The Coin-Toss Election

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The political climate is fragile and feverish, with the nation amid a crisis that is both fast-changing and unparalleled in living memory.

The biggest change in my election forecast is that Trump’s chances of reelection in November have plunged from 74% (the pre-COVID forecast) to 50% as of today.

This does not mean Trump will lose; he could very well win. But it will be a very close election. Deciding the outcome between Trump and Biden as of now is basically a coin toss. Many factors, some foreseeable and some unforeseen, could tip the balance.

Trump’s strengths are that he is an excellent campaigner, has enormous amounts of mo‌ney for the campaign and seems to have unlimited stores of energy. He also has the power of incumbency, which usually propels a sitting president to a second term.

Trump’s weaknesses are the depth of the New Depression and his handling of the COVID-19 pandemic. Amost no one blames Trump for the outbreak, but many found his response belated and overly optimistic in the initial stages. He did some things right (the China travel ban), but many responses were bungled (defective testing kits, shortages of masks and protective clothing, shortages of ventilators).

In stages, these mistakes were overcome. Masks and protective clothing were mass-produced. Ventilators were surged to those locations that most needed them. New hospital beds were made available through Navy hospital ships and temporary hospitals built by the Army Corps of Engineers. Testing kits gradually became available, although there is still a severe shortage.

Instead of taking credit in a measured way for these positive developments, Trump wasted time in petty disputes with corrupt journalists. Those fights might be OK in the normal political arena, but there’s nothing normal about a pandemic. Trump didn’t seem to know the difference and alienated even his supporters in the process with his pontificating and sideshow antics.

These Trump deficiencies (despite many positive accomplishments) began to show up in the polls.

Large employment losses in states that Trump must carry, especially Pennsylvania, will not help Trump’s chances in November. On the other hand, if Trump can reopen the economy and recover some of these losses, he may benefit from a positive trend even if net losses remain.

What about Joe Biden?

Biden may have pulled even with Trump in the election horse race, but he’s not a sure thing by any means. Before Biden can even turn to the campaign against Trump, he must still try to obtain unity in his own party.

Bernie Sanders withdrew from the race, which essentially guaranteed the nomination for Biden. But will the “Bernie Bros” actually turn out on Election Day? Key components of the Democratic base might not be motivated to vote.

The left wants a Biden administration ban on anyone who has worked on or near Wall Street, the fossil fuel industry, the health insurance sector and the lobbying world, to name a few.

In short, the price that Bernie Sanders’ supporters are demanding from Biden may well make Biden unelectable in key swing states like Florida, Pennsylvania, Michigan and Wisconsin.

If Biden does not embrace the socialist agenda, his lost support from the Sanders movement may make him unelectable for other reasons. Biden is between a rock and a hard place, and the Bernie Bros intend to keep him there in order to pursue their goals.

One way for Biden to appease the Bernie Sanders movement without going all-in on the progressive agenda is to choose a progressive running mate. In the eyes of progressives, the right running mate will be able to “keep an eye” on Biden and pursue the Bernie agenda inside the White House even if the specifics are not shouted from the rooftops.

Here’s a summary of the struggle going on inside the Biden camp regarding a VP choice as reported by Tal Axelrod for The Hill on April 19, in an article titled “Progressives Look for Concession From Biden With Running Mate”:

“Joe Biden absolutely has to pick a progressive champion as his VP pick. He has to unify the party, and that’s the key,” Charles Chamberlain, head of Democracy for America, told The Hill. “What we saw during the primary is… that we have two major factions of this party, the corporate wing, more establishment Democrats, and there is [the] progressive, ascendant left. And he absolutely has to choose from that progressive left to unify the party.”

Biden could pick from a number of progressive women to serve as his VP. Among the most prominent contenders who have been floated are [Elizabeth] Warren and Stacey Abrams, the former Georgia gubernatorial candidate and state House minority leader.

Both have openly expressed interest in the role, with Abrams saying she would be an “excellent” running mate for Biden and Warren confirming that she would accept an offer to be his No. 2.

Amy Klobuchar, the Minnesota senator, has also been mentioned as a leading candidate.

There are others, but these three have gotten the most attention.

But there’s no free lunch for Biden. The choice of Stacey Abrams for vice president would undoubtedly rally progressive and minority voters to turn out for Biden. That’s critical. But it helps Biden in places he is highly likely to win anyway such as California and New York.

Abrams’ ultra-leftist views and strident persona would drive away many moderates in critical swing states such as Michigan and Pennsylvania and possibly tip those states to Trump.

What we have today is a too-close-to-call election and six long months to go before Election Day.

Trump is aided by a solid base and a well-organized campaign strategy. Biden is aided by an electoral vote head start in big states like California and New York and a friendly media that will not criticize his many shortcomings.

The Democrats may hold a “digital” convention and keep Biden under wraps as much as possible until the October debates (where his cognitive decline may be difficult to disguise).

Republicans want to get the economy open for business and show some growth in the aftermath of a second-quarter collapse.

But there is one potential development that could move the odds in Trump’s favor…

Remember the “Russia collusion” accusations against Trump? The accusation was that he colluded with Russians to interfere in the 2016 presidential election. Trump campaign aides and early appointees such as Gen. Michael Flynn, Carter Page, George Papadopoulos and others were all said to be in on the conspiracy to “steal the election.”

There was only one problem with these claims. None of them were true. Multiple congressional investigations all reached the conclusion that there was no merit to the claims. The two-year, $30 million Mueller investigation found no evidence of Russian collusion by Trump or his team.

Multiple internal reviews and inspector general reports not only found no collusion, but also revealed extensive wrongdoing by the FBI and the U.S. intelligence community when it came to false representations, doctored reports, illegal surveillance of American citizens and other egregious abuse of constitutional rights.

Well, a day of reckoning may be coming soon. U.S. attorney John Durham has been conducting a multiyear investigation of his own at the request of the U.S. attorney general, William Barr. This investigation targets the wrongdoers in the Obama administration Justice Department, intelligence community and diplomatic corps.

High-profile subjects of inquiry include former FBI head James Comey, former National Security Adviser Susan Rice, former U.N. Ambassador Samantha Power and many other former high-ranking officials.

Guess what? Joe Biden has been listed as someone who requested and was privy to these reports, which raises serious questions.

The Durham investigation is criminal, so a wave of indictments and prosecutions may be coming soon. The exact timing is uncertain, but mid-July seems a likely date for announcement of the results of the investigation and any indictments.

Attorney General William Barr said Monday that he doesn’t expect criminal charges to be filed against Biden (or Obama). But Biden’s involvement in the Russiagate scandal could have implications for the election. We’ll see.

Investors have their hands full today dealing with the Wuhan virus, the new depression and an unsteady stock market. Now you can add legal fireworks to the list of things that may disrupt markets.

Regards,

Jim Rickards
for The Daily Reckoning

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The Great Myth of “Small Government”

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“At this point,” says a New York Times editorial column, “even many Republicans acknowledge that the era of small government is over.”

We have no doubt they do. But how can an era end… if it never began?

No Republican in current practice has lived one day in an era of small government.

To visit one he must first climb into a time contraption…

He must then dial the knobs past the Great Recession, past the Patriot Act and the war on terrorism, past the ballooning deficits of the 1980s, past the guns and butter of the 1960s, past the New Deal, past WWI… to perhaps 1900.

A True Era of Small Government

In 1900 total government spending came in under 3% of the gross domestic product.

Government’s reach was so short… it scarcely brushed the individual citizen.

This state of near-nirvana existed for the following 17 years. Then Mr. Wilson ordered the doughboys across the ocean… and into the trenches.

In 1917 government spending — again, as a percentage of GDP — vaulted near 20%.

But the boys were home before long. The cannons were spiked, the fleets mothballed, the swords beaten into plowshares.

America could return to its central business — business. The pendulum never swung completely back to pre-war levels. But in fairness, it did swing back. By 1929 the percentage of government spending to GDP was back under 4%.

Even in the spending-delirious Depression that followed, it never exceeded 11%.

No Turning Back

By the end of the Second World War that figure scaled 45% — the arsenal of democracy was not cheap.

The hot war ended, mercifully. But a Cold War began. And the New Deal was now riveted onto American life. There was no prying it away.

Small government was well and truly dead.

The Great Society swung by later to shovel additional soil upon its grave.

No recent era of small government therefore exists. As well talk of the recent era of Model Ts, of telegraphs — or of honest money.

Government spending as a percentage of GDP has averaged roughly 20% since 1980. That is, it has averaged WWI levels.

The figure has run higher at times. It has run lower at times. But 20% is about par.

Now mix in state and local government spending. You will find that total government spending presently nears 40% of GDP.

But even these figures may soon appear quaint…

A $4.2 Trillion Deficit This Year

GDP is currently contracting at a savage clip — as government spending is expanding at an equally savage clip.

The natural consequence is a vastly higher percentage of spending to GDP.

The Congressional Budget Office projects this year’s federal deficit will come in at $3.7 trillion… vastly eclipsing its pre-pandemic $1 trillion projection.

But Manhattan Institute senior fellow Brian Riedl estimates the true figure at $4.2 trillion:

My models estimate that the 2020 federal budget deficit — just the deficit — will top $4.2 trillion…

CBO projects that the first four coronavirus response bills will add $2.2 trillion to this year’s deficit. The remaining portion of the deficit consists of the economic and technical effects of the economic shutdown — the nonlegislative costs such as fewer workers paying taxes and more people signing up for unemployment and Medicaid benefits. This analysis assumes approximately $1 trillion in these costs (bringing the total deficit to approximately $4.2 trillion)…

A $4.2 trillion deficit would represent nearly 20% of the United States economy — a genuine enormity:

The $4.2 trillion budget deficit would represent 19% of the economy — the largest share in American history, outside the peak of World War II, and double the 2009 level during the Great Recession.

The way ahead promises little salvation, argues Mr. Riedl:

Even if the economy recovers quickly after reopening, the projected budget deficit will still approach $2.2 trillion next year and never again fall below $1.3 trillion. Combined with the mounting costs of Social Security and Medicare, the deficit will rise to $2.6 trillion by 2030 and continue growing thereafter.

Over the full decade, the coronavirus recession is projected to add nearly $8 trillion to the national debt, pushing the debt held by the public to $41 trillion within a decade, or 128% of the economy. This would exceed the national debt at the height of World War II. Although that war ended before the debt could rise further, the expanding Social Security and Medicare shortfalls will keep the current debt increasing.

The Purpose of Republicans

The old Republicans existed for one purpose: to trim both taxes and spending.

They guarded the Treasury reasonably well. And you could trust them with the nation’s purse.

But these Republicans are no more.

They stranded their posts years ago, opened the purse… and got elected.

They no longer worked to limit spending but to channel it their way, to butter their own constituencies.

They sat at the feet of Mr. Arthur Laffer, with his famous curve. Thus they discovered they could spend like Democrats — while taxing like Republicans.

They labeled the dour old fiscal religion “root-canal economics.”

Deficits do not matter was the new catechism.

Only a handful of old-style Republicans hold out today. But their own party regards them as nuisances.

They are akin to policemen raiding a brothel — and resented for much the same reason.

Yet our sympathies are somewhat with the brothel, with the sinners…

“Small Government” Is Boring

The term “small government” is as hollow as a jug. How does one even define it in the 21st century?

Perhaps small government can be likened to Supreme Court Justice Potter Stewart’s definition of pornography — you know it when you see it.

We do not see it. Do you?

Besides, it is a dreadful marketing slogan. You would not want to sell “small government” for a living.

It is duller than the dullest dishwater… and less inspiring than an Alan Greenspan lecture.

Moreover, “small government” is a defensive doctrine. It hunkers in. But no static defense can forever hold against the relentless assaults of “progress.”

Who Marches to “Small Government?”

There were two great orators of antiquity. The Roman Cicero was one, the Greek Demosthenes the other.

“What a great speech,” said the people when Cicero talked. But what did the people say when Demosthenes spoke?

“Let us march.”

Very few march for small government. They may applaud it, politely. They may nod their heads dutifully.

But few will march.

Many will — however — march for “Health Care for All!” or “Save the Planet!” or “Equality Now!”

These are cries that awaken the blood. They pluck up the adrenaline. They rally us to the colors… and inspire us to enlist.

They inspire us to march.

We may march ultimately off a cliff if present trends do not reverse. We are not confident they will.

We are hopeful — but not confident. Yet of this we are confident:

“Small government” is nowhere in America’s future…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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RIP: Fiscal Responsibility

This post RIP: Fiscal Responsibility appeared first on Daily Reckoning.

Republicans and Democrats have stowed their axes, sunk their differences… and agreed to raise the debt ceiling.

The government will remain in funds for the next two years — beyond the 2020 election, not coincidentally.

The Wall Street Journal reads the truce terms:

Congressional and White House negotiators reached a deal to increase federal spending and raise the government’s borrowing limit, securing a bipartisan compromise to avoid a looming fiscal crisis and pushing the next budget debate past the 2020 election.

The deal for more than $2.7 trillion in spending over two years… would suspend the debt ceiling until the end of July 2021. It also raises spending by nearly $50 billion next fiscal year above current levels.

Failing a deal, the Capitol lights would have winked out Oct. 1. And the federal government would have slammed its door on the noses of the American people.

Chaos and Old Night would have descended upon these shores…

A Rain of Horrors

The ranger at Glacier National Park would have been thrown into idleness…

The Federal Theatre Project would have been thrown into darkness…

And the bright-eyed sixth-grader from Duluth would have been thrown from the Smithsonian.

The last government shutdown (December 2018–January 2019), stretched 35 impossible days.

How we endured those black, unlit times… we cannot recall.

Yet our representatives at Washington have spared the grateful nation a sequel.

Absent a deal…

They would have been required to hatchet spending $120 billion flat, all around.

The arrangement instead raises spending caps some $50 billion this year… and another $54 billion the next.

Both Sides Claim Victory

The president declared the deal “a real compromise in order to give another big victory to our Great Military and Vets!”

With straight faces Nancy Pelosi and Chuck Schumer announced:

With this agreement, we strive to avoid another government shutdown, which is so harmful to meeting the needs of the American people and honoring the work of our public employees.

Democratic Sen. Patrick Leahy gushed the agreement will “stave off economic catastrophe.”

It will furthermore reverse “unsustainable cuts in nondefense discretionary spending.”

Just so.

The Real Meaning of Bipartisanship

The late Joe Sobran labeled Democrats “the evil party.” Republicans were “the stupid party.”

Thus he concluded that “bipartisanship” yields outcomes both evil and stupid.

Perhaps Sobran hooked into something…

Under the deal Republicans get their guns. Democrats get their butter.

And the taxpayer gets the bill.

He pays now through higher taxes — or later through higher interest payments on the debt.

But pay he will.

And so fiscal responsibility lies dead beyond all hope of recall.

“No!”

We expect Democrats to spent grandly and gorgeously.

Since FDR it has read the identical electoral blueprint.

But Republicans traditionally existed for two purposes: to lower taxes — and to square the books.

You wished to spend money you did not have? And throw open the Treasury to the public?

“No!” was the answer you could expect.

Like a sour old schoolmarm with steel in her eye and a rattan in her hand… they might not have been popular.

But you knew where they were. And you could trust them with the checkbook.

But these Republicans are no more.

They have gone the route of fedoras, monocles and spats.

What Happened to the Old-time Religion?

They turned away from their old-time fiscal religion, made their peace with Big Government… and got elected.

They labelled the old religion “root canal economics.”

Republicans instead sat at the feet of Mr. Arthur Laffer, with his famous curve.

They could spend like Democrats without touching the taxpayer.

Deficits do not matter in the new catechism.

Only a few Republican holdouts remain… to keep the tablets.

Reports the Journal:

Fiscal hawks panned reports of the proposed deal Monday before many of the details had been released, warning it could add trillions of dollars more to projected government debt levels over the next decade. 

But they sob in vain…

Drowning in Debt

United States public debt excels $22.4 trillion… and swells by the day, by the month, by the year.

Federal debt presently rises three times the rate of revenue coming in.

To simply maintain current debt levels, CBO estimates Congress would have to increase revenues 11% each year… while simultaneously hatcheting the budget 10%.

Will Congress spend 10% less each year?

We have just received our answer.

For the long-term consequences we turn to the Brookings Institute:

Sustained federal deficits and rising federal debt, used to finance consumption or transfer payments, will crowd out future investment; reduce prospects for economic growth; make it more difficult to conduct routine policy, address major new priorities, or deal with the next recession or emergencies; and impose substantial burdens on future generations.

Deficits to the Horizon

Meantime, the present economic expansion is officially the longest on record.

Can the economy peg along another decade without a recession? Or even half so long?

We already detect smoke rising from the engine, and oil leaking out below.

Trillion-dollar deficits are already in sight.

In the certain event of recession, authorities will flood the economy with money borrowed from the future — deficit spending.

Deficits could double… or possibly triple.

What a Surprise

The only surprise about this debt ceiling deal?

That anyone could be surprised by this debt ceiling deal.

Republicans and Democrats might stage a splendid combat for the crowd. They batten upon each other with savage and vicious blows.

Mr. Trump’s gladiatorial presence makes the show grand beyond comparison.

But watch closer…

The combatants do not strike at the vitals. And the blood is fake.

When it comes to borrowing and spending… Republicans and Democrats are as united as any lovers could hope to be.

Threaten to cut them off.

Then watch the warfare immediately halt… and the hands of peace come extending from both sides.

This we have just witnessed. The debt ceiling is raised.

And so today we drop a mournful tear on the ashes of fiscal responsibility.

As we have noted before, Republicans once defended the approaches to the United States Treasury.

But they have since sold the pass.

And both parties have sold us all down a river…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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