Trump Confusions

Financial markets are widely seen as best predictor of the next future. We should know that nothing can be more wrong. The narratives that govern Wall Street and other places may come with more information than regular people may have but they don’t come automatically with more knowledge. As a matter of fact, financial markets are characterized by herd behaviour, and the rally we currently see is exactly confirming this description. Nobody knows at this point what the economic policy of the incoming Trump administration will look like, besides campaign promises for drastic cuts of personal and business tax rates, huge tax-incentive triggered infrastructure programs, increase of military expenses and rigorous deregulation programs. Still, financial markets seem to like what they supposedly see. Their optimism is in stark contrast to the more dark fears that were expressed in the election night when Paul Krugman hammered the verdict into his machine that projected an endless global slump. In the meantime he and others had second thoughts and see at least short-term strong growth effects. I agree with later but still think there are goo reasons to look with pessimism into the future.

Based on campaign statements we have a rough ida of what may come in terms of economic policies. First, we will get supply-side oriented tax cuts that may follow more the Paul Ryan-line then a pure Trump-line. Still, personal income taxes as well as profit taxes will come down significantly, to 33% and 15% respectively. The old Laffer-illusions are back in town, and based on historical experience and analytical insight we can expect that the trickle-down mechanisms will not work as suggested. What will work, though, will be the increase of the budget deficit, and eventually a strong increase in public debt. There are serious doubts that a Trump administration would get those tax cuts through the House without any compensatory expenditure cuts, exactly the kind of cuts Speaker Paul Ryan is long planning for. How all this should benefit ‘normal US workers’ is a puzzle but then maybe not so relevant in a post-factual world. Moreover, this may be covered for a while due to the expansionary effects of the planned infrastructure program that will generate extra demand in the US, and more so, as the Trump administration will make sure that ‘Buy American’ practices will be held.

Given the current economic state of the US – high employment rates and a relatively small output gap – one can expect that the Trump program will fire up inflation pressure. This may help the Federal Reserve to eventually rise the extremely low interest rate and to bing monetary policy back on a mote ‘normal’ track. The inflow of foreign capital would lead to a further increase of the exchange rate of the USD, and undermine the price competitiveness of US exporters, and at the same time increase the current account deficit. In other words, the twin deficit will return.

If this is not creating enough havoc then we have still the arena of trade policy. Again, we only know at this point campaign statements but it seems that Trump will take a pretty strong protectionist stance, and he needs to do this if he wants to deliver to his voters. In economic terms, it would be detrimental for the US due to the strong global value chains of US-companies. Cutting those supply chains would add even more pain to the US.

It will be interesting to see what of all this will actually be put in policy. Unlike many observers who calm down the public, I feel that the Trump troops are less pragmatic then some think; I also feel that the lack of checks and balances due to the Republican majority in the House will encourage the Trumpists; and I feel that the maverick candidate feels great to have defeated all candidates, and thus sees this as a strong signal to continue with maverick policies. What will happen if the proposed outcomes can’t be achieved, or even worse, if the outcomes are contrary to the promises. Given the reckless and authoritarian character of the President-elect, the worst is in the cards. No good reason to invest into the US.