Professors of finance are a dime a dozen. Their theories are generally shallow and wrong…or kooky and silly. We weren’t sure which category Professor Richard J. Murphy of Sheffield, England, belonged in. We doubt that his core thesis on the coming crash is correct…but it is provocative.
At first glance, Murphy appears to be even more of a cynicalist than we are. He believes Donald Trump is offering dumb economic policies intentionally… trying to sink the US economy.
Everybody knows restricting trade is bad policy. It prevents people from getting the best product at the best price…and it allows uncompetitive, but politically well-connected, domestic companies to stay in business long after they should have been liquidated.
Threatening foreign nations with sanctions if they use currencies other than the dollar is another bad idea. It’s like when you’re losing a Little League baseball game…and threatening to take the bat home. Eventually the foreigners will find their own bat.
And there’s the threat of deporting millions of workers. Add those deported workers to the $2 trillion Musk and Ramaswamy say they will cut from the Federal deficits…and the higher prices caused by tariffs…
All of them coming on stream just as the stock market reaches bubble highs…
… and you have set the stage for a catastrophic meltdown.
No matter. CNBC:
‘SoftBank and president-elect Trump announce $100 billion investment in US over four years’
Yes, the money is pouring in. Soon the jobs will be coming on-line. Or not.
But Murphy believes the Trump Team’s real plan is to crash the economy:
‘Is the possibility that the world economy will crash soon a reasonable likelihood? Yes. And, the reason why comes down to two words, Donald Trump.’
Huh? What’s the game here… ?
Murphy explains. There have been two huge bailouts in the last ten years. In 2008…a huge bailout for Wall Street was organised by Ben Bernanke and Henry Paulson (on loan from Wall Street as US Treasury Secretary). Then again, in 2020 the Trump White House pulled off another one. In each case, the middle classes took the loss…and the rich took the gains.
Estimates are all over the place…but the mortgage finance crisis of 2008…and then, the Covid Shutdown fiasco of 2020 reached upwards to $20 trillion of ‘total economic costs’.
But for the asset owning elite, says Murphy, the subsequent bailouts more than made up for the losses.
Murphy’s hypothesis is that the feds CAUSE the crises intentionally…and use them as cover for bailouts, that make the rich much richer.
And here’s where it gets interesting. Even as cynical as we are, we doubt that they are so calculating. ‘Malice aforethought’ seems unlikely. But the forces of history exert their own gravitational pulls. The Reichstag Fire, Kennedy Assassination, 9/11, Covid – sometimes things happen that are so beneficial to ruling elites…it’s as if they caused them themselves.
There are two pieces to America’s financial world. There is the economic part — the Mainstreet economy where people work and save and invest…always trying to offer better products and services so as to earn more for themselves.
And there is the financial part. The presumption is that Wall Street serves the economic part… by allocating scarce resources to the projects that need them. But when the Fed pushes real interest rates down to ultra-low levels, it scrambles the signals. Resources are no longer scarce. So, the players stop trying to carefully allocate funds to the real economy. Instead, they borrow cheap money to gamble… to buy back their own shares…for mergers and acquisitions… and whatever else pays off. Cryptos, AI…one fad after another…the sky’s the limit.
Since 2008, the investing class got richer than ever… while the real economy dragged and staggered. What happened? The nation’s wealth shifted from the people in the real economy who earned it… to the hedge fund managers, speculators… and people who made their money, not by offering goods or services to others, but from the mispriced money itself.
The resource allocators on Wall Street didn’t allocate resources to manufacturing industries. Wages didn’t go up. Factories weren’t built. People weren’t trained to produce new output. And every mother in the country wanted her babies to grow up and be hedge fund managers, not factory managers. That’s where the money was!
Just taking the last four years, real incomes for real people in the real economy of jobs and products are flat or down. But during that same period the net worth of the top 1% rose by $16.5 trillion (these figures date from before the Trump Bump). Each household in that group is about $13 million richer than it was four years ago. As for the bottom 66 million households, they have gained only about $28,000 each in wealth.
Federal policies crashed the real economy…and then the feds pumped money into Wall Street. Taking the Dow as a measure, it traded at 28,000 in January of 2020. Now, it’s 44,000. The value of US stock, grosso modo, went from around $40 trillion in 2020 to nearly $60 trillion today. That $20 trillion roughly equals the amount taken out of the economy by the crises of 2008 and 2020.
Regards,
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Bill Bonner,
For Fat Tail Daily
