MALMGREN: 'We're going to have a period of chaos and gridlock'

With both political parties in serious conflict and deeply split among themselves, regardless of who wins the election, the people that understand how Washington works know there will be no honeymoon period for the next US President.

The US economy is on the cusp of recession and with the country divided the incoming government faces a policy gridlock. Dr Harald Malmgren was a trusted advisor and senior trade negotiator to Presidents Kennedy, Johnson, Nixon and Ford and he has been involved in a number of transitions of power.

Political structures are hard enough to change under normal circumstances, he explained in an interview with Real Vision TV. Every new President sets up commissions and study groups, then bureaucracy takes over and the whole process becomes highly political, but this time it could be complete chaos.

No honeymoon for new president
“A new president comes into power or comes into the office, let’s call it that. And the first thing that’s going to happen is he’s going to say, well, here’s my agenda. Here’s my State of the Union. I want these things done. And traditionally that would be a honeymoon period. But after this election there won’t be any honeymoon,” Malmgren said.

“The battle has already begun between Trump and Ryan. And Trump doesn’t understand that you can’t function without the Speaker’s help. So if you make an enemy of him, he will just sit and wait for you. And the first thing you want, he’ll just cut it off. And you keep doing that until you say come out submissively and say, ‘I’m sorry. I was wrong.'”

The way Washington works — who’s chief of the barnyard ?

This is just the way things work in Washington, because Congress is in control and not the president, but normally he said the two parties can come to some informal agreement in Congress over what should be done. “But these parties are now not only in serious conflict with one another, but internally they’re divided. So we’re going to have a period of chaos and gridlock,” he said. “I think in the early months, you’re going to get a lot of talk and a lot of manoeuvring for power. Who’s chief of the barnyard? Which animal has the rights over all others? That’s going to be a pretty serious quarrel and the president can’t control that. It’s not in his hands.”

“What I’m projecting is a very slow motion response to the economy’s troubles. And yes, there will be tax reform. But tax legislation has never been quick,” he said. Because when you say you’re going to make a change in the tax law, then the Red Cross and the churches, everybody is affected by that. Old people versus young and tech companies. And outfits like KKR and Blackstone. I mean, it’s just vast.”

The trend says 100% chance of recession

Even if the President starts writing Executive Orders, that will all go through the Supreme Court and a lot of it can be expected to be overturned. Delays in addressing the economic problems of the nation are the last thing that are needed after such a bitter campaign

As Real Vision TV’s Raoul Pal, who writes the Global Macro Investor, pointed out, there is 100% chance of a recession, going back to 1910 on a two term government changeover. So with a recession pretty much imminent, there is virtually nothing that the parties can do about it, because it’s not until the second year of a Presidency where a well organised Congress starts to act.

For Dr Malmgren, the recession has already started, but it’s just that 95% are feeling it.

“When you take right now the fact that capital spending isn’t there. And because world trade is in a slump, there’s no growth there. So everything’s consumption. But with the pile of debt that we now are sitting in, we can’t just borrow to more spending. And then we’ve got new problems,” he said.

“Most households are not improving. Let’s say they have got a fixed pot of money, and that’s what they have. And the median income is drifting down slightly. And they have got to face this coming year, much higher health care premiums, whether or not Obamacare, all of it’s going out, larger out of pocket expenses because the deductibles are being expanded, narrower coverage, more co-pays. So that’s got to come out of the after tax income.

“And then we’ve got rents rising and the younger people are more and more going to the rent direction. But still the costs are rising and of course, more and more young people are going home. And then we’ve got the service of the student debt, which is becoming a phenomenal weight. But what that means is, out of a non-growing, after tax income, the discretionary spending is shrinking really fast. And we already see that. Retail is weakening. We can see it.”

Detroit Michigan


Productive investment must be encouraged

To get things going again, productive investment is needed to build momentum and to change the incentives for business, instead of buying back shares and infrastructure bonds are one option, according to Malmgren. “Now it’s essential to do this for other reasons. We’re going to have a steep decline in the automobile market as a whole, for a bunch of reasons. But that’s always been one of the engines. And it affects not just Detroit, it affects a huge amount of the economy.

“It’s clear we passed the peak, and this is a long term, shrinking role for that whole sector. So we have to find some way to channel savings and investor motivations into productive activity. So if we have to use artificial means like infrastructure bonds, it’s uncomfortable. But we need to do this. And I don’t think we have too many choices. I mean, there’s a limit to what we can do.”

Getting stuck in the Congress supply chain

The trouble is that for a long period of rethinking, Congress is not going to work well and that means no honeymoon for the new president. He or she will also find that it takes six to nine months to assemble the 4,000 political appointees needed, Malmgren said, because they all have to be vetted and if they have any money, that will have to be divested, plus the monumental task of security clearances.

“It’s like supply chains,” he said. “How long to get from here to the assembly of that automobile line. We’ve got all these parts that I’ve got to bring together. I always think of it like supply chain management. And then, when you start taking initiatives, every new president has some initiative he wants to try out and then they fall flat.”

To watch the full interview between Harald Malmgren and Raoul Pal, visit Real Vision TV.

Real Vision TV is financial television for smart investors, featuring in-depth interviews with many of the worlds most respected investors, analysts, investment strategists and geopolitical analysts. Try it free for 7 days.

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