Trump’s economic policy
Click for printable version.
The contours of the future economic policy under President Trump becomes clearer and it amounts to a significant fiscal stimulus. Clear ideological overtones are visible, but the economy will receive a boost. It will change the balance between monetary and fiscal policy and thereby the investment climate.
The markets initially panicked as it became clear that Donald J Trump will be the next president of the US of A. Over the day of Wednesday, the panic cleared away as the markets began to pore over the various statements made by Trump and Congress republicans on the future economic policy.
His list of economic advisors was scoured for indications of what they might advise the president-elect.
A consensus will slowly be established over the coming days.
First, it is important to observe that the gridlock between president and Congress as seen over the past six years will be gone, at least until the mid-term elections in 2018. The Republican Congress majority will not be used to kill the President’s economic policy.
Secondly, Trump has been relatively precise on three issues:
Taxes will be lowered: Corporate taxation will be reduced, taxation of individuals will most likely be reduced, in both cases reducing the federal government income.
Military spending will be increased: Trump wants to reduce the tensions with Russia, but from a position of strength. It may mean a couple of ambitious new programmes for Pentagon.
Infrastructure spending will be increased: During the campaign, Trump has lamented the state of the infrastructure of the US, and travellers in the US can witness to that. Up to 1 trn USD may be allocated this way. It will create jobs (at an unemployment rate of 5% ???) and be hugely popular.
The effect of these initiatives will be a considerable boost to the economy and a considerable budget deficit. That kind of details are not known to disturb the Republicans, who under both Reagan and George W Bush ran huge budget deficits. The ideological basis for this is to “starve the beast”, i.e. to create a sufficiently big deficit that it becomes imperative to cut other federal spending programmes that are unwanted by conservative Republicans.
Thirdly, Trump has in nebulous formulations attacked the Federal Reserve and its QE and zero interest rates programmes. This criticism is cheap, since Fed was the only Federal institution that could actually act coherently to help the economy out of the hole created by George W Bush.
Some of the economic advisors have already been on the record and stated the obvious: there is a limit to how much you can obtain with monetary policy. This is as reasonable as it comes and possibly it signals that the economic policy of the USA will turn away from the excessive dependence on monetary policy and over to a more constructive use of fiscal policy. If that is the case it is good news and then we will wait and see what happens to the budget deficit.
The investment conclusions are as follow:
- Bond yields will continue to climb, leading to a steeper yield curve
- Short term interest rates will increase in line with Fed’s stated positions
- USD will strengthen against the EUR, JPY and CNY
- Stock markets will be in doubt: will the stronger growth increase top lines enough to offset the higher financing costs?