The Bear’s Lair: Bailing out Hillary’s America

Hillary Clinton is leading in the polls, but her election over Donald Trump is not yet certain. However, she is overwhelmingly favored by the pundit class, even the right-leaning of whom have developed an irrational distaste for Trump. It’s therefore worth looking at what the world will look like in 2024, after eight more years of current policies, themselves following 16 years of poor U.S. governance (or 28 years, depending on what you think of Bill Clinton.) By 2024, the U.S. will be in a deep hole – how will it be dug out?

First, let us disillusion those readers who work for Goldman Sachs and listened to Hillary’s speeches there. She will not pursue free-trade policies. She will not have a deep understanding of the difficulties of being a modern investment banker. She will not lighten financial services regulation. She will not represent Wall Street’s interest in her foreign policies. She will not favor fracking.

Given the divergence between Hillary Clinton’s public and private utterances, she is going to have to disappoint either Goldman Sachs or her committed partisan supporters. Yes, Goldmanites, we know you paid good money, very good money, to be reassured that she really sympathized with your worldview and would follow it. Suckers! Hillary Clinton is not the moderate, cake-baking First Lady she pretended to be from time to time in the 1990s, nor is she the sophisticated, economically savvy globalist she pretended to be in her expensive presentations to you. She is what she was in her youth, a leftist committed to changing America in the direction desired by her mentor Saul Alinsky. The question is: how can America recover from the changes she will bring?

Start with monetary policy, where we can be pretty sure that Clinton and her ideological ally Janet Yellen will pursue current funny-money policies for as long as they can. In 1979, President Jimmy Carter panicked at the rise in inflation and brought in bond market favorite Paul Volcker to right the ship, push up interest rates and eliminate inflation. We can be pretty sure Clinton will not do this. She is more arrogant and self-assured than Carter was, while being equally economically illiterate; hence the idea of reversing her favorite economic policy merely because inflation started surging would not occur to her.

Over eight years, there must thus be a significant chance of a Weimar Republic-style monetary collapse, with $100 bills being carried around in wheelbarrows. The fact that there has not been such a collapse yet does not mean there won’t be one. The reality is that monetary policy has been far outside accepted norms for the last eight years, and previous economic ideas about its effects on inflation and on real output have been proved decisively wrong. Both Keynes and Friedman can at this point be thrown into the dustbin, although it might be worth keeping Friedman near the top of the trash pile in case he starts working again (Keynes won’t.) In any case, with Clinton and Yellen in command, if an inflationary tendency takes hold, they won’t do enough to stop it, indeed they are likely to exacerbate it. Over eight years that makes the probability of a Weimar-style currency collapse a significant one.

However, suppose we don’t have a Weimar-style currency collapse, what then? We will certainly have eight years of ultra-low productivity growth, probably negative productivity growth. The Fed will hold interest rates below inflation, with real interest rates far below their equilibrium rate. In addition, Clinton will regulate everything that is not nailed down – she can’t stop herself. Consequently, U.S. productivity in 2024 will be at least 10% below its level in 2016, with a corresponding reduction in living standards.

It is more than likely that this reduction in living standards will be achieved by a major recession, probably this side of 2020 (there is thus a possibility that Clinton will not be re-elected, but let us assume that the Republican party either collapses or nominates an idiot (of either the Trump or Jeb Bush variety) thus allowing Clinton a fairly easy walkover even in the middle of a recession that by that stage will have lowered living standards more than the Great Depression.) That recession will doubtless be followed by even more stimulative monetary policies, probably including a period of negative interest rates. Those will make the economic problem worse, prolong the recession, and drive the long-suffering U.S. citizenry into $100 bills and gold.

The effect of eight years of Hillary Clinton will not be confined to the monetary sphere. She will doubtless increase taxes on the upper middle classes, while doing nothing about the charitable tax deduction that has proved such a scandal in the form of her own family foundation, among others. Combined that with a recession, and it is clear that U.S. debt will be approaching $40 trillion in 2024, while the annual budget deficit is little short of $2 trillion, depending where we are in the business cycle. (The business cycle will have become a business downward spiral, but doubtless economists and commentators will still use the conventional term, to avoid sending their readers into suicidal depression.)

In addition to the official debt and budget deficit figures, there will by 2024 be a further major problem in the funding of Social Security and Medicare. The ultra-low growth rates and recession of the next eight years will push Social Security funding rates well below current levels, so that the social security fund insolvency date, which in the last eight years has advanced from 2037 to 2033, will have advanced again to 2025 — in other words the “trust fund” will face more or less immediate insolvency. What’s more, whereas the fund could survive the currently forecast insolvency in 2033 with a decline in benefits of some 28%, the negative productivity growth in 2016-24 and the greater number of “baby boomers” still with us in 2025 than in 2033 will have made the annual deficits very much worse, so that social security recipients will face an immediate halving in benefits or thereabouts.

The social security problem will in the medium term be alleviated by the collapse in Medicare, which means that medical benefits will no longer be available to the old. The cost increases forced on the U.S. medical system by Obamacare and its Clinton-inspired successor will have sent the Medicare trust fund bankrupt well before 2024, so that funds will already be inadequate to pay the promised benefits. The lack of elder medical care will result in the U.S. expectation of life at 65 taking a sharp nosedive – which will at least alleviate the social security insolvency problem. Mass low-skill legal immigration (there will no longer be any such thing as illegal immigration) encouraged by Clinton will make the problem worse, not better, although it will improve Democrat chances in the upcoming 2024 elections.

The middle classes need not think their relatively greater affluence will enable them to escape the unhappy fate of the downtrodden. Since the recession between now and 2024 will be accompanied by a massive stock market downturn, probably taking stock prices well below their equilibrium level of 9,000 on the Dow (because growth prospects are so poor) middle class 401(K) accounts will have been decimated, while those of the middle classes lucky enough to have old-fashioned pension funds will find their pension funds insolvent.

This unhappy picture, of national bankruptcy, national impoverishment and senior citizen degradation will not be caused by uniquely bad Clinton policies; her policies will be only marginally worse than those of Barack Obama and indeed George W. Bush. It is simply that by 2024, 24 years of excessive budget deficits, no fiscal control, over-expansive monetary policy, excessive regulation and lack of reform of social security and Medicare before baby boomer retirements sent both funds into bankruptcy will have had their inevitable effect in wrecking the U.S. fiscal, monetary and economic system.

There is in theory an escape from this dismal fate. We could elect a President who raised interest rates to historically normal levels, thereby restoring productivity growth to its historically normal level of around 2% annually. He would also balance the Federal budget through a mix of sharp spending cuts and moderate tax increases (especially elimination of the charitable tax deduction). This President would also engage in a massive bonfire of regulations, reform the U.S. medical system so that the hidden subsidies (such as the mandate on hospitals to treat the indigent without reimbursement) were removed and consumers were allowed to buy medical care across state lines and drugs internationally. This mythical President would also raise the social security and Medicare retirement ages by a couple of years, and make the other tweaks necessary to stabilize the systems’ funding. Finally, he would restrict immigration, especially low-skill immigration, to reduce the downward pressure on U.S. wage levels. There would still be a recession and a stock market crash, but with productivity growth back to normal and deficits declining the fiscal and trust fund problems would disappear as if by magic.

Unfortunately, no such paragon is on offer. Ted Cruz lost. Donald Trump is probably worth a flyer on November 8, because his policies are so ill-defined there is a chance he might select the appropriate ones. But I wouldn’t put much money on it.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)