On swamps

Trump promises to drain the swamp; he is doing the opposite (Source: here)

Trump was elected on a promise to ‘drain the swamp’ in Washington DC. Yet, as the toxic fallout from his misguided policies take a toll on the US economy – witness the awful July payroll print – Trump’s government is becoming ever-more interventionist. Trump, it turns out, is not draining the swamp. Rather, he is swamping the United States with an unprecedented number of intrusive and largely counter-productive government interventions, which now threaten to throw the entire American economy down the drain.

One of the defining features of populism is that policies are designed to resonate with voters. When voter sentiment changes, so do populist policies. The logic is simple; as long as the populist manages stays in tune with voters he will not be voted out of office.

While appealing in its simplicity, as a guiding principle for holding on to power populism is deeply flawed. It's biggest failing is that populists always shy away from undertaking unpopular, but necessary policies to maintain economic and political stability.

As I noted in a recent blog, Trump has already begun an assault on the core pillars of American democracy, particularly the rule of law. If he is successful, he will be more secure in power, but only for so long. What, in the end, brings down populists is the economy.

Like a modern car engine, a technologically advanced economy, such as the United States needs constant maintenance and adjustment to continue to run smoothly. This is why most governments reluctantly undertake structural reforms and implement unpopular but necessary policies. This usually happens early in the first term, when those in power still have the required majority in parliament. They know the reforms are unpopular, but they do them anyway because without them the economy could descend into chaos.

By contrast, populists usually shy away from reforms and so invariably put the economy at risk. The most commonly NEGLECTED policies and reforms under populist rulers include:

1.     Maintaining fiscal sustainability in order to maintain a stable debt profile;

2.     Reforming pensions to safeguard retirements for future generations;

3.     Liberalising trade to keep the economy dynamic and prosperous;

4.     Opening borders to foreign talent and labour in order to address the ageing population issue;

5.     Defending the independence of the central bank to maintain price stability;

6.     Supporting - albeit it in a hands-off manner - academic research in order to maximise knowledge-generation;

7.     Basing policy-making on evidence as far as possible;

8.     Using merit-based hiring in the public sector as opposed to nepotism so as to get the best people into the most important positions;

9.     Adhering to international competitive bidding for public sector contracts;

10.  Maintaining a clear division between church and state;

11.  Publishing honest national statistics to give financial markets the best chances of making correct investment decisions when they allocate capital.

This above list is far from comprehensive, but you get the picture. We are already seeing cracks in the US economic and political fabric. For some time now the US economy has been struggling with higher than desired inflation as a direct consequence of Trump’s misguided tariff policies. Rather than reverse his tariff hikes, Trump has chosen to double down and attack the Federal Reserve instead.

Attacking the Fed is a very dangerous road to go down. In the short run, financial markets pay far more attention to interest rates, which are set by the Fed, than to, say, fiscal or even trade policies. The economy is already showing worrying signs of weakness, including a shockingly bad payroll number in July. If the economy has now genuinely begun to tank then financial markets, which recently set new all-time highs will have a long way to fall.

Yet, faced with this serious situation, how did Trump respond to the bad payroll print? He sacked Bureau of Labor Statistics Commissioner Erika McEntarfer, whose office produces the payroll numbers. McEntarfer will undoubtedly be replaced by sycophant, which means the US can now wave goodbye to credible national statistics.

Enter media management. Trump has surrounded himself with an army of arse-lickers, whose job it is to placate the media and feed them distractions. This week we saw Kevin Hassett, Trump’s director of the National Economic Council, defend his boss’ sacking McEntarfer. Sycophants of Hassett’s ilk come out of the woodwork to suck hard on the teat of power wherever governments exceed their remit by draining the life-blood from an increasingly marginalised private sector. They want in on the feast, regardless of the immorality of it all.

In my many years of investing in Emerging Markets, I have witnessed this type of populism in a small number of countries (contrary to popular perception the vast majority of Emerging Market economies actually pursue very conservative policies).

Two countries in particular spring to mind, namely Argentina and Venezuela. Argentina and Venezuela both voted extreme populists into office in the shape of Nestor Kirchner and Hugo Chavez, respectively. During the time these two men – and their equally populist successors – held office, they sought first to deliver instant gratification to voters without regard to budget constraints, and then, when the policies proved unsustainable, they began to attack the symptoms of the crisis rather than address the cause of the crisis.

As overheating and external imbalances rapidly became more and more manifest, Kirchner and Chavez clamped down ever harder on statistics agencies and the central bank, introduced price controls and adopted more and more draconian tariff regimes. They also became more authoritarian. Needless to say, their policies worsened shortages amidst sky-rocketing inflation and collapsing growth.

Trump is on the same path.

He is attacking the symptoms of the economic disease he himself has created with his toxic policies. By attacking symptoms rather than the cause, he will only worsen the problem. The US economy is now entering what could become a death spiral of worsening economic performance, which induces more intervention, which in turn worsens the economy even further, and so on.  

Tariffs – direct government interventions in free trade – are already at 1930s Smoot-Hawley levels. Led by DOGE, the US government is already tapping into extremely sensitive personal data about ordinary Americans, which will undoubtedly be used to exert influence over voters (or worse). The Trump’s Administration is also intervening heavily in higher education, in labour markets, in public health policy, and, as already mentioned, in national statistics. There is simply no precedent for such government intervention in the United States for nearly one hundred years.

As if that was not enough, Trump is also manipulating the press, for example by excluding media organisation from press conferences when their editorial lines offend him.

And don’t forget Trump just passed an extremely irresponsible fiscal bill, which will add trillions to the public debt. Trump is therefore not just extending the US government’s tentacles into the lives of Americans today, but also draining the prosperity of generations to come by mortgaging their future.

My point is simple: Trump’s populism now goes hand-in-hand with ever-greater government intrusion into the lives of ordinary Americans. This is not what Trump supporters voted for. As the economy craters, Trump will try is to manage the situation with more and more desperate and counder-productive measures that purport to give him control. This is why he cannot 'drain the swamp'. Instead, he is swamping the economy with interventions that push the economy further down the drain.

The End