Tuesday, September 15, 2015

The Coming Great Inflation and Asset Price Collapse

No one knows the future, yet people spend much of their time trying to predict it. In their everyday lives, the predictions that people make usually prove correct, which explains why it is profitable to have a brain. However, when the same mental machinery is put to work on problems more remote both from everyday experience and from the present time, reliability of prediction tends rapidly toward zero. This is true not only of predictions made by ordinary folk with only the most superficial knowledge of, say, climate change, economics, or politics, but of the professional prognosticators, whose credibility, such as it is, remains intact only because they dress up their predictions in all kinds of highfalutin verbiage or mathematical mumbo-jumbo.

But while it is pretty safe to say that all predictions about climate, the economy, or the organization of global power 100 years hence are almost certainly wrong except by mere chance, it may nevertheless be useful to examine propositions in the form: all other things being equal, if x,  then y or z, or a or b.

At least such statements acknowledge that a multiplicity of other factors have been ignored, and that they therefore assert nothing definite about the future. An advantage of this approach is that it makes for civilized debate: no need to call someone a denier or an alarmist if they acknowledge at the outset the extent of their ignorance about future climate. Moreover, it encourages one to look for variables that remain unmeasured, or not thought of, and to remember that there still remain blind chance, the unknowable, and the possibility of divine intervention.

It is on this very modest basis that I predict the Coming Great Inflation and Asset Price Collapse. My "if x," is this: if Donald Trump or another person elected the next President of the United States implements what I earlier called Trumponomics. I make the election of Donald Trump or another person as well as the implementation of Trumponomics conditional, as a reminder of the uncertainty of every aspect of the future and, in particular, as a reminder that before November 8, 2016 all life on earth may be extinguished by an unanticipated meteor impact, a supernova explosion in the vicinity of the Sun, all out nuclear war, or simply because  Barack Obama declares himself President-For-Life.

So, to reiterate, here is the program I called Trumponomics:

(A) Corporation Tax and Business Investment: An end to, or a radical cut in, the corporation tax, profits to be taxed as dividends in the hands of shareholders. This, combined with other measures, particularly item (C) below, will induce billions in new investment in America factories, research laboratories, and design studios, much of the new investment resulting from repatriation of profits of American-based international corporations.

(B) Income Tax: Radical cuts to income tax at the lower end of the income scale, with modest increases in taxation at the upper end of the income scale, thereby increasing consumer spending and thus demand for goods and services that generate employment in America.

(C) Jobs: An across-the-board tariff on all imports, including software, design and other services, oil and other resources, thus, in combination with (A), inducing a domestic investment frenzy in manufacturing, oil, mining, R and D, software development, and design.

(D)  Energy and Environment: (1) Promote energy conservation and carbon emissions reductions with a carbon tax plus a countervailing duty (in addition to the general import tax) on manufactured goods from countries without a carbon tax; (2) Open up both off- and on-shore areas for oil and gas extraction making the US a permanently low-energy-cost manufacturing location; (3) Invest billions in energy tech research: thorium reactors; zero emission coal power; etc.

(E) Education: Cut the PC crap and restore control to state and local authorities.

The outcome? Fed Funds rate at 5% plus, inflation at 5% plus, unemployment down from 16% (U6) to under 5%, US GDP growth rate 10%; US literacy sharply rising; US GDP to double by 2024.

The return of significant inflation and sharply higher interests rates will collapse bond values, house prices and shares of companies like Amazon and Tesla that have silly Price/Earnings ratios. Not all shares will be badly hit, however. WallMart, for example, will likely adapt easily from being the most efficient vendor of cheap Chinese stuff, to being the most efficient vendor of somewhat less cheap (because of higher labor costs) American stuff. MacDonalds, StarBucks and hundreds of other large American corporations and tens of thousands of small American corporations will boom because of the revival in American prosperity and hence American consumer spending. 

And an American economic renaissance will not happen in isolation. All Western nations, if they want to trade freely with the United States will have to bring their economic arrangements in line with those in the US. In particular, they will have to play by the same rules on importation of cheap Third-World labor and products from Asian sweat shops.

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