Schiff w/ David Lin: Trump Must Slash Spending

On Monday, Peter appeared again on The David Lin Report to discuss fallout from the election, Trump’s tariff proposals, and recent news from the monetary policy space. Peter offers measured criticism of Trump’s economic agenda, arguing it won’t go far enough to reduce the national debt and deficit spending.

Peter starts by summing up the United States’ fiscal conundrum. Trump’s first term had promise to snap a streak of asset bubbles and money printing, but he didn’t follow through:

We’ve been kicking the can down the road for a couple of decades now going from bubble to bubble. And that includes when Trump was president the first time. I remember when I voted for Trump, I was hoping that maybe he would actually be able to cut government and that the fact that he wasn’t a politician, he would not behave like one. I was wrong on that.

GDP growth is misleading. An inevitable result of expansionary monetary policy is an artificial “boom” in economic activity that disguises malinvestment:

All these numbers are a function of, you know, inflation masquerading as growth. The real economy is weak. It’s been weak for a long time. That’s why people are struggling. … Despite the fact that they tell us that the GDP is up and the economy is getting better. So, yes, we can get more fake economic growth, but at the end of Trump’s term, all the problems he was elected to solve will just be worse.

Tax reforms will not resolve these issues, especially when they only reduce taxes at the consumer level:

We have a horrible economy beneath the surface. And Trump just showing up is not going to fix these problems. And neither will simply cutting taxes the way he has advocated. Because most of the taxes are not really growth-oriented. They’re consumption-oriented.

Likewise, tariffs will not raise enough revenue to meaningfully reduce the debt. This will ultimately result in more Fed money printing:

The tariffs are on Americans, not on anybody else. But the tariffs aren’t big enough to offset all the tax cuts that [Trump] promised so many people to get elected. And so we end up paying for government with more inflation.

Even if tariffs drove net tax revenue, they still wouldn’t accomplish Trump’s trade goals. His last attempt at protectionism proves this:

The tariffs didn’t turn the economy around before. They didn’t even turn our trade deficit around. We have record trade deficits with those tariffs. The tariffs, the trade deficits didn’t go down. We didn’t bring manufacturing home. We’ve been in a manufacturing recession for years.

To really address the national debt, spending will have to be dramatically slashed. That means addressing unsustainable spending on entitlements and in the military:

To solve the problem will require the opposite of what he campaigned on. We need some austerity. We need to tighten our belts. We need to concentrate on cutting government spending and not just waste, fraud, and abuse.

Fundamentally, government inefficiency results from the lack of market forces in the public sector. Unlike businessmen, government actors do not have to worry about profit and loss:

When you have a private enterprise that is guided by profit and loss, and then you have competitive market forces, you have efficiency, because the inefficient companies are driven out of business by the efficient companies. …  Governments are not subjected to those forces, right? When you’re in Congress, none of it is your money,  it’s all taxpayer money. And your motivation is actually to spend as much of it as possible, because that’s the source of your power.

Peter and David wrap up by discussing the Fed’s recent rate cuts and a startling rise in long-term interest rates. Peter sees bank insolvency as a major problem for the future:

The economy can’t handle those higher rates. The mortgage market, you know, everything would buckle if the Treasury got up to 6%. And I think a lot more banks would fail because, you know, a lot more, you know, the banking system is very insolvent right now, thanks to all the low-yielding debt that they own that they accumulated when rates were at zero.

With rumors swirling of Trump replacing Jerome Powell as Fed Chair, Peter reminds us that the solution is not to turn over the money printer to Congress. It’s to get rid of the money printer:

It’s funny—there are people now saying, ‘Hey, the government should take over the Fed. The Fed is unconstitutional,’ which it may be, but not for the reasons they think. They believe the U.S. government should just be in charge of printing money and setting interest rates, which would be even more unconstitutional than what we have now.

Peter last joined David Lin to debate Jack Mallers on the merits of Bitcoin. Check out their conversation if you missed it!