015 by Jeremy Corbyn, the leader of Britain’s Labour party. The belief among some Democrats in the US is that they could circumvent contentious political debates over tax and spending by empowering the Fed to use its balance sheet to fund not financial asset inflation but real growth-creating investments in education and infrastructure.
The success of such a scheme would depend on low interest rates, low inflation and relatively sanguine credit markets. Whether or not you believe those conditions will remain, MMT would also politicise the Fed by making it appear that the central bank was being used to accomplish specific policy goals outside the democratic process. This, of course, is exactly what Mr Trump is doing, albeit to very different ends, right now.
The bottom line is that we are exactly where we were in 2008 — with politicians looking to central bankers to do what they can’t. But why would we ever believe that the Fed (or the ECB) could somehow magically change the fact that we have a bifurcated economy and a looming skills gap? Central banks can’t create growth by themselves. They can only funnel money around.
Mr Trump wants to disrupt the Fed for his own gain. But the Fed is already disrupting itself. The US central bank has recently embarked on a major review of its monetary policy framework, including a listening tour in which regional governors will be talking to people outside their ivory tower — business leaders, mortgage borrowers, pensioners, millennials, labourers and entrepreneurs. The idea is to consider the ways in which the real economy has changed over the past several decades, and think about whether monetary policy should evolve too. Perhaps by the time they finish, we’ll also have an administration and a Congress ready and able to play their part.
WHAT DONALD TRUMP GETS RIGHT ABOUT THE U.S. ECONOMY / THE FINANCIAL TIMES OP EDITORIAL
A DEEP DIVE INTO U.S. LIQUIDITY / SEEKING ALPHA
A Deep Dive Into U.S. Liquidity
by: Trading Places Research
- While the Fed has been successful in inflating the money supply, they have been less successful at juicing nominal GDP growth.
- Historically, the nominal money supply and asset prices are tightly correlated, but this has become unglued in the last 2 years.
- The major risks here are a version of the liquidity trap, and systemic liquidity risk.
- The experience of Japan is instructive: low population growth, low economic growth, low inflation, low interest rates. This is not a recipe for a dynamic economy.

There is a tug-of-war happening right now. The fundamentals are souring everywhere you look at the beginning of 2019, yet equities surged globally in response to increased central bank liquidity, and what people believe that means.
But as we saw up top, these valuations are not justified by the growth of the economy generally or corporate profits specifically.
The entire point of increased central bank liquidity is to reduce the cost of capital so that marginal or high risk/reward investments go from thumbs down to thumbs up.
But that’s not what’s happening. Outside of IP investment, fixed investment growth and productivity growth have been moderate at best.
So where is all this capital going? First, to the tune of an additional $1.25 trillion in 2018, it is going to fund the federal debt at rates barely above inflation. That should tell you what investors think about other opportunities. Second, at least for the S&P 500 companies, the increased cash flows they are generating from all this liquidity is going back to shareholders. Some companies are even issuing debt to return cash to shareholders, raiding their own balance sheets, because long term rates are so low.
Again, there doesn’t seem to be much interest in investing in new capacity. Finally, with the increased savings rate, consumers put an extra $300 billion in the bank during December and January compared what they would have at the old rate.
So right now we are floating on a sea of global central bank liquidity, but soon, like Japan, we may start drowning in it.

- Over time, nominal M2 grows exponentially. Its growth historically has mirrored the growth of nominal GDP.
- Since the last recession, real M2 has inflected above the historical trend. This is the result of Fed actions, particularly quantitative easing, and the lack of inflation that has typically accompanied increases in the money supply.
- While the Fed has been successful in inflating the money supply, they have been less successful at juicing nominal GDP growth. On average, there is a 3% per year spread in the growth rates since the crisis.
- Without Fed actions, the money supply would have been a hugely disastrous situation in the early recovery years.
- Instead of juicing nominal GDP growth, the Fed-sponsored M2 growth has gone to asset price inflation.
M2 and the S&P: A Love Story
- Historically, nominal money supply and the S&P 500 are tightly linearly correlated.
- In the period of 1994 to the present, the relationship between the two became strained as permalow interest rates and inflation have added more exogenous factors.
- But the post-crisis period is characterized by an even tighter relationship between the money supply and the S&P than in the historical data. Much of the money supply growth in this period was sponsored by the federal deficit and the Fed’s balance sheet, not nominal GDP growth, as had previously been the case. The Fed’s actions have been much more successful in inflating the money supply and asset prices than nominal GDP.
- Since 2017, the money supply and S&P have become divorced from each other, especially recently. End-of-cycle psychology has taken hold, but instead of chasing growth like in 1999, or yield, like in 2007, based on the experience on the last 10 years, investors are chasing liquidity from the federal budget and the Fed.
Why You Should Care
Year of Recession | Peak Fed Funds of Cycle |
---|---|
1970 | 9.20% |
1974 | 12.92% |
1981 | 19.10% |
1990 | 9.84% |
2001 | 6.51% |
2007 | 5.25% |
Current | 2.40% |
- Overnight rate: 0.30%
- Real YoY GDP growth: 0.25%, with a 20-year CAGR of 0.8%
- 10-year government bond: 0.068%
- Overnight rate: -0.36% (negative since 2015)
- Real YoY GDP growth: 0.64% with a 1.4% 20-year CAGR
- 10-year government bond: 0.19%
- Fed Funds: 2.4%
- Real YoY GDP growth: 2.97% with a 20-year CAGR of 2.14%
- 10-year Treasury: 2.69%
- Student loans: $1.5 trillion.
- Credit card debt: $1 trillion.
- Auto loans: $1.25 trillion.
- US Equities: The ratio of the Wilshire 5000 to GDP is near the all-time highs of the dot-com bubble. Same for the S&P 500.
- US Mortgages: Again. The ratio of the Case-Shiller home price index to GDP is approaching the pre-crisis high.
- Over time, nominal M2 grows exponentially. Its growth historically has mirrored the growth of nominal GDP.
- Since the last recession, real M2 has inflected above the historical trend. This is the result of Fed actions, particularly quantitative easing, and the lack of inflation that has typically accompanied increases in the nominal money supply.
- While the Fed has been successful in inflating the money supply, they have been less successful at juicing nominal GDP growth. On average, there is a 3% per year spread in the growth rates since the crisis.
- Without Fed actions, the money supply would have been a disaster in the early recovery years.
- Instead of juicing nominal GDP growth, the Fed-sponsored M2 growth has gone to asset price inflation.
- Historically, nominal money supply and asset prices as represented by the S&P 500 are tightly linearly correlated.
- In the period of 1994 to the present, the relationship between the two became strained as permalow interest rates and inflation have added more exogenous factors.
- But the post-crisis period is characterized by an even tighter relationship between the money supply and the S&P than in the historical data. Much of the money supply growth in this period was sponsored by the federal deficit and the Fed’s balance sheet, not nominal GDP growth, as had previously been the case. The Fed’s actions have been much more successful in inflating the money supply and asset prices than nominal GDP.
- Since 2017, the money supply and S&P have become divorced from each other, especially recently. End-of-cycle psychology has taken hold, but instead of chasing growth like in 1999, or yield, like in 2007, investors are chasing liquidity from the federal budget and the Fed.
- The major risks here are LT2.0 and systemic liquidity risk.
- With the Fed Funds at 2.4%, the Fed will have very little ammo to combat the next recession.
- With trillion dollar structural deficits as far the eye can see, the hope for fiscal stimulus to fill liquidity holes is slim.
- The experience of Japan is instructive: low population growth, low economic growth, low inflation, low interest rates. This is not a recipe for a dynamic economy.
- There are many asset classes that may be overvalued by their owners.


HOW TO WIN FRIENDS AND INFLUENCE ALGORITHMS / THE WALL STREET JOURNAL
How to Win Friends and Influence Algorithms
From YouTube to Instagram, what you see in your feeds isn’t really up to you—it’s all chosen by invisible, inscrutable bots. Here’s how to take back at least some control
By David Pierce
The algorithms that power Facebook, Instagram, Twitter and YouTube have a disproportionate control over our lives. And while there are certain controls that allow us to tweak what we see when we’re on these massively popular networks, there’s no real escape. Pierce investigates ways to resist, whether it’s by tweaking settings or changing how you interact. Photo: Photo Illustration by Emil Lendof/The Wall Street Journal; Photos: iStock
The top of my Facebook FB 0.90%▲ feed currently shows a photo of a woman I’m not really friends with—I think we were on a kickball team once?—who recently got married. This photo has topped my feed for the better part of three days, despite the fact that I don’t care. Meanwhile, there’s been a black-hole sighting and a new way to watch Disney movies and a WikiLeaks arrest and presumably lots more. I’ll never know because, according to Facebook, what matters is that wedding photo.
This is life in the age of the inscrutable, opaque algorithmic feed. I may decide whom I friend or follow, but Facebook, Twitter, Instagram, YouTube and the rest decide what I actually see.
This can be annoying, like the ever-present wedding photos. It can also be hugely problematic, like when Facebook surfaces hateful and fake content or a simple YouTube search leads you down a recommendations rabbit hole into the internet’s darkest corners. Often, what you’re seeing and who made it are a total mystery.
Ostensibly, the point of these algorithms is to show you what you care about. The companies frame it like the difference between Netflix and channel-flipping: Wouldn’t you rather see the best stuff whenever you want, instead of only what happens to be on right now? These services claim to have users’ interests at heart, but they also have an interest of their own, to show you whatever good, bad or ugly stuff it takes to keep force-feeding you ads.
These services don’t make it easy, but there are ways to take back a bit of control over your feed. Some offer the ability to turn the algorithms off and see your feeds in more transparent ways. More often, the best you can do is try to influence the algorithm slightly in your direction. (You still might never know if it’s working.) There are handy Chrome extensions and third-party apps that do some of the work for you, too.
Tweaking the System
In general, one word rules the way your feed is sorted and presented to you: engagement. The more you click, like, comment, share and read, the more likely you are to keep checking back in. Your feed is carefully ordered to make sure you never get bored. As my colleague Christopher Mims put it so well: “If it’s outrageous, it’s contagious.”
The invisible sorting systems start with a few obvious things: whom you follow, friend or subscribe to heavily influences what you see in your feeds. If you double-tap to like an Instagram post or comment below it, that’s another positive signal. If you tend to watch a lot of videos, the platforms will show you more videos and fewer photos. If you don’t like a post, but stare at it for a while, you’re still adding a tick to the “show me more!” column. And these bots don’t get sarcasm: Hate-likes are the same as like-likes.
But it’s also possible to tell the algorithms what you don’t like. On Facebook, for instance, you can click the three dots at the top right of any post and choose from options such as “Hide post,” which will both hide that post and show you fewer like it, or “Unfollow [the person who posted],” which removes all of that person’s posts from your feed without unfriending them. Facebook says these are among the strongest indicators you can send to its algorithm. Twitter and YouTube offer similar tools. Clicking the “Not Interested” button on a YouTube thumbnail makes a powerful statement.
You can send the social-media algorithms a strong signal by telling them what you don't like, and why. Unfortunately, that's a lot more work than just liking a post. Photo: David Pierce/The Wall Street Journal
Companies should make it easier. “This is an area we’re investing more in—explicit controls for you to say, ‘I like this thing’ or ‘I don’t,’” said Wally Gurzynski, a product manager at Twitter. Mr. Gurzynski said Twitter’s also working on helping users understand what happens when they click those buttons and how their actions affect the content they see. Facebook recently announced a similar feature, called “Why am I seeing this post?” When (if?) the company rolls it out, you’ll be allowed to take actions to see more or less content like any particular post.
Even then, these controls aren’t enough. “They give you the illusion of control without giving you actual control,” said Matt Kruse, the developer of Social Fixer, a browser extension I like that lets you filter certain users, keywords or topics out of your Facebook feed. When you tell Facebook what you don’t like, all you’re really doing is shouting instructions at the wizard behind the curtain. You should really be able to get back there and tinker yourself.
Everything in its right place
For all its problems with abuse and hate speech, Twitter is at least the most transparent feed: You can click the starry icon at the top and see all your tweets in reverse-chronological order. Keep an eye on it, though, because Twitter will eventually switch you back to the algorithmic feed. It wants to show you all the intoxicating stuff you’ve missed.
You can set Twitter to show you all your tweets in chronological order by tapping the starry icon, but eventually, it’ll switch back to the algorithmic feed. Photo: David Pierce/The Wall Street Journal
The other networks are worse. Facebook offers a version of your news feed sorted by “Most Recent,” which you can access by clicking the three dots to the right of the News Feed icon, but Facebook still filters out lots of content. (You can access the feed on mobile by typing “Most Recent” into the app’s search field.) Eventually, it also switches back to the Top Stories feed.
Facebook-owned Instagram doesn’t even pretend to offer a chronological feed. “Before we were ranking people’s feeds, they were missing over half of their friends’ posts,” said Julian Gutman, a product lead at Instagram. If you want a cleaner, more transparent experience, I recommend Filtergram, a web app that gives you a chronological, filterable feed of all the public accounts you choose. You don’t need an Instagram account to use it.
Instagram offers fewer tools than other platforms, but you can still tap on the three dots above a post and select 'See Fewer Posts Like This' to tell the algorithm what you don’t like. Photo: David Pierce/The Wall Street Journal
For YouTube users, I recommend the Chrome extension DF Tube. With it enabled, a YouTube page is rendered as minimally as possible. It won’t automatically play recommended videos at the end, show you related videos on the side, or display all the comments below a video. With everything disabled, YouTube’s homepage becomes a search bar and any video page shows nothing but a video.
Extensions like SocialFixer and DF Tube are popular and the developers say they’re not collecting private information, but you should always be careful about what you add to your browser. They’re also powerless on your phone. Nobody can really give you the tools you need there except the social companies themselves.
I’d like more tools, but even now, by giving up as much algorithmic help as possible, I’ve found I use the services less—and that’s a good thing. In general I feel more able to understand what I’m seeing and why, and more in control over the unrelenting stream of content that determines so much of my life.
And if I don’t like what I see on Facebook or YouTube? You better believe I’ll let them know. And I hope they—or at least, the mysterious black boxes they built that control our lives—are listening.
THINGS THAT SEEM NORMAL BUT DEFINITELY AREN´T, PART 1: SOARING CHINESE DEBT / DOLLAR COLLAPSE
Things That Seem Normal But Definitely Aren’t, Part 1: Soaring Chinese Debt
by John Rubino
It shouldn’t be, though, because no society can continue to borrow this kind of money without spinning out of control. Some details:
China issues record new loans in the first quarter of 2019 as Beijing battles slowing economy amid trade war
China’s efforts to battle its slowing economy amid the trade war with the United States gathered pace at the start of 2019 with banks issuing a record amount of new loans in the first quarter of the year.
Banks issued 5.81 trillion yuan (US$865 billion) of new loans between January to March, beating last year’s previous high of 4.86 trillion yuan, the People’s Bank of China said on Friday.
In March alone, banks issued 1.69 trillion yuan (US$251 billion) in loans, which was the second highest behind only March 2009 when China was at the peak of rolling out an all-out stimulus programme which engineered a rebound in China’s economic growth but also left the country with a huge debt hangover.
Aggregate financing, the broadest measure of credit supply that include bond issuance, initial public offering and off-balance sheet lending, jumped to 2.86 trillion yuan (US$425 billion) last month, while the January-March amount was 8.18 trillion yuan (US$1.2 trillion), up by 2.34 trillion yuan from a year ago, the central bank data showed.
The following chart shows the year-over-year percentage growth in Chinese private sector borrowing.
Assuming (generously, given the trade war and long-in-the-tooth expansion) that Chinese GDP growth will average 6% in coming years, debt growing at twice that rate is just a tad aggressive.
Especially for an economy that more than quadrupled its debt in the previous decade.
source: tradingeconomics.com
Some comments on the subject from Credit Bubble Bulletin’s Doug Noland:
Beijing has become the poster child for Stop and Go stimulus measures. China employed massive stimulus measures a decade ago to counteract the effects of the global crisis. Officials have employed various measures over the years to restrain Credit and speculative excess, while attempting to suppress inflating apartment and real estate Bubbles. When China’s currency and markets faltered in late-2015/early-2016, Beijing backed away from tightening measures and was again compelled to aggressively engage the accelerator. Timid tightening measures were unsuccessful – and the Bubble rages on.
China now has the largest banking system in the world and by far the greatest Credit expansion. The Fed’s dovish U-turn – along with a more dovish global central bank community – get Credit for resuscitating global markets. Don’t, however, underestimate the impact of booming Chinese Credit on global financial markets. The emerging markets recovery, in particular, is an upshot of the Chinese Credit surge.
Booming Credit is viewed as ensuring another year of at least 6.0% Chinese GDP expansion, growth that reverberates throughout EM and the global economy more generally.
The resurgent global Bubble has me pondering Bubble Analysis. I often refer to the late-cycle “Terminal Phase” of excess, and how much damage that can be wrought by rapid growth of increasingly risky Credit. Dangerous asset Bubbles, resource misallocation, economic imbalances, structural maladjustment, inequitable wealth redistribution, etc. In China and globally, we’re deep into uncharted territory.
Why can’t extremely fast credit growth continue forever? Because at any given time there are only so many borrowers capable of paying back big loans, and most of them have already borrowed what they consider wise for their legitimate needs. In order to move the amount of borrowing beyond this natural equilibrium, lenders have to find new, by definition less creditworthy, borrowers.
Let the process continue for a while and an economy ends up with mostly junk credit – that is, loans unlikely to be repaid. Which is a pretty good description of today’s world.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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