In my last article (The False Fundamentals Narrative Begins to Envelop the West) I talked about how I believe central banks – the Federal Reserve in particular – are planning to use the fundamentals of economic data as a cover for raising interest rates. I argued that the rise of nationalist movements throughout the West are being strategically positioned in order so that they can be held accountable for the inevitable downturn that will ensue as rates begin to rise and central banks talk up the prospect of cutting back on their trillion dollar balance sheets.
Another factor gradually coming into play is that of deregulation. During his election campaign Donald Trump had pledged to reduce financial regulations that he felt were preventing growth in the economy.
One measure that Trump is now actively pursuing is a repealing of the Dodd-Frank act. On Friday February 3rd, he signed an executive order which instructed the Treasury department to consult with federal regulatory agencies and the Financial Stability Oversight Council, and report back on potential changes that could be made to Dodd-Frank.
“The first thing that we are going to attack is regulation, over-regulation. It’s not just in the financial markets, it’s in all markets. So today you’re going to start seeing the beginning of some of our executive actions to roll back regulation in the financial services market.”
Dodd – Frank was introduced in direct response to the financial crisis. The act created the Financial Stability Oversight Council, a body which is effectively in charge of looking for risks within the financial system.
The Act also created the Consumer Financial Protection Bureau, to oversee consumer financial products, such as mortgages.
A key part of the Act is the Volcker Rule, which restricts the way that banks are allowed to invest and places restrictions on speculative trading.
The act is named after former Financial Services Committee Chairman Barney Frank and the former Senate Banking Committee Chairman Chris Dodd, who together worked to bring about the legislation. The aim, on paper, was to implement strict capital standards on banks and derivatives trading. Barack Obama signed it into federal law in 2010.
Nevertheless, Donald Trump remains incredulous:
“Dodd-Frank has made it impossible for bankers to function. It makes it very hard for bankers to loan money for people to create jobs, for people with businesses to create jobs. And that has to stop.”
Barney Frank, meanwhile, had a warning for Trump as reported by CNN Money. He believes a repealing or watering down of the act risks a new financial crisis into the future:
“You would have what led to the 2008 crash. At some point, all of that unrepayable debt causes the system to crash.”
Also casting doubt over the policy to repeal financial regulation was Federal Reserve Chairwoman Janet Yellen. Here is a short clip of her speaking in November 2016:
On the same day as signing the executive order on Dodd Frank, Donald Trump signed a second order instructing the Labour department to review the Fiduciary Rule.
The rule, which would supposedly put client interest above that of financial professionals, is according to Business Insider,
designed to make all financial professionals who provide retirement planning advice or work with retirement plans accountable to the fiduciary standard, as opposed to the more relaxed suitability standard.
It would protect millions of investors from paying unnecessarily high commissions on investment products.
One of the biggest arguments against the rule is that it could unfairly impact smaller and independent retirement advisors, who might not have the ability to afford the costs of complying with the new regulations. The UK passed similar rules in 2011, and the number of financial advisors has since dropped by 22.5%.
Unlike Dodd – Frank, the Fiduciary Rule has not yet been signed into federal law. Before Donald Trump’s executive order, it was due to come into effect on April 10th 2017. There now exists uncertainty over whether the rule will be deferred before its upcoming implementation. So investors are continuing to plan in the event that it does still come into effect.
Combined, the two Executive Orders are an indication of Trump’s intent to try and scale back and eventually repeal financial regulations which originated under Obama. Trump’s main argument for this is that less regulation will encourage greater economic growth and job creation.
At this point I’d like to draw your attention to a post I published back in January – Basel III: A Vehicle to Begin Collapsing the Markets Under Trump? Briefly, the global Basel III accord, which works through the Bank for International Settlements, would – once fully implemented – create new capital standards (see Dodd – Frank) and fix the shortcomings laid bare by the financial crisis in 2008. That’s the official spiel at least.
A completed deal on Basel III would then go to the respective authorities e.g. leaders of the G20 nations, who would be tasked with processing its full implementation. Bare in mind, however, that Basel III is a voluntary program which works by consensus. It is not bound by any treaty or international law, which makes it vulnerable and in the long run potentially ineffective at preventing another financial crash. I believe this to be an intended consequence as I have outlined in previous posts.
As I talked about in the Basel III article, the problem now is that progress on the accord stalled in January, three weeks before Donald Trump was inaugurated. But the void between the delay, and any future meetings to finalise Basel III (said to be taking place in March), has now been filled with Trump’s executive orders.
Given the Trump administration’s aggressive stance on financial regulations, Patrick McHenry, who is a top Republican in the House of Representatives, and also vice-chairman of the House Financial Services Committee, has urged the Federal Reserve to cease all further negotiations with international forums such as Basel. In a letter to Janet Yellen, McHenry wrote:
“It appears that the Federal Reserve continues negotiating international regulatory standards for financial institutions among global bureaucrats in foreign lands.
The Federal Reserve must cease all attempts to negotiate binding standards burdening American business until President Trump has an opportunity to nominate and appoint officials that prioritise America’s best interests.”
McHenry added how he felt the Fed were continuing with negotiations “without transparency, accountability, or the authority to do so. This is unacceptable.”
Criticising McHenry’s interjection was Diane Swonk of DS Economics, who said that,
“This is a multi-pronged attack on the Fed’s independence.”
Playing on the idea of a potential rift between the Fed and Donald Trump are remarks made by Trump himself. Before his election victory, he suggested that he would likely replace Janet Yellen once her tenure comes to an end in January 2018. Yellen replied by insisting she would see out her full term as chairwoman.
But it is Trump’s reasoning behind low interest rates under Yellen that warrant closer examination. Back in October he said:
“I think [Yellen] is a very political person. She has always been known as a dove on interest rates. Janet Yellen for political reasons is keeping the interest rates so low that the next guy or person who takes over as president could have a real problem. They are trying to put the next recession — it could be a beauty — into the next administration, and that’s not fair.”
He did not finish there, as reported by US News:
“It’s staying at zero because she’s obviously political and she’s doing what Obama wants her to do. I love low interest rates, but for the country, something has to happen.
What happens if interest rates go up fairly substantially? And with all of the money we have and we are borrowing, do you know what that does to our balance sheet? Everybody’s figuring these crazy low interest rates; well, they’re not always going to be this way.”
“She’s keeping [rates] artificially low to get Obama retired. Watch what is going to happen afterwards. It is a very serious problem … and to a certain extent, I think she [Yellen] should be ashamed of herself.”
As you would expect, Janet Yellen did not respond to Donald Trump’s criticism directly. But now that Trump is in office, and with moves underway to begin repealing regulations forged under Obama, the potential for open conflict between the Federal Reserve and the White House – when the two are supposed to be independent of the other – is evident.
The fact that, so far, the war of words are all coming from Trump’s administration is, I would suggest, no coincidence. Trump is being portrayed as the aggressor, which works to keep the emphasis and attention on him rather than the Federal Reserve.
Outside of the US, reaction to Trump’s executive orders came quickly after their release. Whilst giving evidence at the European Parliament’s Committee On Economic and Monetary Affairs, ECB chairman Mario Draghi said:
“The last thing we need is a relaxation of regulation. The fact that we are not seeing significant financial stability risk is the reward of the action of supervisors. The idea of repeating the conditions of before the crisis is very worrisome.”
Solidifying Draghi’s position were comments from Phil Angelides, who served as chair of the Financial Crisis Inquiry Commission:
“In the wake of the financial crisis, millions of families lost their homes. Millions of people lost their jobs. The economy was wrecked and communities across the country were devastated. And now, with bankers at his side, President Trump begins to rip apart protections put in place to protect America’s families and our economy”.
Dennis Kelleher of the Better Markets Group then weighed in. This is precisely the line that will be taken by the mainstream media and ‘Progressives’ should a financial collapse happen under Donald Trump:
“The American people trusted candidate Trump when he said he was going to protect them from Wall Street’s recklessness, but President Trump has betrayed that trust. He is unleashing Wall Street on Main Street, which is exactly what the financial protections of Dodd Frank were put in place to prevent.”
One further comment came from Andreas Dombret, who as well as being a member of the board on the German Bundesbank is a member of the Basel Committee responsible for devising Basel III. Dombret said that dismantling regulations at this time would be a ‘big mistake‘, and by definition increase the odds for a further financial calamity.
A key element in regards to financial regulation is the role of the US treasury, a department that is currently awaiting Steve Mnuchin to be confirmed as its new secretary. As with other candidates appointed by Donald Trump, Mnuchin is not without controversy. Aside from him being a former executive for Goldman Sachs, the LA Times reported recently that the Senate Finance Committee had approved Mnuchin’s advance to the treasury, whilst at the same time voicing concern about his appointment:
The panel approved Mnuchin despite sharp objections from Democrats about the wealthy Wall Street executive’s tenure as head of Pasadena’s OneWest Bank and a dispute over whether he misled the panel in answering questions about foreclosures.
Further doubt was raised by the committee over Mnuchin’s suitability in an article published by Reuters on January 20th:
President-elect Donald Trump’s pick to lead the Treasury was attacked for failing to promptly disclose he was a director of an offshore business vehicle domiciled in the Cayman Islands and owned more than $100 million in real estate.
Mnuchin said he moved his Dune Capital Partners LLC registry to the Caymans to allow for some pension fund clients to invest in his funds, not to avoid taxes.
He’s getting a big thumbs down from a film lending company that alleges in a lawsuit that the Wall Street and Hollywood financier helped cheat it out of more than $80 million.
RKA Film Financing accused Mnuchin of allowing money intended to release films from Relativity Media to be misspent for other purposes. Some $50 million of the misspent money went to a bank that the treasury secretary-designate founded, the lawsuit contends.
Despite the negative press surrounding Steve Mnuchin, he is almost certainly going to be confirmed as US Treasury Secretary this month. One of the first issues he will face is the reinstatement of the federal debt limit on March the 16th, when US national debt will break through the $20 trillion mark. To prevent the US defaulting on its debt, the debt ceiling will have to be raised, which will require approval from Congress.
Whilst the debt limit will be portrayed as Donald Trump’s problem, it was actually Barack Obama who managed to secure legislation in late 2015 to suspend the limit for the remainder of his presidency, thus preventing the threat of a default under his watch. As Reuters pointed out,
Without action by Congress, the Treasury Department would have exhausted the last of its borrowing capacity on Nov. 3, according to Treasury Secretary Jack Lew, and risked default on U.S. obligations within days that would roil global financial markets.
In essence, the debt limit was positioned so as to become the next administration’s problem. During his hearing at the Senate Finance Committee, Steve Mnuchin was adamant that,
“Honouring the U.S. debt is the most important thing. I would like us to raise the debt ceiling sooner rather than later.”
The Fiscal Times expanded on Mnuchin’s appearance at the committee by reporting a line of questioning from Democratic Senator Mark Warner:
When Warner declared that Trump must “never again question America’s willingness to stand by its debt obligations”, Mnuchin replied:
“Senator, I agree with that 100 percent. We have the obligations, there should be no uncertainty that we are paying the bills.”
Further complicating matters is Donald Trump’s nominee for the director of the Office of Management and Budget, Mick Mulvaney. The OMB is inextricably tied to the debt limit as along with the treasury it deals with the US federal budget.
Another of Trump’s picks still yet to be officially ratified, Mulvaney was last week labeled a ‘deficit hawk’ by Bernie Sanders, who said that,
“We have a nominee whose ideology is in direct contrast to what President Trump ran on. President Trump told working people and seniors he would not cut Social Security, Medicare and Medicaid. Yet you have a nominee who prides himself, who is a deficit hawk, who has said over and over again that he will do exactly the opposite of what President Trump campaigned on.”
Throwing a fresh bit of scandal into the mix – a common feature amongst Trump’s cabinet picks – Sanders noted that,
In his questionnaire from the committee, Mulvaney disclosed he had failed to pay taxes on a babysitter for his newborn triplets, for which he paid more than $15,000 in back taxes and was still figuring out penalties. Sanders quoted Senate Minority Leader Chuck Schumer in saying similar issues had forced nominees to withdraw in the past.
As reported by the Daily Kos, Mick Mulvaney has a history of voting against increasing the US debt limit. In 2013, he voted against a budget deal that prevented the shut down of the government. Two years on he was ‘demanding changes to entitlement programs as part of any debt-ceiling package.’
The danger is that Mulvaney and Mnuchin could become divided over the issue of the debt limit. According to Bloomberg:
A co-founder of the conservative House Freedom Caucus, Mulvaney used his vote on the debt ceiling to push President Barack Obama’s administration for spending cuts, and the incoming OMB director recently downplayed the dangers of defaulting. That puts him out of sync with Mnuchin, who has cautioned against playing politics with the country’s debt.
Responding to senator’s questions about US debt during his nomination process, Steve Mnuchin said:
“My responsibility as secretary would be to pursue all means available to the Treasury to meet this commitment, including historic extraordinary measures that have been employed by necessity in the past.”
Compare that with Mick Mulvaney’s response to senators during his Senate confirmation hearing. Mulvaney is said to have “played down the threat of a failure to raise the debt limit and did not back off previous support for prioritizing payments once the debt ceiling is reached.”
“I do believe that defaulting on America’s debts would have grave worldwide economic consequences. I do not believe that breaching the debt ceiling will automatically or inevitably lead to that result.”
It is likely that after March the 16th, the treasury will exercise once more an ‘extraordinary measure’ to keep US debt ticking over and avoid a government default. But as picked up on by Market Watch, this is not a long term option:
Congress and the White House would almost certainly have to agree to raise the limit not later than midsummer to stave off a crisis. The spending cuts required would be too deep to solve the problem alone.
That brings us neatly to the issue of Donald Trump’s fiscal policy. Trump’s campaign was not run under the guise of trimming government spending. It was predicated largely on cutting taxes as opposed to raising them for additional expenditure. His ‘Make America Great Again‘ approach will require substantial investment, given that the objective is to rebuild American infrastructure and industry, and ultimately create millions of new jobs for American people.
This furthers the threat of Trump and the Federal Reserve being maneuvered into conflict.
Before the Fed decided on February’s interest rate, Market Watch ran an article in which they suggested that Janet Yellen could become the ‘foil’ to Trump’s administration. The premise of this rests on Donald Trump pushing through Congress a massive infrastructure spending program, to the tune of hundreds of billions of dollars. In response, the article opined that if the funds for such a program came from increased borrowing, and not from spending cuts or tax rises, then the Fed would put up interest rates. The question is, would Trump associate such a response as being politically motivated? Would he see it as open opposition to his policies, from a bank that is promoted as independent of federal government?
Speaking about the prospect of Janet Yellen effectively becoming the Democrat’s chief opponent to Donald Trump, Diane Swonk said:
“Yellen would run, not walk” from any suggestion she was the Democrats’ last best hope in Washington.
“The Fed is just walking a very fine line, and it is important for the central bank to be seen as nonpolitical.”
At one of her latest press conferences, Janet Yellen commented on the prospect of increased fiscal stimulus in the months ahead. Keep in mind that these comments were made with two of Yellen’s objectives in mind – low unemployment and a 2% annual inflation rate:
“I would say at this point fiscal policy is not obviously needed to provide stimulus to help us get back to full employment.”
The U3 Unemployment number – the only one considered relevant in the mainstream – is now at 4.8%, whilst inflation stands at 2.1%. In terms of ‘price stability‘ and ‘sustainability‘ – as central bank figureheads like to phrase it – if these rates remain consistent, and in particular the U3 rate falls in the coming weeks and months, the Fed’s narrative of ‘full employment‘ will hit a crescendo. The conditions would therefore be met to increase interest rates.
But could Donald Trump’s fiscal policy prove a catalyst for the fed increasing rates more than they had publicly anticipated? I believe this is possible. Consider that you would have the cost of borrowing rising off the back of fiscal stimulus being implemented. When you look at it from this perspective, you begin to see how an open quarrel between Trump and the Fed could easily materialise.
Once Steve Mnuchin and Mick Mulvaney are confirmed to their posts, and the debt limit is breached, the narrative will begin to open out more than at present, and in turn will prompt multiple fields of conflict into the year. I believe as well that a concerted effort has been underway ever since Donald Trump’s election victory to de-legitimise both him and his administration. It has not been with the intention of preventing a Trump presidency, or indeed stopping his cabinet picks from being confirmed. It has more been about presenting Trump as incompetent, a rash decision maker, someone who uses twitter as a running commentary for his role as president. The haste at which executive orders have been signed – most notably the order restricting travel to citizens from specific middle eastern countries – has thrown into question Trump’s diplomatic ability on the world stage. In the long run, this way of governance is an asset to the globalist elites behind Donald Trump. De-legitimising him is I believe part of the plan. It galvanises the necessary opposition to his presidency to further accentuate the left / right false political paradigm.
Meanwhile, as we await further figures on the economy, the Federal Reserve have made their position clear regarding future interest rates hikes. They will respond to incoming data to determine their monetary policy. That data has now entered the realm of ‘price stability‘. It is now just a question of whether rising inflation, job creation and unemployment figures are presented as ‘sustainable‘. If they are, I think rates will rise in March.
If, on the other hand, the fundamentals remain largely static, or indeed slip back from current levels, they may decide to leave rates unchanged and maintain a cautious outlook. Should that prove the case, then Donald Trump’s fiscal stimulus plans will come sharply into focus. Might they prove the impetus for the fed beginning a series of rate hikes? Quite possibly if the economic data turns subdued.
We wait to see what the Federal Reserve decide for interest rates next month, and perhaps glean the first details on Donald Trump’s long awaited fiscal stimulus policy.
Only then can we judge with more clarity how the globalists are planning to manipulate the economic landscape in 2017.