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America is going broke. That’s not an opinion or scare tactic — it’s a fact based on simple arithmetic. President Trump could be forced to face this fact as early as March 15, the date the latest U.S. debt ceiling suspension ends.

Government debt is growing faster than the economy. If you extend that trend, and that’s exactly what official government projections do, you reach a point where higher taxes cannot cover interest expense, investors lose confidence in the bond market, and a death spiral of higher deficits, higher interest rates, and still higher deficits spins totally out of control.

This does not mean the end of America, let alone the end of the world. There are several ways out of the debt death spiral. It’s just that none of the ways out are easy, and all of them will cause massive losses to unprepared investors.

The ways to escape the debt dilemma are default, inflation, asset sales (“What do you bid for Yellowstone National Park?”), an IMF bailout, or some combination of these.

Default imposes immediate losses on government bondholders, and mark-to-market losses on other bondholders as interest rates spike to account for increased risks. Even the pos-sibility of default can push world markets into a tailspin or result in a credit downgrade for the United States, which happened in 2011 during that debt ceiling crisis.

Inflation spreads the losses around to all holders of fixed dollar claims including bank deposits, money market funds, annuities, insurance policies, pensions, and long-term contracts.

Asset sales are a humiliation (just ask the Greeks). Besides, a lot of U.S. assets are not worth much to foreign investors if they cannot be removed, exploited, or used to generate cash-on-cash returns.

An IMF bailout means that the U.S. would give up partial control of its economy to an unelected, unaccountable globalist institution with unforeseen consequences such as the displacement of the dollar by the special drawing right (SDR) as the benchmark global reserve currency.

To understand why these dire outcomes are in the cards, one need only look at the U.S. debt to GDP ratio. Why is the debt-to-GDP ratio so important for understanding America’s unstable financial situation? The reason is that debt cannot be analyzed in isolation; it must be compared to the income available to support that debt.

Obama Has Tied Trump’s HandsSince Ronald Reagan, each president’s spending has affected his succes-sor’s actions. This month, we’ll look at the crisis Obama left for Trump and the indications and warnings that will signal if Trump’s agenda will prevail…

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Making the Complex Simple

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INSIDE THIS ISSUE

Obama Has Tied Trump’s HandsThe debt crisis has been dumped in Trump’s lap. Here’s the signal that will tell us if he’s going to beat it…

The Triumph of Politics 2.0I’ve seen this movie before, personally. The same forces that stopped Reagan from “draining the swamp” will also stop Trump.

The Resource Play of the Century for Under $3The man who helped get the Alaskan Pipeline approved is focused on this gold and copper project worth billions…

How the U.K. Turned a Trump Tweet into a $125Mil ContractBritish PM Theresa May trans-formed a public relations snafu into a defense contract. Read on for how you can profit 20–30%…

Jim Rickards, Editor

Byron King, Senior Geology editor

Nomi Prins, Contributing editor

Peter Coyne, Publisher

Dan Amoss, CFA, Analyst

Katelyn Sigler, Managing Editor

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It’s no different for a country than for an individual. If you owe $25,000 on a MasterCard that may or may not be a problem. If you make $20,000 per year, the $25,000 credit card debt will eat you alive with interest payments, and penalties and possibly cause you to file for bankruptcy. On the other hand, it you make $500,000 per year, you can probably pay off the credit card with what’s in your bank account. The point is you cannot decide whether $25,000 is a high or low debt load without looking at the income that can be used to pay it off.

The U.S. today has about $20 trillion in national debt. Is that high or low? If the GDP were $60 trillion, most economists would say the $20 trillion in debt was low and easily manage-able. The debt-to-GDP ratio would be 33% (20/60 = 0.33). But, if the GDP were only $19 trillion, then the debt-to-GDP ratio would be 105% (20/19 = 1.05).

Which is it? Sad to say, it’s the latter. The U.S. debt is about $20 trillion, and U.S. GDP is about $19 trillion giving a debt-to-GDP ratio of 105%, a very dangerous level.

You can see this more clearly in the chart below. This was re-leased in January 2017 by the Congressional Budget Office, or CBO, and shows the history of the U.S. debt-to-GDP ratio from 1790 to 2017 with projections out to 2050.

This chart is also useful because it shows that prior peaks in the U.S. debt-to-GDP ratio were associated with major wars, specifically the Revolutionary War, the Civil War, World War I and World War II. After each war, the debt-to-GDP ratio declined substantially. Basically, the U.S. went into debt

to fight and win major wars, and then reestablished sound national finances after the wars were over.

Interestingly, the chart shows that the last time the U.S. was debt free was in 1836 during the administration of President Andrew Jackson. President Jackson was also famous for abolishing the Second Bank of the United States, which was the U.S. central bank of its time. Jackson believed in no debt and no central bank.

With the exception of the Civil War and its aftermath, the U.S. had very low debt-to-GDP ratios and no central bank from 1836 to 1913. After 1913, the U.S. again had a central bank, this time called the Federal Reserve. U.S. debt-to-GDP ratios have been considerably higher ever since.

Despite its usefulness, this CBO chart is distorted because it shows so-called “Federal Debt Held by the Public.” This requires some explanation.

Federal debt held by the public excludes federal debt held by government agencies, such as the Social Security Ad-ministration, in trust for recipients of various entitlement programs such as retirement, disability and survivors’ benefits. But, there is no sound basis for excluding that debt.

Those benefits will certainly have to be paid (neither political party is calling for entitlement reform right now), and the government securities held in trust are there to provide the means of payment. The idea that entitlements might be revised and that the debt should not be counted as “public” debt is pure fiction.

That fiction also distorts the historic comparisons. The first chart shows the historic peak debt-to-GDP ratio was about 110% in 1945 at the end of World War II, and that the cur-rent ratio is about 75%. However, there was no significant amount of non-public debt in 1945 because the entitlement programs were new, off-budget, and cash-flow positive.

The next chart offers a more recent historical perspective than the CBO chart, dated from 1940–2017. It also offers a more realistic picture of the actual debt-to-GDP situation. This chart includes all government debt including that held by government agencies to pay benefits. The comparison is more apples-to-apples.

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1780 1810 1830 1850 1870 1890 1910 1930 1950 1980 1990 2010 2030

Federal Debt Held by the Public150%

125%

100%

75%

50%

25%

0%

Civil War WWI

GreatDepression

WWII

Source: Congressional Budget Office

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What this chart shows is the same World War II peak (about 121%), and that the current ratio is 105% — much higher than the 75% shown in the official CBO chart above.

This chart also shows the steady rise of the debt-to-GDP ratio from the lows of about 33%, achieved in the 1970s during the Nixon, Ford, and Carter administrations, to the dangerous high of 105% reached in 2017. The modern era of exploding national debt really begins with Ronald Reagan and continues today with the newly installed Trump admin-istration. That is the history we turn to now.

The fiscal policy story of the period 1981 to 2017 can be summed up in a curious phrase: Feed-the-beast, starve-the-beast.

The beast, of course, is the U.S. government with its vora-cious appetite for taxpayer funds. Feeding the beast refers to huge deficits and expanded spending. Starving the beast refers to spending cuts and fiscal prudence. These alternating bouts of spending increases and spending cuts are amplified or mitigated by tax cuts and tax increases. These make the deficits worse, or in some cases better, than they would be based on spending alone.

The problem is that the feed-the-beast, starve-the-beast strategy has been used by successive administrations to tie the hands of their successors with mixed results. It is this political dynamic, combined with the simple math of defi-cits and growth, which has led to the dangerous state the U.S. finds itself in today.

The culmination of almost forty years of fiscal irresponsibility (with a few exceptions) has now been dumped in Donald Trump’s lap. The debt trap is not Donald Trump’s fault, but it will be his issue to resolve because it is now reaching a critical state. This debt wall may be the defining policy issue of the Trump administration although it is receiving little attention at the moment. As the debt ceiling talks approach, you’ll hear more about this in the mainstream.

A bond market revolt, borderline hyperinflation or a de-flationary debt implosion are all possible outcomes. Read on to understand how we got here, and where the debt problem is going now.

Reagan: Morning in AmericaWhen Ronald Reagan was sworn in as 40th president of the United States in January 1981, the U.S. debt-to-GDP ratio was about 35%, a level last seen in the 1930s. From 1945 to 1970, the United States had managed to reduce its World War II debt load through a policy called “financial repression.” This policy consisted of the Federal Reserve and the banking system keeping interest rates just slightly below the rate of inflation for a prolonged period of time.

For example, if inflation is 3% and interest rates are 2%, the “real” interest rate is negative 1%, which means that the real value of money falls 1% per year. This also applies to the real value of debt. The 1% per year decline in the value of money seems small, but if continued for 35 years, the real value of money and debt is cut in half.

The economy also experienced strong economic growth throughout most of the 1950s, and 1960s. There were budget deficits, but as long as the deficits were lower than economic growth measured as a percentage of GDP, the debt-to-GDP ratio fell.

The combination of financial repression and real growth meant that the debt-to-GDP ratio was falling even as the actual debt grew. This goes back to our MasterCard exam-ple. High debt is not a problem if you have high income to support it.

But Reagan faced many other challenges when he assumed office, including 20% interest rates, 15% inflation, and a major recession — the worst since the Great Depression, which consumed his first two years in office. But, at least the debt level was low and American credit was sound.

Once Fed Chairman Paul Volcker eradicated inflation, interest rates fell, the recession ended and a period of strong growth began which lasted from 1983 through 1990. This was also the period of sound money known as “King Dollar.”

Contrary to popular mythology, Reagan was not a fiscal con-servative. In fact, he was a big spender. Reagan saw the low debt ratio he inherited as a tool he could use to win the Cold War, and he set out to do so with as much determination as other wartime presidents such as Abraham Lincoln or FDR.

Neither financial repression nor the dynamics of the Cold War were well understood by the American people. Certainly citizens enjoyed the strong growth under Reagan after 1983, and understood the dangers of a nuclear-armed Soviet Union.

140

120

100

80

60

40

201950 1965 1980 1995 2010

Source: Trading Economics

Actual U.S. Debt-to-GDP Levels Are More Threatening than CBO Figures

End ofWWII

Reagantakes office

Clintonsurplus

Obama debtexplosion

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But, they did not necessarily see the connection between financial flexibility and military prowess in the way that a master strategist like Reagan could.

The Cold War was as much an existential conflict as the Civil War or World War II. Reagan used fiscal deficits and borrowing power to begin a huge military expansion including the strategic defensive initiative (so-called “Star Wars” anti-missile technology) and the 600-ship navy. By the mid-1980s, the Kremlin leadership realized they could not keep pace with the U.S., militarily or financially.

Mikhail Gorbachev became head of the Soviet Union in 1985. He proceeded to engage in negotiations with Reagan designed to de-escalate the new military build-up and to open up Soviet society so that it could modernize its econ-omy. The negotiations were successful, but the opening process, called glasnost, ran out of control and led to liberal resistance in Eastern Europe and the eventual collapse of the Soviet Union in 1991.

In addition to massive Cold War spending, Reagan also pushed through major tax cuts early in his administration, which put added pressure on debt and deficits. During the Reagan years, the U.S. debt-to-GDP ratio grew from 35% to 55%, the highest level since the early 1960s.

In Reagan’s defense, he did win the Cold War. (This actu-ally happened while Bush 41 was president, but historians rightly credit Reagan’s military and technology policies with bringing about the victory.) Reagan had every reason to believe that America would follow its historic pattern of running up the debt to win a war, then reducing the debt once the war was over. This pattern of debt ratio increases followed by debt ratio declines has been followed repeatedly in U.S. history as shown in the CBO chart.

Yet, another dynamic was now in play. The early years of the Reagan administration were an example of a feed-the-beast cycle, consisting of tax cuts and big spending increases. The resulting deficits were intended to force later administrations to cut spending, the strategy called starve-the-beast.

The idea was that tax cuts would deprive the government of revenue, and the high debt ratio would force the govern-ment to reduce deficits. The only way to reduce deficits in a low-tax regime is to cut spending. That’s exactly what the fiscal conservatives around Reagan wanted.

The big spending, tax-cutting policies of the Reagan admin-istration were highly successful at growing the economy and winning the Cold War. The deficit day of reckoning would then fall on subsequent administrations, which would have to pursue unpopular measures such as tax increases or spending cuts. The original feed-the-beast politics would

morph into starve-the-beast and tie the hands of subse-quent administrations. To a great extent, that’s exactly what happened.

H.W. Bush: Read My LipsBy the summer of 1988, the Reagan administration was wind-ing down and the next presidential election campaign was in full-swing. The 1988 campaign pitted Reagan’s Vice President, George H. W. Bush, against Democrat Michael Dukakis. The Democrats were already calling for tax increases to offset the Reagan deficits.

At the Republican nominating convention on August 18, 1988 in New Orleans, Bush flatly declared, “The Congress will push me to raise taxes and I’ll say no. And they’ll push, and I’ll say no, and they’ll push again, and I’ll say, to them, ‘Read my lips: no new taxes.’”

That pledge was intended to shore up Bush’s support from the conservative wing of the Republican party. It worked. Bush easily obtained the nomination and just as easily de-feated Dukakis in the general election. The no tax pledge was the most memorable line Bush ever said on economics and the American people remembered it.

Unfortunately, the deficits numbers did not accord with Bush’s pledge. Mid-way through Bush’s term, the debt-to-GDP ratio crossed the 60% threshold. Many economists consider this a danger zone. The 60% level is the one used under the Maastricht Treaty, which governs the European Union, as the maximum that can be tolerated and be consistent with unified EU fiscal policies.

Bush’s advisors led by Richard Darman needed to reach a budget compromise with the Congress controlled by the Democrats. The Democrats insisted that tax increases be part of any package including spending reductions or en-titlement reforms. Bush agreed and received support from many prominent Republicans. However, he lost the support of Republican voters. In 1990, the New York Post ran the headline, “Read my lips. … I lied.”

From the perspective of fiscal prudence, Bush 41 had done the right thing. The debt-to-GDP ratio first leveled off then began to decline slightly back toward the critical 60% level. But while Bush’s policy may have been sound economics, it was lousy politics. Bush lost the 1992 elec-tion to Bill Clinton partly because of voter dissatisfaction with his breach of the no tax pledge.

Starve the beast had worked. The U.S. was back on a path of a reduced debt-to-GDP ratio. Unfortunately for Bush 41, the beast had devoured his chances at reelection. The new president, Bill Clinton, would now have to deal with Reagan’s starve-the-beast legacy.

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Clinton: The Bondholder’s FriendIn 1993, shortly after Bill Clinton was sworn in as president, his closest political advisor, James Carville said: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

That story encapsulates the realities that faced Bill Clinton after he won the presidency. Clinton was the first Democratic president in twelve years. The last Democrat before Clinton was Jimmy Carter, a conservative southern governor and tech-nocrat. Carter was fiscally conservative. In any case, Carter’s spending options were limited by the runaway inflation and near collapse of the dollar that occurred on his watch.

The last big-spending liberal Democratic president had been Lyndon B. Johnson who left office in 1969. Liberal Demo-crats had waited twenty-four years from LBJ to Clinton for a chance to revive big social spending programs of the kind they associated with FDR, Harry Truman and LBJ. Clinton embodied the liberals’ hope that big spending would return.

The liberals were soon disappointed. Clinton was faced with the same tough budget realities as Bush 41. The ghost of Reagan’s starve-the-beast policies lived on.

Democrats and Republicans agreed on the need for fiscal prudence and to bring the debt ratio back down below 60%, if not lower. The only disagreement was on the right mix of taxes, spending cuts, and entitlement reforms to achieve that goal.

Clinton economic advisor Bob Rubin warned Clinton about a new danger — the so-called “bond vigilantes.” The vigilantes were major bank bond dealers and institutional investors who were hypersensitive to the threat of inflation.

Large deficits were considered potentially inflationary at the time because the Fed was expected to monetize the debt as it had in the 1970s. (This was long before the deflation scares of the early 2000s). Higher interest rates could slow economic growth. Therefore Rubin urged Clinton to cut spending and raise taxes to reassure the bong vigilantes that the deficit was not out of control.

Fortunately for Clinton, he had a Democratic Congress until 1994 and was able to push his tax cuts through in the Deficit Reduction Act of 1993. This raised the top individual tax rate from 31% to 39.6% where it is today.

Clinton was also the beneficiary of the so-called “peace dividend.” The Reagan-Bush victory in the Cold War was so complete that defense spending was able to be reduced substantially without jeopardizing national security. The

impact of lower defense spending on the debt-to-GDP ratio was no different after the Cold War than after World War II — the debt ratio came down.

This combination of higher taxes, lower defense spending, and sound monetary policy by Fed Chair Alan Greenspan worked wonders on the debt ratio. It fell steadily during the Clinton years and moved decisively below the 60% critical threshold by the end of Clinton’s term.

Despite political opposition, and later impeachment, Clin-ton’s personal popularity remained high. He presided over the longest peacetime economic expansion in U.S. history. At the end of Clinton’s presidency, he managed to produce a small budget surplus for the first time since the late 1960s. There was even some talk among the bond vigilantes that the U.S. Treasury market might “go away” because Clinton’s policies could retire the national debt for the first time since Andrew Jackson.

Bush 41 and Bill Clinton both succumbed to the starve-the-beast trap laid by Ronald Reagan. Both raised taxes as a result. Bush lost reelection and Clinton lost the Congress, but their policies did in fact bring the debt ratio back under control.

That progress ended irrevocably after the swearing in of Bush 43 and the 9/11 attacks.

Bush’s Three WarsLess than eight months after George W. Bush was sworn in America was at war. It was not a cold war, it was a red hot shooting war. But, it was not a war against a nation state, it was the Global War on Terror.

Not surprisingly, the U.S. debt-to-GDP ratio began to rise again as it had in the Revolutionary War, Civil War, World War I, World War II and the Cold War. The difference was that the increase was starting from a much higher level.

Prior to the Revolutionary War, the U.S. had no national debt because it was not a country. Alexander Hamilton created the national debt and the Treasury bond market by persuading President George Washington to assume a hodge-podge of debts from the states and the prior Continental Congress. The debt ratio prior to the Civil War was close to zero and was still only about 5% prior to World War I.

From World War I to just prior to World War I, the debt ratio was about 40%. However, that was mostly due to weak growth during the Great Depression rather than a debt binge. The ratio had gone up because the denominator shrank, not because the numerator swelled.

America’s credit was sound and its borrowing capacity was not constrained. Prior to Reagan’s Cold War strategy, the

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debt ratio was only 35%, well within the safety zone of government debt sustainability.

The Global War on Terror, or GWOT, was different. America had not finished tightening its belt after the Cold War victory. The debt-to-GDP ratio at the start of the GWOT was just under the danger zone of 60% and soon rose into the danger zone decisively.

Bush 43 quickly pivoted from the starve-the-beast response of Bush 41 and Clinton to a new version of Reagan’s original feed-the-beast approach. Bush pushed through two major tax cuts in 2001 and 2003 and drastically ramped-up de-fense and intelligence spending.

By 2003, Bush was fighting three wars at once in Afghani-stan, Iraq, and against global terror. Most Americans did not initially question these wars and the increased spending that went with them because of the trauma of the 9/11 attacks and the perceived need to push back in the Middle East. Most Americans also welcomed the Bush tax cuts as needed relief from the 2000-2001 recession, dot.com market crash, and the perceived high taxes of the Clinton years.

Nevertheless, the impact on the debt ratio was swift and predictable. The ratio rose from about 58% when Bush took office to 63% by the end of his term. This was a sig-nificant increase and it pushed the U.S. back above the 60% critical threshold that Clinton had gone below.

Yet, this debt ratio increase also fit the historical pattern of increased debt during wartime, albeit starting from a higher level. By the end of Bush’s term, the War in Iraq was over, and the Wars in Afghanistan and GWOT had turned into long-term struggles that were costly but did not involve big spending increases of the kind seen in 2002–2007.

Bush 43 was now ready to repeat the Reagan playbook. He pursued feed-the-beast, but wanted to serve up a starve-the-best menu to his successor, Barak Obama. In effect, Bush would tie Obama’s hands by leaving him no choice but to reduce spending to get the debt ratio back under control. Bush 43 intended to do to Obama what Reagan had done to Bush 41 and Clinton.

Fate intervened. Bush was struck with the worst financial crisis since the Great Depression in the final months of his term. This gave Obama the perfect excuse to increase spending to offset the financial crisis rather than reduce spending. Instead of starve-the-beast, Obama would fol-low with more feed-the-beast.

In 2009, the U.S. took a decisive turn toward complete financial ruin.

Obama Doubles DownThe massive deficits of Obama’s first term (2009–2013) need to be understood not only in the context of Bush 43’s starve-the-beast strategy, but also in the long sweep of progressive Democratic presidents and their vision for America.

Neither Bill Clinton nor Jimmy Carter lived up to the expectations of progressive Democrats for expanded spending and entitlement programs. Carter was a fiscal conservative constrained by hyperinflation. Clinton was a moderate constrained by the bond vigilantes and a Re-publican Congress after 1994.

Progressives had to look back to LBJ’s Great Society (1965), and before that to FDR’s 100 days (1933), to find the kind of government activism they wanted. The landmark programs of social security and Medicare were passed by FDR and LBJ. By the time Obama was sworn in, there had been nothing of comparable magnitude in over 40 years. Progressives were hungry, and Obama was a progressive.

Obama had the ready-made cover to do exactly what pro-gressives wanted without having to nod in the progressives’ direction. The global financial crisis of 2008 was the worst panic since the Great Depression, and sent the economy crashing and unemployment skyrocketing.

The White House economic team of Christina Romer, Larry Summers, Austan Goolsbee, and Steve Rattner were not radical progressives; they were conventional neo-Keynesians. Their solution was entirely predictable — massive deficit spending to “stimulate” the economy out of its recession.

This stimulus would come from the mystical Keynesian “multiplier” effect that said $1.00 of deficit spending would produce more than $1.00 of economic growth. Romer estimated the multiplier effect at about $1.50 for each $1.00 of new deficit spending.

It was left to Obama and his closest political advisor, Valerie Jarrett, to combine the progressive wish list with the neo-Keynesian stimulus into what became known as the American Recovery and Reinvestment Act of 2009. This was an $831 billion deficit spending package on top of the baseline spending already approved, and the automatic spending on unemployment insurance and food stamps that results from recession.

The 2009 stimulus act was touted as being for “shovel-ready” infrastructure, but only a small portion was directed at critical infrastructure or productive spending. Most of the money went to support liberal interest groups such as teachers, mu-nicipal workers, healthcare workers, community organizers, and others who might have been laid off in the recession.

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The 2009 stimulus opened the door to the greatest spending spree in U.S. history.

For 70 years, from 1946 to 2016, the average annual budget deficit was 2.11% of GDP. In contrast, deficits as a percentage of GDP for the early Obama years were 9.8% in 2009, 8.7% in 2010, 8.5% in 2011, and 6.8% in 2012. Not until 2014 did budget deficits return to something like the historical norm.

The Obama years (2009-2017) saw the national debt more than double from $9 trillion to almost $20 trillion. The debt-to-GDP ratio soared to 105%, the exact opposite of what George W. Bush might have expected from his attempt to impose a starve-the-beast policy.

Obama produced the worst possible combination of massive deficits, a skyrocketing debt-to-GDP ratio, and substantial tax increases. This might have been acceptable — if the economy had produced the kind of robust growth expected by the neo-Keynesians.

If debt increased by $11 trillion, where was the $15 trillion or so of added growth the Keynesians projected?

It never happened. Instead, the economy grew at an aver-age annual rate of 2.05% from the beginning of the Obama recovery in June 2009 until the end of 2016. This was the weakest recovery in U.S. history.

Growth was far below the 3.19% annual average for post-1980 economic expansions, and the 5% average annual growth in the early years of the Reagan expansion (1983–1986).

Even more ominously, the dismal Obama economic per-formance was produced in peacetime, not in a time of war. There would be no “peace dividend” as there was for Bill Clinton. There would be no deferred consumption, labor market slack, or investment catch-up as there was in the aftermath of wars in the past.

Far from deferring consumption and investment, Obama’s deficits had brought growth forward, leaving a permanent output gap and little prospect for growth in the next administration.

Trump Reaps the WhirlwindDonald Trump was sworn in as the forty-fifth president on January 20, 2017, amid great expectations from the U.S. stock market and global investors. The Trump policies of tax cuts, reduced regulation, and larger deficit spending on defense and critical infrastructure had been ripped from the pages of Ronald Reagan’s playbook.

Indeed, many of Trump’s closest economic transition advi-sors, including David Malpass, Steve Moore, Larry Kudlow, Art Laffer and Judy Shelton, were veterans of the Reagan Revolution of the 1980s. Trump was ready to feed-the-beast again with tax cuts and larger deficits.

The problem is that the beast has already been fed $15 trillion by Bush 43 and Obama combined in the form of added debt for war spending, and progressive party payoffs. Trump’s cupboard is bare.

As the debt ceiling suspension reaches its expiration date, Congress is already insisting that any Trump tax cuts be “revenue neutral,” which means that a cut in one part of the Internal Revenue Code has to be matched with an increase somewhere else. This shifts wealth around, but has little or no stimulative impact.

Congress is also demanding that any infrastructure spending be paid for without increasing the deficit. This can be done with tolls and user fees for bridges, tunnels and airports, but the tolls and fees are just another form of tax increase, which also reduces the stimulative effect in the short run.

In the next article today, we’ve brought in special guest David Stockman to give us his insider perspective at how this could play out in the coming weeks. As a former Con-gressman and member of Reagan’s cabinet, I consider David an expert when it comes to fiscal analysis. Today, Stockman provides us with unique insight about the dynamic playing out between Trump and Congress today.

What we can see is that Trump’s hands are tied. His handlers want him to run the Reagan play book, but this is not 1981, it’s 2017. Reagan’s debt-to-GDP ratio of 35% is a distant memory. Trump has inherited a debt-to-GDP ratio of 105%. His administration has no scope for fiscal stimulus, and there is considerable doubt that so-called stimulus would work anyway given the high debt burdens already in place.

Foreign investors sense the coming debt crack-up and are bailing out of U.S. Treasury securities. As shown in the following chart, net buying of U.S. Treasuries by foreign investors began to plunge after 2010 when the Obama deficits emerged.

That buying shrank steadily until 2016 when net buying turned to net selling. The stampede out of U.S. govern-ment debt in anticipation of a debt crisis has begun.

This coming debt crisis is not Trump’s fault, but it is his misfortune. After some improvement under Bush 41 and Clinton, Trump has inherited the profligacy of Bush 43 and Obama. Now the chickens are coming home to roost.

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The shift from net buying to net selling in U.S. Treasury securities by foreign accounts has been dramatic both in its size and swiftness.

The Next Signal to WatchTrump advisors believe they can avoid a debt crisis through higher than average growth. This is mathematically possible but extremely unlikely.

A debt-to-GDP ratio is the product of two parts — a numerator consisting of nominal debt and a denominator consisting of nominal GDP. In this issue, we have focused on the numerator in the form of massively expanding government debt. Yet, mathematically it is true that if the denominator grows faster than the numerator, the debt ratio will decline.

The Trump team hopes for nominal deficits of about 3% of GDP and nominal GDP growth of about 6% consisting of 4% real growth and 2% inflation. If that happens, the debt-to-GDP ratio will decline and a crisis might be averted.

This outcome is extremely unlikely. As shown in the chart below, deficits are already over 3% of GDP and are projected by CBO to go higher. We are past the demographic sweet spot that Obama used to his budget advantage in 2012–2016.

From now on, retiring Baby Boomers will make demands on social security, Medicare, Medicaid, Disability payments,

Veterans benefits and other programs that will drive deficits higher.

The CBO projections show that deficits will increase to 5% of GDP in the years ahead, substantially higher than the hoped for 3% in the Trump team formula.

As for growth, we are now in the eighth year of an expan-sion — quite long by historical standards. This does not mean a recession occurs tomorrow, but no one should be surprised if it does.

Official CBO projections, shown in the chart below, expect approximately 2% growth and 2% inflation for the next ten years. That would yield 4% nominal growth, not enough to match the deficit projections. The debt-to-GDP ratio is projected to soar even under these rosy scenarios.

The Congressional Budget Office, CBO, estimates that inflation and real GDP will each grow at about 2% per year in the coming ten years. This means that nominal GDP, which is the sum of real GDP plus inflation, will grow at about 4% per year. Since debt is incurred and paid in nominal terms, nominal GDP growth is the critical measure of the sustainability of U.S. debt.

There are numerous problems with the CBO projections. They make no allowance for a recession in the next ten years. That is highly unrealistic considering that the current expan-sion is already one of the longest in history. A recession will demolish the growth projections and blow-up the deficits at the same time.

$800B

$600B

$400B

$200B

$0

-$200B

’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16Source: U.S. Treasury

Annual USD Change in U.S. Treasuries

4

2

0

-2

-4

-6

-8

-10’67 ’72 ’77 ’82 ’87 ’92 ’97 ’02 ’07 ’12 ’17 ’22 ’27

Source: Congressional Budget Office

Total Deficits and Surpluses

Deficits

Surpluses

Avg Deficit1967–2016

(-2.8%)

ACTUAL PROJECTED

6%

4%

2%

0%

-2%

-4%2002 2007 2012 2017 20122 2027

ACTUAL PROJECTED

Growth of Real GDP

4

3

2

1

02002 2007 2012 2017 20122 2027

Per

cent

age

Cha

nge

in P

rices

ACTUAL PROJECTED

Inflation

OverallCore

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In 1985, I left Ronald Reagan’s Cabinet in disgust. The Reagan Revolution had gone to Washington to “drain the swamp” — cut spending, reduce the size of government and return power to the people and free markets.

But that didn’t happen. In fact, the swamp got deeper and more stagnant. So I wrote my first book, The Triumph of Politics, in 1986. It showed how all of the “swamp creatures” in D.C. make it impossible to ever drain the swamp.

You’ve seen this in the first 30 days of the Trump adminis-tration. And it’s just a taste of what’s to come. The Trump White House will be engulfed in bitter partisan conflict and crisis throughout the next four years. The fact that upward of 50 House Democrats went so far as to actually boycott Donald Trump’s inauguration should have been forewarning enough.

I remember 1980. As a member of Congress, I was Ronald Reagan’s sparring partner to prepare for the presidential debates. And then Reagan appointed me his budget director. Like Trump, Reagan was as unwelcome by the Beltway establishment. But I remember even Congressman Ron Dellums — nearly an out-and-out Marxist and a black militant sympathizer — attending the swearing in.

That initial wave of cordiality from the Democratic side wasn’t merely pro forma. In my own case, I can recall Speaker of the House Tip O’Neill personally inviting me up to his cavernous office to meet with his entire leadership team and roster of committee chairmen shortly after the inauguration.

At the time, I saw the assemblage gathered in the speaker’s office as the politburo of the Welfare State. I knew they

CBO also makes no allowance for substantially higher interest rates. With $20 trillion in debt, most of it short-term, a 2% increase in interest rates would quickly add $400 billion per year to the deficit in the form of increased interest expense in addition to any currently project spending.

Finally, CBO fails to consider the ground-breaking research of Kenneth Rogoff and Carmen Reinhart on the impact of debt on growth. We have discussed the 60% debt ratio danger threshold in this article. But there is an even more dangerous threshold of 90% debt-to-GDP revealed in the Rogoff-Reinhart research. At that 90% level, debt itself causes reduced confidence in growth prospects — partly due to fear of higher taxes or inflation — which results in a material decline in growth relative to long-term trends.

These headwinds practically insure that the Trump growth projections are wholly unrealistic. With higher than ex-pected deficits, and lower than projected real growth, there is one and only one way for the Trump administration to reduce the debt ratio — inflation.

If inflation is allowed to rip to 4% and Fed financial repres-sion can keep a lid on interest rates at around 2.5%, then it is possible to achieve 6% nominal growth with 5% deficits, which would be just enough to keep the debt ratio under control and even reduce it slightly.

Can Trump pull-off this finesse? Are his advisors even analyzing the problem along these lines?

We will know soon. As we’ll discuss in upcoming issues, Trump will have the chance to make an unprecedented five appointments to the Fed board of governors in the next 16 months, including a new chair and two vice chairs.

If he appoints doves, that will be the signal that inflation in the form of helicopter money and financial repression is on the way. That will also be the signal to move out of cash and increase our allocation to gold beyond the current 10% level.

If Trump appoints hawks to the board, that will be a signal that his team does not understand the problem and is re-lying on overoptimistic growth assumptions. In that case, we could expect a recession, possible debt crisis and strong deflation. That is a signal to keep our 10% gold allocation as a safe haven, but also buy Treasury notes in expectation of lower nominal rates.

We are watching for Trump’s nominations to the Fed board. The first three should be announced soon. Once the names and their views are known, the die will be cast.

For now, read on for David Stockman’s insider look at the power struggle that will play out between President Trump and Congress as we close in on the March 15 expiration of the debt ceiling suspension. (You can get more in depth analysis from Stockman by reading Contra Corner. Click here to learn more.)

The Triumph of Politics 2.0I’ve seen this movie before, personally. The same forces that stopped Reagan from “draining the swamp” will also stop Trump. By David Stockman, Reagan’s Former Budget Director and 20-Year Wall Street Veteran

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had zero sympathy for Ronald Reagan’s plan to drastically shrink the domestic budget and slash income tax rates by 30%. Still, they were willing to give us a hearing and the benefit of the doubt.

In fact, Tip O’Neill sat me in one of two giant winged chairs (he filled considerably more of his than I did of mine!). Then for the next several hours, they heard me out, and did not throw me out. Tip even admitted afterward that “We re-alize some of the old ways have to change… We don’t agree with everything, but this young fellow sure knows what he is talking about.”

That was then…

What was at the time a fair debate about whether federally subsidized school lunches, for example, should be provided to families at twice the poverty line or higher has been submerged by a 35-year eruption of Big Government and soaring national debt that makes the discussions that day trite by comparison.

Donald Trump is destined to be the recipient of a giant fiscal due bill. Yet the very Beltway politicians who gen-erated it will be after him hammer and tong every step of his presidency. We are not just speaking of the partisan opposition of the congressional Democrats.

All of Washington is arrayed against the Donald. This includes the Republican establishment and congressional leadership. Their make-nice efforts after the election were a matter of tradition. After all, the speaker of the House re-fused to appear with Donald Trump the weekend before the election in his home state of Wisconsin, even as Trump was on the cusp of an upset victory in a blue state that had not voted Republican in a presidential race since 1984. What would’ve changed his mind in the course of seven days?

The notion on Wall Street that we now have a Republican government that controls the White House and both houses of Congress and that it can implement sweeping policy shifts is wrong. There is no Republican “majority” on Capitol Hill. There’s only a gang of factions that will form a circular firing squad around President Trump. The Republicans will bring Trump’s legislative agenda to a thundering halt before it even gets launched.

The immediate case in point is the campaign pledge that Obamacare would be subject to “repeal and replace” within days of the inauguration. That didn’t happen. And it’s not going to happen within these vaunted first 100 days. Or even this year or next. Instead, the so-called Republican majority will splinter. They’ll bog down the legislative pro-cess in prolonged maneuvering and wrangling.

That, in turn, will block the rest of the Trump agenda for tax cuts, infrastructure, border control and much else for months to come — if not indefinitely.

To be clear, I’m all for the Great Disrupter. I don’t believe that the Beltway conflagration that lies dead ahead is his fault, either. He was elected owing to three decades of de-structive policies foisted on the nation by the Wall Street/Washington elites and the special-interest group racketeers who rule the roost in Washington, D.C.

I summed up my outlook for the Trump administration on Fox Business Network’s Cavuto: Coast to Coast with Neil Cavuto: lots of hope, zero faith.

The stinging defeat Donald Trump administered to the ruling elites on Nov. 8 was the single most hopeful political event of this still-young century. It may even eclipse Ronald Reagan’s shocking victory in 1980.

But I have seen this movie before, firsthand.

The plain truth is that if Ronald Reagan couldn’t drain the swamp way back then, how in the world can Donald Trump do it now, after 36 years of massive growth in gov-ernment and debt?

The implications for the Great Disrupter could not be any clearer. His predecessors have used up the nation’s public balance sheet. As Jim showed above, Reagan inherited a debt-to-GDP ratio of 30%. He had wide-open space to accidentally implement giant deficits. But Donald Trump has no running room at all with debt-to-GDP at 106%.

This means there will not be any Trump stimulus. The bedraggled U.S. economy is not about to get up on its hind legs and leap into 4–6% growth, as some of Trump’s geriatric supply-side advisers have suggested. Instead, I believe the American economy will soon slide into a prolonged period of stagnation and recession. And that’s after 92 months of the phony Obama recovery that was kept alive by the Federal Reserve just long enough to get through the 2016 elections.

Washington is heading for the mother of all debt ceiling showdowns by midsummer. In order not to inconvenience themselves for the 2016 elections, back in October 2015, Congress quietly suspended the debt ceiling until March 15, 2017.

That allowed the Obama Treasury Department to borrow at will. And it did! During the past 16 months, the stag-gering sum of $1.8 trillion has been added to the nation-al debt. But when they throw on the debt ceiling switch again on March 15, Capitol Hill is going to be shocked. The tea party and Freedom Caucus Republicans who are

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genuinely frightened by the nation’s soaring public debt will be particularly shocked.

The outstanding debt was $19.96 trillion. That’s about $400 billion higher than at the start of the current fiscal year, on Oct. 1. Obama’s were borrowing at a rate of $5 billion each and every business day. It also means that under the law, the debt ceiling will automatically be frozen at something like $20.1 trillion on March 15.

At that time, the U.S. Treasury will have several hundred billion dollars in cash and a few short-term gimmicks to postpone the day of reckoning for a few months.

But here’s the thing. By the Fourth of July, the Trump administration will be out of cash, while all of the so-called “stimulus” legislation — tax cuts, infrastructure, the de-fense buildup and the Mexican Wall/border control — will be backed up in a giant political/legislative logjam awaiting congressional action to increase the debt ceiling by at least $2 trillion. That’s how much would be needed on top of the $20.1 trillion we will have as of March 15 in order to accommodate the giant deficits already built in — plus the huge potential costs of the so-called Trump Stimulus.

Folks, it’s not going to happen.

The Imperial City will de-scend into a protracted period of political paralysis and mayhem. It will not only take months to resolve, but will also finally puncture the lunatic notion peddled by the Wall Street brokers after the shock of Nov. 8 that Donald Trump is the second coming of Ronald Reagan.

In the days and weeks ahead, we will be documenting the great unraveling of the Trump-O-Mania that has temporarily infected Wall Street and the stock market. It won’t be a pretty sight, and you’ll need a day-to-day guide to explain what’s really going on. That’s why I’m sending anyone who answers my letter here a free autographed copy of my latest book, Trumped! You should read it along with the other free materials I’ll send you within these first 100 days of the Trump administration.

Go to the link above now while the offer is still available.

The Resource Play of the Century for Under $2The man who helped get the Alaskan Pipeline approved is now focused on an Alaskan gold and copper project worth billions of dollars. Read on for the company that could create jobs and wealth for the next five generations… By Byron King, Senior Geologist

Several weeks ago, I walked into a handsome, elegant build-ing at the corner of 37th Street and Park Avenue in New York City. I went up to the fourth-floor dining room of the venerable Union League Club. It’s a beautiful, wood-paneled room, with walls covered in fine, museum-quality art. It was delightful, and tables were beautifully set for lunch.

But I wasn’t there to eat lunch or admire art. I was there to talk business and learn the deep facts about what may become one of the greatest mining projects in the history of the United States, and possibly one of the greatest single resource investment projects ever.

My host ushered me to one particular table, where I sat next to a distinguished man who handed me a business card. I took a quick glance and saw two addresses — Anchorage, Alaska, and Washington, D.C. The man was

Tom Collier, a longtime player in and out of government in Washington, D.C.

We made a bit of small talk. He asked if I’ve visited Alaska, and whether or not I’ve seen the Alaskan Pipeline. I an-swered that I’ve been to Alaska on many occasions, and that I’ve traveled the entire length of the 800-mile-long conduit that carries oil from Prudhoe Bay, on the Arctic Ocean, down to the loading terminal at Valdez, on the Pacific Ocean.

I hold the greatest level of admiration and professional respect for the design work, engineering and technical skill that went into building that masterpiece of steel, as I told Mr. Collier.

Then, I added, “I’m even more impressed with the well- crafted act of Congress that was necessary to build the pipeline. It was a brilliant piece of legal work.”

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About 45 years ago, Collier helped draft that body of legislation, which broke the logjam on one of the most controversial natural resource projects in the United States. He helped put together the legal basis for a program that, ultimately, built the mighty Alaska Pipeline.

Today, Collier is on the cusp of bookending his long career with a similar effort. But instead of oil, this time he’s focused on an economy-altering copper and gold project.

The Pebble ProjectTom Collier is now the CEO of the Pebble Project. You likely won’t find an accurate portrayal of this development in the mainstream (fake-stream) media. Pebble is an effort to develop what is undoubtedly among the largest copper-gold deposits in the world, located in southwest Alaska and controlled by a company called Northern Dynasty Minerals (NAK: NYSE).

Collier is spearheading this effort to build one of the largest copper-gold mines in the world. As a lawyer — in particular a specialist in obtaining government permits — he knows where to go in Washington, who to see and what to say, to convince politicians and bureaucrats to sign off on major projects. (It’s much more involved than just filling out forms, be assured.)

One key roadblock to Pebble has been obtaining a permit under Section 404 of the Clean Water Act. Since 1972, authority for Clean Water permits has resided with the Army Corps of Engineers. In over 45 years, less than 1% of Clean Water permits have been denied. The Corps of Engineers issues thousands of Clean Water permits every year. Submit a well-engineered plan and the Corps will give you a permit.

But under the late-departed Obama administration, the Environmental Protection Agency (EPA) had other ideas, certainly as concerns the Pebble Project. About three years ago, the EPA simply seized Clean Water permit authority away from the Corps of Engineers and summarily denied any permit to Pebble — before Pebble had even filed its formal 404 application.

At the time, the expressed concern was that a big cop-per-gold mine could wipe out streams and wetlands in Bristol Bay, Alaska, that sustain nearly half the world’s sockeye salmon. This sounds like a big deal. And when most people think of Alaska, it’s likely that images of vast, glacier-capped mountains, green forests and salmon-filled streams come to mind.

Thus, when people propose building a large copper-gold mine in Alaska, people’s inner environmentalist surfaces.

Even people who are generally sympathetic to resource extraction may come out to stand against the march of pro-gress. Woodsmen, spare those trees! And save the salmon!

Yet the truth is that we’re dealing with a large expanse of relatively barren grassland and with minimal water flow cutting across the landscape. Like this…

The fact is that the proposed site for the Pebble Project is pretty boring as environmental causes go. The image above could be rolling hills in well-dug, longtime mining states like Wyoming, Nevada or Texas. There’s nothing re-ally special about the landscape we’re dealing with when discussing Pebble.

But underneath that stark landscape lies a phenomenal mineral resource. Current estimates, based on drilling and engineering data, say that the Pebble deposit holds over 70 million ounces of gold, nearly 60 billion pounds of copper, 345 million ounces of silver and 3.4 billion pounds of molybdenum, which has many industrial uses.

By way of comparison, the old Homestake gold mine, near Rapid City, South Dakota, produced about 60 million ounces

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of gold over its entire mine life of 125 years, 1876–2002. And today, for lack of large gold deposits, mining companies pay billions of dollars for exploration and development firms that can offer ore bodies with as little as 3 million gold ounces. So with 70 million ounces of gold at one spot in Alaska, Pebble is a gigantic mineral resource.

As for copper, Pebble’s deposit is about the same size as the immense Grasberg Mine, run by Freeport-McMoRan, in Indonesia. At 60 billion pounds of copper, Pebble utterly dwarfs any other copper mine in the U.S.

The cumulative value of the buried mineral wealth at Pebble is in not the tens, but hundreds, of billions of dollars. It’ll require many billions of dollars in capital investment to build a project. The numbers are up near 15,000 construction jobs, making this one of the largest single building projects in the U.S. since the Manhattan Project of World War II.

If/when Pebble gets developed, we’re looking at a gigantic extraction project that will yield ores, minerals and elements for a century and more. It’s not a generational project; it’s the project of five or six generations.

But it all depends on whether Northern Dynasty can obtain the necessary permits to develop the Pebble Project, and then finance that development.

The Trump Effect on ResourcesAs a matter of federal law, the EPA’s summary dismissal of a water permit for Pebble — before the application had been submitted and reviewed — was entirely improper. Yet the only way to change the EPA’s bureaucratic block is to go to court, which means years of litigation and delay. That’s exactly what the environmental faction wants to do — delay, delay and delay while the developer’s money, and investor patience, runs out.

But now President Trump is the new sheriff in town. He broadcasts (and tweets) every intention of changing how things get done in Washington. Plus, he wants to create jobs and develop wealth within the U.S. The Pebble Pro-ject could do both on a large scale.

Within days of the election of Donald Trump, some people saw the writing on the wall. Shares of Northern Dynasty began to move up in price, going from $0.75 to $1.19 by Dec. 1. When Trump signed the executive order advancing the Keystone XL Pipeline on Jan. 24 — which had been halted by under the Obama administration also for environ-mental concerns — the share price of Northern Dynasty surged to $3.32.

Recently, short-sellers slammed Northern Dynasty. Shares tumbled under the $1.50 range, wiping out the post- election gain. The short-sellers’ story is that Pebble is “too expensive” ever to develop, and the company is over- promoted. But all large copper-gold mines are expensive. It’s a question of whether they can earn enough profit to make up for their expenses.

First, Pebble needs its permits. Once that hurdle is removed, I foresee profits with North ern Dynasty over time. In 2011, Northern Dynasty shares traded over $17 each, and the Pebble copper-gold resource is better-understood today. I anticipate shares moving back up.

Even though the past six years were tough on Northern Dynasty shares and shareholders, due to continuing oppo-sition to Pebble from the environmental lobby, everything is subject to change now. There’s a new administration. New people. New policies. New opportunities.

And remember, Tom Collier is no babe in the woods. When we talked in New York a few weeks back, he stressed the im-portance of dotting every “i” and crossing every “t.” At this stage, Collier is laser-focused on what he calls the “politics of permitting.” He is examining every alternative to get this project moving.

In the end, Collier is confident that he’ll get the necessary permits from the U.S. and Alaskan governments to move ahead with Pebble. Collier has a timeline that extends well into the 2020s, but it’s doable, from his perspective. If Pebble gets permits, he believes project financing will beat a path to the door. There’s simply too much mineral wealth locked up under that barren Alaska soil for major mining firms to ignore.

A Word of CautionNorthern Dynasty shares trade in the $1.50 range, giving the company a market cap of about $430 million. How-ever, Northern Dynasty is a development-stage company, with no income, no earnings and losses on the books. Its daily effort is all about spending funds to move a gigantic mineral resource into development. The current business model is that Northern Dynasty raises funds and then spends the proceeds.

Northern Dynasty is a long way from mining a single pound of copper or ounce of gold. That makes this a high-risk idea, with strong probability of being a roller-coaster ride in the months and years to come. Its price will move up or down with copper and gold prices, as well as political developments.

That’s why I need to make it clear that this idea is best suited to resource speculators. If you can’t handle

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stomach-churning levels of risk, or absorb a poten-tial loss, you should be a spectator for this one, not a participant.

However, if you can afford to speculate and can stomach the risk, Pebble presents an opportunity to capitalize on the new presidency of Donald Trump as he revamps the way things happen in Washington. If Washington politics ease up on resource development in the U.S., this Pebble idea could become a high-risk, high-reward moneymaker for those who buy in.

In my view, based on many years of following resource de-velopment issues in the U.S. and abroad, if Pebble can be done, it will be accomplished by Tom Collier, the man who helped usher in the Alaska Pipeline 45 years ago. And just

as the Alaska Pipeline is still moving oil after almost three generations, Pebble could be creating wealth a century and more from now.

Note: Do not chase the price of this share. This is a highly speculative play, not suitable for all investors. Only use funds that you can afford to keep tied up and possibly lose. Along the way, expect to see ups and downs based on political developments in Washington.

How the U.K. Turned a Trump Tweet into a $125 Million Contract As the U.K. prepares to negotiate Brexit terms in March, British PM Theresa May transformed a public relations snafu into a defense contract. Read on for the details, and how you can profit 20–30% this year…By Nomi Prins, Contributing editor

In the future, Theresa May could look back on the canceled meeting between President Trump and Mexican President Peña Nieto on January 26 as the luckiest break in her political career.

A week after Trump took office, he and President Nieto called off a scheduled visit, and may have gotten close to starting a trade war between the U.S. and its third biggest trading partner. However, this cancelled meeting also sparked off a sequence of events with long lasting repercus-sions for both the U.K. and the EU, which we’ll examine.

As President, Trump has pursued his campaign vow to have Mexico pay for a border wall. Jim recently wrote about the history of Mexican-American relations in Rickards’ Currency Wars Alert, and why there is underlying tension between the two countries. But when Trump tweeted that he was still convinced Mexico would pay for the wall, this tension was brought to the surface.

The President of Mexico had a very public choice to make. Unsurprisingly, the Mexican reaction to the idea of paying for the wall was universally negative. Facing an 11% approval rating in his own country, Peña Nieto canceled the meeting with Trump.

The U.S. and Mexico trade $586 billion worth of goods

and services annually. The countries also cooperate on se-curity, migration and the environment. However, the pro-posed border wall would be over 1,000 miles and cost as much as $40 billion, according to MIT research. Trump’s plan is for the cost to be paid initially by the U.S.

The border wall plan has been questioned in the U.S. by the left, and increasingly by the right, too. This made Peña Nieto’s timing in calling off his visit particularly

ACTION TO TAKE: Buy Northern Dynasty (NAK: NYSE) up to $1.75 per share.

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thorny for President Trump. Because he’s been so vocal about the border wall and campaigned heavily on the promise to build it, he doesn’t want to lose face. But he also promised to secure trade deals and jobs for the American people.

Enter British Prime Minister Theresa May. May was sched-uled to visit the White House on January 27, the day after Trump’s tweet above. Trump’s rift with President Nieto provided excellent timing for May’s visit and potentially for the U.K.’s economic trajectory.

The U.S. and U.K. “Special Relationship”May and Trump are already linked by the nationalist sen-timent that brought them both to power. In the U.K., the citizens voted to leave the EU because they felt it would be beneficial to their personal economic conditions.

The Brexit vote was a show of disdain for the elites in power, who supported remaining in the more globally minded EU. The U.K. stock market, like that in the U.S., may have risen on the back of cheap money flowing in from global speculators — courtesy of central banks and ultra-low rates — but it left many Britons behind. Trump, who publically supported the U.K.’s “Leave” movement, appealed to the same nationalist emotion during his presidential campaign.

With their similar stance on globalism, and just days after President Nieto’s canceled meeting, Trump was in a frame of mind to be very friendly to the U.K. leader when she arrived at the White House. There, the two began building upon the “special relationship” between our countries. As a goodwill gesture, Trump even put the bust of Winston Churchill back in the Oval Office.

May played to Trump’s ego. She congratulated him on his “stunning election victory.” She also announced that the Queen has invited him to pay a state visit. Trump told her more than once that, when he goes to the U.K. later this year, “I want to see you first.”

In their talks, Trump promised to establish a bilateral deal with Britain after Brexit takes. This is important to the U.K. The U.S. provides the second biggest market for U.K. good and services, buying 20% of U.K. exports.

In 2015, the U.S. and U.K. transacted about $235 billion in total trade. (For comparison, this is less than half the amount the U.S. trades with Mexico.) Thus, the trade aspect of the “special relationship” is more important to Britain.

The U.K. is the sixth largest trading partner of the U.S. For now, only about 5% of the $5 trillion total U.S. annual trade is with the U.K. If there’s a new trade deal though, this could mean that there is a lot of room for growth.

Any new trade agreement between the U.S. and U.K. won’t happen before mid-2019, after Brexit is fully executed. In the meantime, Trump has promised to do a “quick trade deal” and a “smooth deal” with the U.K. and to honor any trade deals Britain already has with the U.S. via its EU membership until a bilateral deal goes into full effect.

Trump and May have agreed to create working groups to determine what a deal would look like and get as much done as possible. They want to hit the ground running after Brexit is complete.

EU Negotiations in MarchThis budding personal alliance provides the U.K. with a stronger bargaining position as it enters Brexit negotiation talks with the EU. When May became Prime Minister, she promised to trigger Article 50 to leave the EU by the end of March 2017. On Feb. 1, the U.K. parliament voted to allow the government to begin its negotiations. That gave May the authority to stick to the March timeline.

As an EU member, the U.K. is a member of the Europe-an Single Market. There are no tariffs on trade between member states. The EU has implemented other free trade agreements between the U.K. and non-EU countries that the U.K. would want to keep after it leaves the EU.

As the U.K. enters the negotiations, May wants to have the support of many countries behind her to give her more leverage in both leaving the EU and avoiding higher tariffs when entering new trade deals.

After May’s meeting with Trump, it’s clear that the U.S. is willing to enter a bilateral trade deal. While this gives her leverage when negotiating with EU and creating other bilateral deals, the tariffs on trade between the U.S. and U.K. are just 3%.

There’s not much room to move that percentage down, but certainly the U.K. wouldn’t want it to be higher. This means we can speculate that, as part of the negotiation of trade deal with the U.S., other things will come up for discussion, including bank regulations, agriculture and the insurance markets.

When she left the U.S. with the promise of a “smooth” bilateral deal from Trump, May went to Turkey and met with its controversial president, Recep Tayyip Erdogan. She touted a U.K.-Turkey fighter jet project and stressed her desire for a better trade relationship between the two nations. She called Erdogan “an important NATO ally” and promised to bolster his country’s defenses.

On Jan. 28, Britain and Turkey signed a 100 million pounds ($125 million) defense deal to develop Turkish

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fighter jets, paving a path to more cooperation later. May said this deal showed “Britain is a great, global, trading na-tion and that we are open for business.” It is a harbinger of what can happen as a result of the U.S. and U.K.’s special partnership.

In early February, the Israeli and Italian Prime Ministers were hosted in the U.K. May is also going to visit China soon to discuss post Brexit trade agreements. As a hedge to any trade issues with the EU, she is seeking to revive the “golden age” between the U.K. and the Four Asian Tigers — Hong Kong, Singapore, South Korea and Taiwan.

May is on a mission to secure the best trade deals she can for the U.K., not unlike Trump. After laying the ground work of a bilateral trade agreement with the U.S. — which Trump happily encouraged after the impasse with Nieto — May used that leverage to negotiate with many other countries. This allows the U.K. to come to the EU negoti-ating table in March with a stronger financial industry, and growing transportation, shipping and defense companies.

Increasing Investment in the U.K.The Bank of England (BOE) raised its 2017–19 growth fore-cast for the UK economy after Philip Hammond, a Member of Parliament and Chancellor of the Exchequer, announced a plan for higher infrastructure investment in the U.K. (This is similar to Trump’s plan to increase infrastructure spending. As Jim details in his article, governments use spending to try to provide fiscal stimulus and growth.)

The BOE joined the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Develop-ment (OECD). They had raised their global growth forecasts on expectation of more fiscal stimulus and infrastructure projects from the U.S. under Trump in 2017 and 2018.

Because the pound is still relatively weak, we can expect U.K. exports to increase. In particular, the U.K. is beefing up its military exports. That bodes well for the U.K.’s defense manufacturing and infrastructure related sectors.

The U.K. has the second largest aerospace industry in the world, with over 3,000 companies employing about 230,000 people. As trade and investment increase, people will be seeking these “salient” investment options. And as we mentioned earlier, May has already negotiated a 100 million pound defense deal to develop Turkish fighter jets.

The Turkish fighter jets are the new dual-aircraft, Ad-vanced Hawk. This aircraft was co-developed by India’s Hindustan Aeronautics Limited (HAL) and Britain’s BAE Systems plc (BAESY: OTCBB). It can be used as both a combat aircraft and for training purposes. The fighter jet is good for smaller air forces, which is the target market, specifically countries wary of China. (Which means it could also put a dent in China’s market share of such aircrafts.)

Our recommendation is to buy shares of BAE Systems plc (BAESY: OTCBB). BAE dominates the U.K. defense market, with a large market share in land, naval, and air weapons systems. Its products include tanks, artillery, sub-marines, and the Queen Elizabeth aircraft carrier platform for the Royal Navy. BAE is also a leader of the consortium that manufactures the Eurofighter Typhoon jet.

BAE is one of the largest defense contractors in the world, with a long history, which allows for a steady business of equipment replacement and repair. Beyond the U.K., which makes up about 31% of revenue, BAE generates 36% of revenue in the U.S. and 21% from the Kingdom of Saudi Arabia.

In the U.S., BAE is a contractor on the F-35 Joint Strike Fighter program, and a large manufacturer of armored vehicles. The balance of revenue is from smaller markets like Australia and India. Saudi Arabia’s defense spending has surged in recent years to counter Iran, and spending will remain high. Theresa May’s prowess in deal-making is good for BAE’s prospects to win new business in both the U.S. and around the world.

BAE shares screen very well on valuation, balance sheet strength, and growth prospects. Its forward P/E ratio is just 13, well below the average P/E of 18 for its peers in aerospace and defense. The stock pays a semi-annual div-idend, which currently yields an impressive 3.8%. Over the next year, we expect total returns of 20-30% in shares of BAE Systems.

ACTION TO TAKE: Buy BAE Systems plc (BAESY: OTCBB) up to $33 per share.