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sTwo US economic anacoluthons.

Two break points are threatening the very grammar of US Economic Policy.

The first is the lack of grown up collaboration between the White House and the FED, the second the nation-wide conspiracy hidden in plain sight to misrepresent the future rates of growth in use.

The FED breakdown is juvenile, and illustrates the apparent inability of US political structures to adapt and evolve constructively over time – itself an extremely concerning issue. Splitting the authority for Financial Policy was always ultimately a defensive tactic. It was an admission of the likely future inability of the White House to be relied on to think and act objectively and with skill for all americans rather than for its own short term interests. In this case Trump’s bully boy tactics have fully justified this sad assumption. His twitterings have furthermore stifled sensible debate and led to polarised and often misleading hypotheses about whether the FED had become a puppet of the Adminstration or no. He has confused the market, increased uncertainty and so risk (see attached graph).

The nation-wide manipulation of GDP forecasts is quite a different cat.

Since the Depression a decade ago the growth in our GDP has been around 2%+ each year. In the previous 20 years it ran at around 3%+ – a 50% difference! The chatter today is about this downward trend continuing. My expectation over the next 18 months is for 1%+ – the FED is expecting something similar before adding a small quotient for inflation. OK so far – the future looks tight to grim.

And yet Pension Funds are still assuming an underlying future return not of 3% but of 7.5%*. Professional and Retail investors are working under the expectation of 6% – 11%* returns excluding inflation! Justin Layard of the WSJ has an excellent article on this today.

The ramifications of these two breakdown points – the first between the FED and the White House, the second between investors and the public – are potentially catastrophic. We are living not just on borrowed time but on a broken set of principles held up by an unadaptive political organism.

Have a good day, James.

* NASRA