Today we are going to talk about the world economy. This is the first lecture we have done on the economy since the election of Donald Trump as president. This lecture is going to build upon the lectures we've done previously and people should probably look at our world future outlook report and some of our charts to get perspective on the whole situation. The big picture here is we are living in the midst of probably the greatest debt hyper bubble in history. This is not an opinion, debt as a percent of total debt, as a percent of the American economy, is at its highest level in history. In other words, there really hasn't been the so-called "deleveraging." There has been real leveraging in particular where public-sector money and public sector debt has stepped into the breach to prop things up and keep things from collapsing. In particular, you have the creation of $4 trillion worth of funny money by the US Federal Reserve Board, and for the first time in history, the US Federal Reserve Board now is a key holder of mortgages. The Federal Reserve Board owns now about $2 trillion of mortgages. This is very significant because the US Federal Reserve Board is supposed to be the last line of defense and is not supposed to hold mortgages. It is not illegal, but it's not supposed to hold mortgages, it's supposed to hold only very, very secure investments. And so it is significant that you have also as head of OMB a right wing Republican Congressman who supported efforts to shut down the government and default on debt and so on. This is very encouraging. The central core of the modern world economy is that US government debt is sacrosanct and that money will be printed, stolen, ripped off, whatever. And Wall Street still thinks that's the case but that's not entirely clear. That's not entirely clear.
Now another thing that's changed with the trump administration is that America is finally going to have to come to terms with 30 years of disastrous trade policies.
HOW FORMER PRESIDENT BARACK OBAMA HANDLED THE FINANCIAL CRISIS OF 2008
Looking back, Obama deserves a lot of credit for saving the world economy from collapsing between 2009 and 2010, to try to clean up the disastrous mass produced by the incompetence and irresponsibility of Mr. Hank Paulson, former President George Bush and Mr. Bernanke, of the sort of three horsemen of the 2008 Apocalypse, and they certainly left Obama with the disaster. Unfortunately, by around 2010, Obama, for reasons known only to himself, proclaimed the summer of recovery and basically spent the next series of years until he finally sort of stumbled out of office just telling everybody how wonderful everything was without solving really any of the fundamental problems in the economy.
TRUMP'S ABRUPT APPROACH
So all those problems are going to start solving themselves and/or Trump is going to try to solve them. Trump does deserve credit for bringing up the trade issue. Another problem with Trump is that a there's not at all clear that this is not to be handled in a very careful manner there's indications that Trump's going to try to reverse 30 years of policies in one year, like trying to a stop a car going very fast by driving it into a brick wall. It probably won't have good results. So this is a real problem.
ARTIFICIAL ECONOMIES WORLD WIDE
You don't really don't understand anything about today's economy if you don't understand that the entire American economy right now, and also the other major economies, are artificial. That they are propped up by this huge money printing binge that followed the 2008 collapse. There were some reforms, but really the reforms that were needed were not put through. Instead there was a huge pile of money printing, literally trillions and trillions of dollars by the central banks of the major world powers to kind of fill in the blanks here. Now in the case of America, Europe, and Japan, this debt largely went into consumption, which is very dangerous because this is no long-term. That's just throwing money away to a certain extent. Now in China was a huge orgy of money printing, but a good part of that went into infrastructure and in spite of all the doom and gloom about China, that was probably a lot of waste and corruption and so on that was probably a much better use of funny money than what was done by people such as Obama. But we really don't know. China is a totalitarian state; we really don't know what's going on in China. We really don't know. The shadow banking system, the real estate, anybody who says they do know is full of baloney because we don't know. The information isn't public, you can speculate, but you don't know.
TRUMP'S PLANS
Now since Trump is elected, there's been an absolutely revolutionary development in the United States that the geniuses on Wall Street, as usual, are sound asleep about, which is that Trump is going to reverse 30 years of trade policy. He has to. Obama presided over just a sort of continuing soaring balance of payments deficits. The China trade deficit broke one record after another and Obama would make idiotic statements such as there is no problem and so on. So Trump, to a certain extent, is a creation of Obama. But what is very revolutionary about trump, that's never happened before, it would've happened eventually under Hillary Clinton if she won, but it wouldn't have happened right away. Trump is like trying to stop the car right now, is that the whole structure of world finance is facing a huge threat in the sense that Trump is going to try to force a change in the whole structure of world payments by bullying US companies to come back home and the cornerstone of this, which is very interesting that the Republicans in Congress have made a 180 degree U-turn and are promoting what's called a border adjustment tax, that we won't get into the details of the border adjustment tax and there are arguments that it's similar to a value-added tax. It is and it isn't. But the border adjustment tax is a blatantly protectionist piece of legislation. Now that may be necessary. We are sympathetic to it. But it will be very foolish to think that is not a huge threat to the entire structure of world finance, because the entire structure of world finance is based on this global supply chain and the continued deficits of the United States.
Now as we pointed out for years, really going back to the 80s, these deficits were going to catch up with the US and this year is the year politically that they did catch up because the entire Trump tax plan is a bunch of hot air as Mr. Brady, the Republican chairman of the House Ways and Means Committee, has stated. That the whole thing doesn't work without the border adjustment tax. Now Wall Street, as usual, is living in Lala land and is dancing around in a state of glee because they heard they are going to be deregulated, yeah that worked out so well in 2008, and that there's going to be lower taxes for everybody so they can buy fancier cars and even more luxury homes if they haven't got enough already, whatever, anyway, so but they're not listening to this border adjustment tax. You have a truly revolutionary development in US tax policy, so you have a very shaky financial situation. You cannot over emphasize the importance of the Federal Reserve money printing. It was the greatest welfare for the rich program in the history of the world. Trillions of dollars went to the banks so they could borrow money at ridiculously low interest rates to pretty up their balance sheets. It's always amusing to see these Wall Street Analyst's, "All the banks are in such good shape!" Of course they're in good shape, anybody can be in good shape of the got trillions of dollars of 0.1% loans, anybody can be in good shape at that. But this has just papered over all the problems. What's worse than that is that the interest rates we are in are a global bond bubble and the interest rates have been artificially held down which is what's keeping the real estate market alive.
THE REPRICING OF THE GLOBAL BOND MARKET
Now water can't flow uphill indefinitely. Gravity actually flows downward not upward. So the entire global bond market is going to reprice. Now when you look at manias and fads, like the .COM mania of the late 90s, or the modern real estate mania, it really wasn't that hard to figure out that this whole situation was going to end in a crash landing. and it's really not that hard to figure out that the modern global bond bubble which is probably the biggest and most dangerous bubble in history is going to end in a tremendous crash/ this isn't really genius/ what you need in terms of dealing with this is calm sober leadership to work out a 10 year plan to deal with this. But this doesn't seem to be at all what were getting with the trump administration. No it is not. In fact, part of out of the problem of the trump administration is it is so erratic as to who is in charge, who's doing what. All this is very unclear. This does not bode well for dealing with the coming global financial crises. So these are some important points to keep in mind as the global bond bubble re-prices and it also relates to the huge amount of trash mortgages that are on the books of all these banks, such as specifically Bank of America which bought the countrywide disaster, and J.P. Morgan which bought Washington Mutual. Now Bank of America in particular has paid $57 billion, that's right $57 billion in fraud payments for its mortgage related activities. But the bad news doesn't stop there. They still have all the vast ocean of trash mortgages. On their payroll. On their balance sheet. now what happens there is when the bond market and the interest rate market reprices, because most of these mortgages were refinanced at such ridiculously low rates, the banking industry gets into a squeeze because the cost of their credit goes up while the income from the trash mortgages is locked in at these low prices. So this leads to big problems.
NO MORE MONEY FOR BAIL OUTS
Now in the coming crisis, the money has been used up, there's no more money of any significant amount for bailouts. Okay there will be bailouts, but Wall Street is assuming this will all happen all over again and it will not. What will happen will be bail ins. a lot of the Republicans want to get us back to the good old days, and give them credit they're moving us in that direction, where we can back get back to the good old great days when we had massive bank failures, runs on banks, and so on and so forth. That's where they're going. What will happen is that the when these banks fail, the depositors, over a certain amount, are going to have to pay to clean up the mess. And how far out of control this will get is unclear. What will trigger this? Who knows? And most of the time when things get overpriced little things trigger things. This is what triggered the .COM collapse. Often something very small... because it's what is the tipping point for an absurd situation...what could trigger the real estate collapse, you didn't have to be a genius to figure out there was going to be a real estate collapse with all the low doc loans, and no doc loans, and liar loans and so on and so forth. This was not very hard to predict. So who knows what will trigger it? And the coming collapse of the global bond market is also not very hard to figure out.
HOW WILL THE ECONOMIC SITUATION SORT ITSELF OUT AROUND THE WORLD?
When you look at this whole thing it's an upside down pyramid. It is just a question of when not if it tips over. So we need to look around the world in conclusion to see how all this is all going to sort itself out. Now in America you have a highly unstable situation. You have a safety net that's been shredded. You have a president who's not seen as legitimate. You also have a president who tweets at 3 o'clock in the morning and is considered by many people to be not 100% psychological, who is not psychologically well, and this doesn't bode well for handling a crisis, but America's very poorly equipped. And you also have that out there that a good part of the population is on pillsÂ…, drugged out and so on. And still better you have a lot of religious crackpots in America. You have a lot of highly unstable religious groups inside the American evangelical Christian movement and so on and so forth. So this all does not bode well. In Europe you do have a safety net. You do have a safety net. Europe is going to weather the coming crisis further and continuing our trip around the world China...China we don't know...but we have look at the whole developing world and the so-called emerging markets. The Trump border adjustment program and Trump's trade policies are an enormous threat to their financial stability, so who knows what might happen there. But this could be this could be very messy, I mean how much of the credit bubble is China? Again we don't know because China is a totalitarian state. We don't know. But this could be very messy. Now let's look at a couple wildcards around the world. The biggest wildcard is Russia. Obama started up a new Cold War with Russia due to his stupid policies and so on and so forth and in his gutlessness in standing up to the war mongers. Will that be stopped by trump? This is not clear because the Democratic Party is now adopting an anti-Russian proposal so they can attack trump in a truly breathtaking act of irresponsibility. If it is not, that can blow things up all across the board. Literally worst-case scenario you can fry everybody in a nuclear holocaust. We hope that doesn't happen but, a resumption of worldwide military competition is not going to be good. Trump is very confrontational to China so you easily could have a Russia China military alliance for the first time since the Cold War that will confront America with an equal military superpower. That's a highly likely development.
Another wildcard is a country we have a lot to do with and that's Pakistan, where you have the combination of Islamic extremists and the fastest growing nuclear weapons program in the world. This could get really...quite lively...quite interesting and so on. And we're not even getting to the longer-term things beyond...and might not be longer-term in the environmental area where both India and China are pumping out their water reserves all under their key agricultural areas and this could be not so good in terms of also the ugly aspect of the green revolution of pesticide poisoning and other stuff like and so on and so forth.
In Africa you have the largest amount of poverty in the world. If the world economy sinks well... that's not going to be so good for them.
In India we still can't quite figure out this business of abolishing all paper currency, which is really a totalitarian mad scheme and whether that's damaged the Indian economy or not. Again they're in very vulnerable shape if things head south.
And Latin America, Brazil has just thrown out its president last year and elected somebody else who is considered a crook, so that's not so good. Mexico will be highly destabilized if Trump keeps up his hostile policies.
CONCLUSIONS
So all this is like a steaming sea of turmoil and at the center of it is Mr. Donald Trump and so this is going to lead to a lot of turmoil. You should be prepared for any repricing of the global bond markets and severe global liquidity situations. No you shouldn't buy the bank stocks because Wall Street is saying you should buy the bank stocks; Wall Street as usual is batting a thousand and is constantly wrong. But looking ahead we have the potential of a historic financial/political crisis because the financial crisis will bring on a political crisis and this will change the world as we know. We will elaborate on this in future lectures. This is the end of this lecture.