Since the early 1990s, we have been living in the George Soros Dream World. Interest rates have been very low, encouraging leverage, raising asset prices and making billionaires richer. Meanwhile, the world economy has become ever more global, moving towards the global one-party state Soros favors and impoverishing the working-class, modestly educated, locally-oriented folk the billionaire disdains. Now he and his cronies hope for a recession that will doom President Donald Trump’s re-election. They should be careful of what they wish for; this time, the recessionary bell may be tolling for them.
Superficially, the pointers to the next downturn are similar to those of of 2007-08. Interest rates are once again at artificially low levels, and this has pushed up asset prices and leverage, so there is a great deal of “malinvestment” to use the Austrian economists’ term, waiting to come crashing down. Residential real estate in places like London, San Francisco and New York appears to be priced at unsustainably high levels, in terms of the long-term purchasing power of those cities’ citizenry. The sad story of the vacant weed-infested multi-millionaire houses in Hampstead’s The Bishops Avenue, bought 30 years ago by foreign investors and never lived in, is a testament to the market’s artificiality.
Corporate debt is at an all-time high, driven by overleveraged buyout transactions that have proliferated in this cycle, and by foolish and unsustainable share repurchases. U.S. share prices themselves are close to all-time highs, with the globalization efficiencies that had been buoying them now clearly disappearing. And so on.
Last time around, the collapse in asset prices caused a debt disaster, with housing debt bankrupting most of Wall Street and pushing the U.S. economy into a massive recession. However, this is unlikely to happen this time. That’s not because of the blizzard of regulations that were passed after 2008 – most of those were useless and industry lobbyists secured the effective repeal of those which had any effect, such as the Volcker rule prohibiting banks from gambling with taxpayer-guaranteed capital.
However housing, the largest single asset class, and the one whose obligations are most held by ordinary investors, is not this time likely to get into too much trouble (outside a few overheated cities the lenders in which deserve to lose their shirts). Hence a large part of the losses is likely to be concentrated in high-risk bond funds, professional bond investors, and the hedge/private equity fund combines, which could usefully be cut back sharply. Naturally, the stock market will crash, and private market valuations, which have been hugely inflated by the surplus of funding available, will collapse even further.
The effect of a crash concentrated in high-risk debt, stocks and luxury real estate would be unpleasant, but need not necessarily cause a full-blown depression, as it did in 2008-09. In that case, a financial downturn was exacerbated by bad public policy, with bailouts, fiscal “stimulus” and funny money. Those policies killed confidence, rewarded greed and ineptitude and made the downturn much worse. As with the Long-Term Capital Management bailout in 1998, a government which bails out hedge funds and speculators is making the world safe for dodgy billionaires but impoverishing everybody else and grossly prolonging the recession. Say’s Law cannot be circumvented.
If other policies were as in 2008, a deep recession would still be almost inevitable, even though the financial crash itself would not precipitate it. However, there have been several policy changes since 2008, each of which makes a deep recession less likely and cushions Americans of moderate skill and incomes against that eventuality.
Regulations in the United States are being lifted, not tightened as in 2007-16, freeing up investment opportunities, while the fracking boom, which has made the U.S. an oil exporter as it was not in 2008, has revolutionized the country’s energy position. International trade regulations are being tightened, and U.S. manufacturers, realizing the political, economic and reputational risks of far-flung global supply chains, are seeking by every means to shorten and harden them. Immigration of low-skill people is being tightened.
Overall, the intense competition for employees at the lower end of the skill scale resulting from these policies has sharply tilted the job market towards low-skill Americans and away from illegal immigrants and residents of Third World countries. With less competition wages have naturally risen – real median family income has risen $5,003 to August 2019 since Trump took office, according to the Heritage Foundation, compared with a sorry $401 rise in the entire sixteen previous years.
We have seen this policy mix before. Contrary to neocon myth, Trump’s protectionism is squarely in the Republican tradition, and in particular is associated with the great William McKinley. In the 1896 Presidential election, McKinley ran on a platform of the “full dinner pail” for the working classes, together with sound money, favoring the Gold Standard. His opponent William Jennings Bryan ran on a “funny money” platform favoring free coinage of silver and strongly opposing big business.
McKinley won election by a substantial margin; more important, his policies over the next decade produced a massive increase in U.S. working class living standards, together with a surge in the United States’ global importance. With the United States committed to a Gold Standard, prices tended to decline and real interest rates were high. That did not matter; the immense surge in productivity of U.S. industry produced by the high interest rates and sound money not only produced higher profits but fed through magnificently into the workers’ “dinner pails.”
Trump is committed to a McKinley tariff policy and has already benefited U.S. living standards immensely by that commitment, and the corresponding commitment to tighter immigration control. Now he needs to commit to a McKinley monetary policy; the “funny money” of the last twenty years has merely raised asset prices and produced bubbles, benefiting nobody but the very rich and a parasitic class of their hangers on in overpaid service sectors. Should Trump commit to a policy of high real interest rates, the quality of investment in the U.S. economy will continue improving, as it has for the last 2½ years, and productivity growth will continue clawing back its losses in the funny-money decades. Sound money, even a Gold Standard, would be immensely beneficial to the working man, as it was in 1896.
The collapse in asset and stock prices and devastation in the hedge funds sector will produce redundancies – of course they will. A move to tariffs and the collapse of dreams of globalization will produce further downsizing in multinational companies and the largest banks. However, those redundancies will be concentrated heavily among the overeducated and overpaid who work in financial services, law and other “concierge” services for the ultra-rich, the stateless multinationals and the bubble economy. The economy’s returns to fancy degrees from top colleges will collapse, as employers come to realize that the recent graduates of those colleges are mostly outstanding in their ignorance and prejudice.
Those people are leftist Democrats, almost to a man or woman, so far has their income generation deviated from the norms of a healthy capitalist economy. A return to such an economy will hit their pocketbooks and even their livelihoods hard, so naturally they prefer to leech off the middle classes with socialist schemes while preserving their own phony charitable tax deductions intact.
George Soros has done very well in the last 25-30 years, and so have the deeply unpleasant causes he supports. A recession now that consists of a massive asset price collapse combined with a firm move by President Trump to a McKinley economy will continue the current sharp rise in middle-class living standards and ensure the President’s landslide re-election. Working-class satisfaction will be increased further by the gnashing of teeth among the Soros-friendly elite – as Oscar Wilde said, “It’s not enough that I should win – Others must lose.” As a 3 for 1 benefit, it could not be improved.
(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.)