Will Central Planning Work?; How do we Solve a Problem like North Korea?*

Will Central Planning Work?

Friday’s The Lonely Realist was distributed early on a turbulent news-filled day. That news included March’s EU factory output, which fell off the table, and U.S. manufacturing activity, which slipped to its lowest level in almost two years. The slowing global economy ignited a bond market rally in which U.S. interest rates fell sharply and those in Germany went negative. The increase in U.S. bond prices inverted the yield curve – that is, the interest rate on shorter-term US Treasury securities (e.g., three-month Treasury Bills) is now higher than the interest rate on longer-term US Treasury securities (e.g., 10-year Treasury Notes). This is highly unusual abnormal – longer-term debt securities naturally carry a higher rate of interest – and is often a sign of a pending recession, which alarmed the stock market and led to Friday’s 460 point sell-off in the Dow.

The last time the yield curve inverted was in 2007.

The U.S. and global economies are slowing. Can Central Bankers prevent the current slowdown from becoming a recession, or worse?

In a reply to Friday’s The Lonely Realist, one reader made the following comment:

“I can’t agree about the Fed’s ability to control the market cycle. The latest growth cycle is, in my view, the result of a massive injection [of liquidity] and tame inflation due to poor labor market data (unemployment data is soft, there is a shadow labor pool that checks wage inflation) and other factors. It does seem this Fed is doing a decent job for the time being, but I’m not confident about the economy. Trump is [unpredictable], his tariffs are harmful, Brexit or a [black swan event] could tumble us into a downturn, the Fed doesn’t have much ammunition, and Congress and Trump are in such conflict I don’t see infrastructure spending before it’s too late (as in 2008), so Keynes will not mitigate matters much.”

The U.S. and global economies indeed are in a precarious state, Trump is unpredictable, his tariffs are harmful, Brexit or a black swan event could tumble us into a downturn, and Congress and Trump are in serious conflict. While those factors multiply the economic risks, they don’t necessarily lead to recession (although A. Gary Shilling, in an article on Bloomberg, may be seen to agree with the reader – see A Recession Is Coming, And Maybe a Bear Market, Too). This is another test of how well state-sponsored Central Planning works – as in Federal Reserve market manipulation-with-government-support, which has been successful for almost 10 years. Admittedly, that task is becoming more difficult by the day. However, with Democrats continuing to believe in big government powered by Modern Monetary Theory, and with Republicans fully onboard with MMT-in-practice, wedded to ever-larger budget deficits funding ever-expanding government spending, an economic alliance in 2019 is a reasonable likelihood. If so, then the U.S. may well see Congress enact an aggressive infrastructure program and fund increased defense spending. (What these “socialist” policies may mean for capitalism and democracy will be addressed in a subsequent The Lonely Realist.)

It’s also worth noting, once again, that the economic expansion of the last 10 years – GDP growth of little more than 2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} — has been sub-par when compared to historical recoveries where GDP growth generally exceeded 4{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. Although the depth of the Great Recession may account for the subsequent mediocre growth rate, another interpretation is that the controlled nature of the recovery means that the next recession will take significantly longer to develop – that this time, history may merely rhyme.

On the other hand, the reader may be entirely correct.

We shall see.

How do we Solve a Problem like North Korea?

We can’t.

Only China could and China will not. Doing so is not in China’s interest.

North Korea will continue to develop and build nuclear weapons. North Korea will continue to develop and test intercontinental ballistic missiles. North Korea will continue to sell nuclear technology and missile systems to America’s enemies. North Korea will remain “the hermit kingdom.”

It really is that simple.

Presidents Clinton, George W. Bush and Obama at various times tried diplomatic inducements (including normalization of relations and economic and food aid) and, in return, North Korea agreed to several freezes of its nuclear weapons programs. It consistently violated those freezes.

Presidents Clinton, George W. Bush, Obama and Trump also have tried sanctions.

Although sanctions have squeezed North Korea and created serious problems for the Kim dynasty, they have not prevented North Korea from stockpiling nuclear weapons or testing intercontinental ballistic missile systems.

In short, nothing has worked to definitively solve the North Korea nuclear problem although sanctions may have dissuaded North Korea from causing a regional or global crisis.

China will continue to provide the Kim family with whatever it needs to stay in power.

President Trump most recently has tried a charm offensive.

Kim Jong Un hasn’t been charmed. President Trump and Kim Jong Un may be in love, but Kim doesn’t love Trump THAT much.

President Trump also has tried threats, over-the-top, unbelievable threats.

Threats haven’t worked either. Those threats were correctly perceived as hollow. For any number of reasons, no matter how great a nuclear menace North Korea presents, the U.S. will not go to war without provocation. Kim Jong Un will not be sufficiently provocative.

In the past, the U.S. has avoided the temptation to publicly capitulate. That changed on Friday when President Trump reversed America’s sanctions policy, tweeting: “It was announced today by the U.S. Treasury that additional large scale Sanctions would be added to those already existing Sanctions on North Korea. I have today ordered the withdrawal of those additional Sanctions!”

The White House’s explanation for this turnaround was that “President Trump likes Chairman Kim and he doesn’t think these sanctions will be necessary”


The turnaround is an admission by President Trump that his administration’s approach is not achieving – and will not achieve – his stated goal of denuclearizing North Korea. That’s reality, but the method of his admission is a reality with consequences.

One interpretation is that President Trump’s tweet was made in error and will be reversed next week. Perhaps. President Trump’s tweet caught his administration by surprise. It was only the day before that John Bolton, President Trump’s National Security Adviser, tweeted how important the increased sanctions were.

Another interpretation is that President Trump is not willing to put more of his personal capital on the line with North Korea. It has become clear that he will not be able to score a win (the recent summit with Kim was a failure) and an election year is approaching. Perhaps it’s time to cut losses. Perhaps.

However, in publicly withdrawing from an escalating sanctions strategy, the U.S. is admitting defeat. The U.S. will not use its still-potent economic, military and political power to challenge the North Korean status quo. That message will not be lost on America’s allies … or its enemies. It’s a message that’s consistent with the withdrawal of the U.S. from the world stage, the end of Pax Americana, and a reaffirmation of the meaning of America First: North Korea is too far away; it doesn’t matter enough to America; let South Korea and Japan worry about North Korea. America no longer will practice multilateralism. It will act unilaterally.

Unfortunately, it also signifies that the American government is disorganized no longer relies on the knowledge and experience of its generals and appointed experts, including the National Security Adviser, the National Security Council and the State Department or any other person with relevant expertise. It’s further confirmation that not only America, but President Trump, will act unilaterally.


“We can’t solve problems by using the same kind of thinking we used when we created them.” Albert Einstein

“Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.” Albert Einstein

*┬® Copyright 2019 by William Natbony. Al

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