Friday, 11 August 2017

Donald Trump and North Korea: A Necessary Slight-of-Hand

On quite a few occasions here in Financial Regulation Matters we have focused on the growing credit bubble and its potential effects when it collapses. In today’s post, we are going to continue this assessment by looking specifically at the situation in the United States, which will encompass an array of reports and studies that discuss an ever-growing problem that is beginning to set records. As we often do in Financial Regulation Matters, we will position this discussion within a much wider context and discuss how the proximity of this bubble to the last Crisis is particularly worrying, but also we will look at how impotent the system is at actually constraining it, with the result being methodologies that are moving into absurd territories.

We have discussed the rising credit problem on a number of occasions before, but mostly in terms of the warnings posed by British regulators. However, looking at the global picture reveals a much more dangerous situation in that the world’s leading economies are witnessing record levels of debt. In China the current ratio of credit in relation to GDP stands at an incredible 260%, which has led to an influx of analysis that essentially confirms that a bursting of that bubble is almost inevitable, but would cause devastating shockwaves around the world. China’s increasing consumer and governmental debt represents the pinnacle of a growing systemic problem, one which has seen the levels of debt issuance by countries and major supranational organisation almost double since the Financial Crisis, with organisations like the E.U., the Asian Infrastructure Investment Bank and the World Bank all entering the capital markets in an attempt to raise massive amounts of resources for their needs. Yet, if we are looking for a massive pile of debt then we need not look further than the U.S.

It was reported recently that the rate of outstanding consumer credit-card debt (just credit cards) has recently surpassed the record set before the onset of the Financial Crisis by reaching $1.02 trillion. Then, in other news, an analyst from UBS has recently been discussing how there is a $1 trillion bubble of corporate debt in the credit markets that have been fuelled by institutional investors being driven to speculative-grade credit in the wake of decreasing yields from bonds such as Treasury Bonds. Student loans in the U.S. are outstanding at an incredible $1.4 trillion, outstanding loans on auto-loans stand at $1.16 trillion (particularly sub-prime auto-debt), and all of this is operating under the umbrella of the impending impasse concerning the raising of the national debt ceiling in the U.S. – Treasury Secretary Steven Mnuchin has been warning Congress that levels will need to be increased, using the Civil Service Retirement and Disability Fund as the emotional black-mail battering ram to get his way – a debt ceiling that now stands at $19.808 trillion and one that will be renegotiated in September of this year. It is clear then that the U.S., like many modern countries, is addicted to debt; yet, the question of how to reverse this addiction is proving as elusive as ever.  

During the campaign trail Donald Trump proclaimed that he would end the credit-related threat facing the U.S. in 8 years by fixing what he saw as imbalances in trade with other countries (something which he suggested would be facilitated by tax cuts for the rich); whilst we can write that statement off as one of the many statements that have or need to be written off from Trump, the behaviour of Trump is a significant indicator of the chances of finding a solution. The reaction to the highs of the stock market (before the North Korea issue hit the headlines) demonstrated a massive u-turn from his election rhetoric, and also signified the need to make the absolute most of any perceived ‘win’ owing to the turmoil that is consistently attached to his Presidency. However, as the hubris of a booming stock market begins to recede, the reality of the political and economic situation becomes ever clearer, and Trump is left with the reality that the debt levels are rising to obscene and record levels on his watch (amongst an array of other problems). As with most elements of the situation, there has been no inclination that a solution is being sought or considered, so if we take a step back and look at the totality of the situation, we see that the President is deciding to create a diversion rather than deal with the issue at hand, and that ‘diversion’ is North Korea.

Though there is no need for a qualifier here, mainly because followers of Financial Regulation Matters already know that the underlying sentiment within every post makes clear that following the promoted opinion of mainstream media is a fool’s errand, the divisiveness of the North Korea issue should not cloud the reality of the situation. To begin with, the incredible rhetoric we are hearing from a sitting U.S. President is having the desired effect in that the mainstream media’s adoption of his frankly ludicrous rhetoric is resulting in increased levels of fear regarding North Korea and the usage of nuclear weapons more generally. Though the ‘politics of fear’ as a concept should be well known, its usefulness still remains, with Trump relying upon it and especially when his position or abilities are in question. Almost none of Trump’s speeches, or his incredible tweets, have an air of peace or calm, with all outputs being based on fear or division and, with no easy ‘wins’ in sight, it appears that Trump has gone to his, and arguably America’s favourite imperialistic play-book. Trump’s adoption of the invasion and militaristic narrative is one that has served a number of leaders throughout history (not just American history) extremely well, but if we consider the large number of experts who have been emphatic in their analysis that North Korea does not actually pose the threat that it (arguably by way of survival) and Trump (arguably, for the same reason) advertise, then the reality of the situation comes into view. Rex Tillerson, the U.S. Secretary of State has been almost dismissive of Trump’s warmongering, strategically-vital aircraft carriers are in fact leaving the region, and the Brookings Institute confirms that the threat posed by North Korea is certainly not what Trump and his supporters suggest. Whilst one must acknowledge the dangers of North Korea, the elevation in rhetoric in fact paints the U.S. President as the greater threat to world peace, a threat that is based upon levering the might of the U.S. to coerce what are, in effect, third-world countries and in doing so move the global narrative to one that the U.S. President can affect, rather than one that he cannot.

Ultimately, that sentiment of narratives that can be affected is perhaps the most important one to consider when we are being bombarded with the ludicrous sentiments like unleashing ‘fire and fury’ and reminding North Korea that the U.S. is ‘locked and loaded’. These statements are simply not befitting of such an established and revered office, but they are indicative of a desperate attempt to shift the narrative. Yes North Korea needs to be challenged, but stifling the economic lifeblood of the country and then reminding them that their people can be ‘destroyed’ is not only unwise, it is perhaps damaging the position of the American government irreparably. Whilst dialogue with North Korea rather than in increase in militaristic tension is needed, the issue serves as a diversion from the fact that Trump is leading an administration that has no idea of how to address the incredible economic situation threatening America on a daily basis. The ease at which Steven Mnuchin offered up the support of civil-service workers as a sacrificial lamb and bargaining chip against the U.S. Congress is demonstrative of an administration whose answer is simply ‘more debt please’ – the danger for us all, however, is if Trump’s slight-of-hand, which he no doubt considers a safe option, backfires, is evidently clear; the sentiment of ‘buyer’s remorse’ on both sides of the Atlantic is almost palpable.

Keywords – Donald Trump, North Korea, Kim Jong-Un, Nuclear War, Credit Bubble, Politics, #finregmatters

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