Another week, another bit of American conventional wisdom is shredded by Donald Trump. This time it is the CIA. Mr Trump is the president of the USA and the CIA is employed to protect him, but he doesn’t see it this way. He has turned his ire towards his own security forces and he intends to investigate them, not the other way around.
So this is what he meant by “draining the swamp”. Mr Trump is going after Washington. All the insiders who have for years populated the American capital, all the lobbyists who raised funds and bought influence, and all the civil servants who have for years filtered access to power and created policy, are now the president’s targets. He is sidestepping the media, the think-tanks and the establishment. They don’t like it, but this is what radical looks like.
We have no idea where it will all end, but one thing is clear: Mr Trump will change America forever. He is the most disruptive politician in decades.
He aims to do to the Washington establishment what Airbnb did to hotels and Uber did to taxi drivers. He aims to disrupt everything and cut out the middlemen. All the insiders, all the “know-alls”, all the tens of thousands of people who feed off the political system, these people are in his sights.
From now on, the relationship he intends to have with the American people (at least his American people) will not be mediated by the media. It will not be conditional on getting the “thumbs up or thumbs down” from the commentariat and it will not be determined by experts. It will be as one to one.
By deploying Twitter, he has cut out the media. This is radical stuff and a total departure from decades, possibly centuries, of form.
In the same way as Roman emperors sometimes bypassed the senate (an institution the emperor often mistrusted) to get to the people, Mr Trump is trying the same trick. Who knows, he might pull it off.
Whatever the end game, it is fascinating to watch.
Speaking of watching, there is a reality TV air to the whole thing. The way he treats his cabinet is like an episode of the reality show ‘Survivor’, whose motto is “Outwit, outplay, outlast“.
Who will be voted off next week? Last week it was national security adviser Michael Flynn, who’s next? Again, this is a totally new departure because that’s just not how politics was done in the past.
In the past things were less uncouth. Now there are no niceties.
If a senior member of the team isn’t performing the way the president wants, that person is fired and another one hired.
Interestingly, heartland America, which is Mr Trump’s America, loves this chaotic meritocracy. It is what they voted for. When they roared in those huge campaign meetings, “Drain the swamp”, they meant it and now it looks like he does too.
All the while, the financial markets and the economy watchers are nervously excited. Wall Street believes all the deregulation noises coming out of the White House and no one denies that American infrastructure needs massive upgrading, so a fiscal stimulus is on the cards, which will drive the economy too.
But how hard will it drive the economy? And will the Federal Reserve sit on the sidelines or will the Fed hike rates in order to rein in the government?
And if the Fed tries to thwart Mr Trump by raising rates, will Mr Trump turn on the Fed like he is turning on the CIA?
If he turns on the Fed, then we are in for a big showdown at the very heart of the American economic system.
At its most simple, the Federal Reserve under Janet Yellen believes that America is at close to full employment today and that the economy can only grow at about 2.5pc without overheating. This means that at some time, interest rates will have to be increased and this would choke off Mr Trump’s boom.
Mr Trump’s team believes that the economy can grow to 3pc or 4pc and therefore believe that the Fed shouldn’t raise rates too soon. But if the Fed goes along with Mr Trump and is seen to be captured by his will and is seen to be soft on inflation, the US bond market will sell off, driving up long-term rates.
But here is the dilemma.
This conflict between the Federal Reserve and the Treasury in the US is one of the oldest in the book. In 1981/82, Paul Volcker hiked interest rates in response to Ronald Reagan’s tax-cutting start. Mr Volcker said he had to beat inflation and the ensuing recession blighted Reagan’s first three years.
Reagan backed down.
In 1992/3, Bill Clinton was pitted against Fed chairman Alan Greenspan. Mr Clinton fought the election on the promise of tax cuts for the middle classes.
Mr Greenspan took Mr Clinton’s economic guru, Robert Rubin, aside and told him firmly that if Mr Clinton cut taxes, he’d raise rates in retaliation. If, on the other hand, Mr Clinton reneged on his electoral promise, Mr Greenspan would do nothing and long-term interest rates would fall, driving up stock and house prices and driving the Clinton boom via higher asset prices.
Mr Clinton backed down.
Now will Mr Trump back down, or will he see this as yet more technocratic, unelected insiders — the central bankers — frustrating the people’s president?
What would this mean?
It would mean Mr Trump interfering in the appointment of future Fed governors and ultimately Ms Yellen’s successor. If he is happy to go after the spooks in the CIA, I’m sure he will not be scared of a few economists in the Fed. After all, they represent to him the ultimate insiders — civil servants who are unelected. He may well make them his next target.
If that happens, all hell will break loose on Wall Street because, after all, the near 30-year boom in American asset prices has been driven on the understanding that the Fed always wins.
What if that no longer holds true?
Then all bets are off.