Donald Trump has confirmed that he has chosen Steven Mnuchin and Wilbur Ross as his Treasury and Commerce Secretary. I just hope he knows what he is doing.
If Ross’ trillion dollar infrastructure funded by private banks plan proves to be inflationary, and the Federal Reserve raises interest rates by even a small amount, it will mean a lot of pain for US businesses already battered by years of recession.
Zerohedge reports that Ross’ plan will result in a significant increase interest rates.
“His infrastructure plan calls for up to $1 trillion in additional spending over ten years, most of it privately financed. A memo released in late October by Mr. Trump’s economic advisors Wilbur Ross and Peter Navarro detailed a plan to finance up to $1 trillion in infrastructure spending over ten years, equal to $100bn per year or about 0.5% of GDP. We previously estimated that a spending boost of this size would reduce the unemployment rate by about 0.3pp and raise inflation a touch, leading the Fed to eventually hike one or two more times by 2019 relative to a baseline without the infrastructure package.
The plan described by Ross and Navarro would be largely privately financed, but encouraged by tax credits. The plan would seek to incentivize the private sector to increase investment in infrastructure projects that would be supported by future usage fees, such as road tolls. Ross and Navarro suggest that 17% of the initial investments could be financed with equity and the remainder with debt. The government would then provide a tax credit equal to 82% of the equity to reduce the cost of financing. The large role of debt-financed private investment in Mr. Trump’s infrastructure plan implies that a significant increase in interest rates could be a hurdle for the plan’s feasibility.”
Wikipedia on US federal debt.
“However, $1 trillion in additional borrowing since the end of FY 2015 has raised the ratio to 76.2% as of April 2016 [See Appendix#National debt for selected years]. Also, this number excludes state and local debt. According to the OECD, general government gross debt (federal, state, and local) in the United States in the fourth quarter of 2015 was $22.5 trillion (125% of GDP); subtracting out $5.25 trillion for intergovernmental federal debt to count only federal “debt held by the public” gives 96% of GDP.
The US federal debt is heading to 20 trillion. A one percent interest increase would, therefore, cost the federal government 200 billion dollars alone, a two percent interest rate increase 400 billion dollars. And the state and local debt still has to be added.
US household debt is 12.5 trillion. A one per cent increase in the interest rate will cost American households 125 billion dollars alone.
Total US debt including business and private is 65 trillion dollars. A one percent interest rate increase will cost 650 billion dollars. That will virtually wipe out the entire trillion dollar infrastructure programme. And if interest rates rise by 2 or 3 % then the infrastructure programme will end up costing the Americans nearly 2 trillion dollars per year.
So, the success of Ross’ infrastructure project in stimulating the real economy even a little bit depends on keeping the interest rate from increasing by even a small amount. Otherwise debt will continue to grow faster than the economy. That means taxes will have to be raised to pay the higher interest rates or the budget will have to be cut.
But at least Trump is insulating himself against a possible move to impeach him after the mid term elections by divesting himself of his business interests. That means, Trump will, hopefully, be around to change out his cabinet if they fail to deliver significant jobs and growth.
And he has already defused tensions with Russia and picked a health secretary to dismantle Obamacare.
Wilbur Ross for 25 years led Rothschild Inc., where he built a legacy as a vulture banker descending on bankrupt companies, stripping them of assets, firing people etc but he later helped failing energy companies.
“The son of a New Jersey school teacher and a judge, Ross attended Yale and considered a career as a fiction writer until a summer internship on Wall Street steered him toward finance. After an getting an MBA from Harvard, he spent two decades heading Rothschild Inc’s bankruptcy advisory business, where he represented investors in Trump’s failing Taj Mahal casino in the early 1990s. Ross and Carl Icahn convinced bondholders to strike a deal with Trump, who some investors wanted to push out, which allowed Trump to retain control of the property.
Ross stuck out on his own in 2000, launching WL Ross & Co. after buying control of a $200 million Rothschild investment fund he had been managing and raising another $250 million from investors. He began scooping up ailing firms, putting millions into struggling steel, coal and textile companies across many of the regions that helped propel Trump to the White House. (He sold WL Ross & Co. to investment management firm Invesco in 2006 for about $375 million, but has remained its chairman and chief strategy officer.)
In what may be his most notable deal, Ross brought together LTV Steel, Acme Steel and Bethlehem Steel in the early 2000s under the name International Steel Group; in 2005 he sold the firm to what is now ArcelorMittal for $4.5 billion, netting $260 million for investors. His foray into investing in distressed coal companies that same year proved similarly lucrative: Ross went public with his coal assets, under the banner International Coal Group, and personally made $210 million.”
Steven Mnuchin is a Goldman Sachs banker who has made money in finance, not the real economy, and who has bankrolled films like Avatar, pushing the Globalist world view.
No plans have been announced to recapture the Federal Reserve and renationalize the money supply, the only long term way of achieving real prosperity.
President-elect Donald Trump’s transition team has also begun holding meetings at the Department of Homeland Security with Frances Townsend, and on Tuesday, with Rep. Michael McCaul (R., Texas), two GOP homeland-security experts who have in the past been openly critical of some of Mr. Trump’s comments on Muslims.