Voodoo Two

Voodoo Two? - Watch Free Video

Two weeks ago I made a Macro Watch video in the form of an "Open Letter" to President-elect Trump. It was called "President Trump, You Can Make America's Economy Great Again. Here's How". Today I would like to make that video available to everyone in the Rich Dad community. Here's the link. No password is required. Just click and watch:

As regular readers of this blog will know, I believe the global economy is an enormous economic bubble that is in real danger of imploding into a new great depression. But I also believe that if the right economic policies are put in place in the United States we have the opportunity to restructure the global economy and grow our way out of this mess. The purpose of my Open Video-Letter to the President-elect is to point out both the dangers he will face and the extraordinary opportunities available to him at this unique moment in history.

It is too soon to know what policies he will put in place. However, he has signaled that he intends to cut taxes and to increase government spending on the military and on infrastructure. Those are the policies Ronald Reagan adopted when he became president in 1981. President Reagan's critics called those policies Voodoo Economics, but they worked. The latest Macro Watch video, uploaded yesterday, asks whether another round of "Voodoo Economics" would work for President Trump.

My conclusion is that it might - in the short run. However, the risks those policies pose to the economy and to investors are much greater now than they were in 1981. In fact, Voodoo Economics Round Two could lead to a collapse in asset prices and a disastrous economic breakdown.

In 1980, Ronald Reagan ran for president promising to cut taxes, increase military spending and balance the budget. He did cut taxes and he did increase military spending, but he did not balance the budget. Instead, he produced the largest peacetime government budget deficits in history. Government debt increased from $909 billion in 1980 to $2.6 trillion in 1988. The increased government spending and the increased government debt worked wonders for the economy. US economic growth was strong from 1983 to 1988.

Unfortunately, in 2017, the same policies - tax cuts and increased military spending - could fail completely. Here's why. In 1981 the ratio of total debt to GDP in the United States was 163% and the Federal Funds Rate was 19%. Today, the ratio of total debt to GDP is 350% and the Federal Funds Rate is 0.25%. The heavily indebted US economy is much more vulnerable to a pickup in inflation and interest rates now than it was 36 years ago. That means President Trump must chose very wisely about how much to borrow and where to spend. The attached video lays out his best options.

The video also offers a warning to investors and highlights the danger signals they must watch for. Asset prices are stretched and very vulnerable. If President Trump makes the wrong decisions about borrowing and spending, then stock prices, home prices and gold could all plunge violently.

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Original publish date: December 01, 2016

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