The FT reveals the world's confusion about Trump's economic plans this morning. In just one email alert there are the following headlines:
You might think that the FT is rattled, and you would be right. They think Trump is going to rock the US, and so the world, economic order. He will if he does the things he has said he will. And Congress may, unusually, back him in doing so. And that is what is worrying.
The concern is based on the incoherence of the plan, it's timing, and the potential longer term consequences and spreads over a number of issues.
First, it's obvious that Trump intends to spend. I have no problem with that. I have been to the States twice this year; it is obvious that it is crumbling. Any president needed to rebuild it: its economic future would be grim if they did not. So fiscal policy is in: I have no complaint. But let's be clear, this will happen when the US is already seeing growth and when there is relatively high employment: Obama has already got the economy on some sort of track, albeit without tackling infrastructure. So any such spending has to be matched with anti-inflationary policies, like prudent taxation measures to reclaim the money that the state will be injecting into the economy to keep the purchasing power of the currency on an even keel.
But tax cuts across the board, although most especially for the wealthy, are also on the agenda. For most of America the gains will be small: for the wealthiest his cuts will increase their net income by up to 14%. There are three consequences: a minor spending boom and a massive savings glut at the top. The first will suck in imports if infrastructure spending claims much of the spare labour in the economy. The saving boom increases inequality and will fuel financial services.
Those savings will also be amply rewarded: interest rates are going to rise, without a doubt. Trump thinks the Fed has run an unnatural economic policy by keeping them low, so up they will go. I am not going to predict by precisely how far they will rise, but I am expecting a two or three percentage point increase over time. The excuse will be that this constrains inflation whilst sucking hot money into the US to pay for the combination of spending and tax cuts, which inevitably mean borrowing in the short term. There will also be a need for an interest rate rise to tackle the loss in confidence in the dollar when tariffs and other trade measures are imposed.
The knock on effect will be a massive boost to the financial services industry - which is going to see many of the regulations imposed post 2008 removed. We are heading back to the wild west days of unregulated finance: debt booms are on their way.
As will inflation be back. This is nigh on inevitable with this combination of policies. That of course can justify the interest rate rises, but I suspect Trump wants to increase real returns as well as nominal ones, so the issues are not wholly related.
And let's not pretend that Trump's largesse is universal: twenty per cent of Americans will lose their healthcare. Poverty will increase as a result. The environment will be trashed with untold long term cost. Eleven million people are to be expelled from the US, creating a labour crisis. It is likely that many benefits will be reduced to pay for some of this programme. Republican USA will not change all its spots. This is domestically bad news for many in the US
And the ramifications will spread: US interest rates will travel fast. The UK will respond. So too will trade aggression: there will be reactions. This is not then an issue of US concern alone. Making sense (or otherwise) of all this is important.
So, let's address the issues. I have made it clear since 2008 that I want a fiscal stimulus for the UK. I have not changed my mind. I also know that the US is critically short of government investment. So I have to welcome any programme to address that issue. But, and that is a massive but, there have always been caveats to my enthusiasm because although I am also more relaxed about inflation than many (I would have a 3% target, for example) an economy out of control has no benefit for anyone, at all.
And fiscal stimulus, by a combination of large scale spending and simultaneous massive tax cuts for a few whilst imposing cost increases on many by interest rate rises and tariff impositions when the economy is already relatively near full employment, looks to me like the perfect recipe for an inflationary boom and massive bust.
In the short term (up to two years; enough to win the mid term elections) there will be economic growth with some disruptions only for the poorest that will be ignored by the media and most in the population. Inflation will not take off immediately. But the problems will be growing quite rapidly even by then.
Cost of living increases will result in a debt spike.
Many will not be able to afford their mortgage repayments as interest rates rise and wages don't, at least at first.
Inflation will grow, and exponentially as the impact of the policy itself grows.
The obvious inequality of the benefits will fuel social tension.
A short term stock market boom will eventually be tempered by trade and debt concerns that impact profit.
The US will discover that as migrant labour is sent home there won't be the people needed to build the infrastructure after all. Or to do quite a lot of other things either.
And that wall with Mexico will become a symbolic failure of the programme as nothing happens.
To put it bluntly; the whole economy will become unbalanced. Near full employment will become full employment as attempts to repatriate many workers who are key to the US economy (although few have realised it) begin. Economic stimulus in that situation can only mean inflation. And tax is the only true anti-inflationary tool (as I argue in the Joy of Tax) meaning that right now the fiscal stimulus should be matched with tax increases because of the risks to the economy. The exact opposite will happen and the whole thing faces the risk of serious economic collapse. That may not happen in four years. It would in eight.
The moral? Don't put a man with a micro brain in charge of the macroeconomy. he will never understand it. But we're all going to pay the price for his failure of comprehension, including in the UK. Start budgeting for an increase in your mortgage at the same time as the economy slows down again: that's the message from Trump.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Impressively coherent analysis of inchoherence!!
I have a fixed rate mortgage but thanks for the heads up. I’ll pass the advice on.
Another risk I see is that as Trump sets off some of the economic consequences you speak of above, it is more likley that he will have to rely on the more nasty populist policies he has spoken of to retain his ‘popularity’ (electorial college machinations aside)- sending the Mexicans back, building the wall etc., to look as though he is doing the right thing.
I wonder though if those middle aged Americans of both sexes who voted for him are up for back breaking and low paid fruit picking jobs that the Mexicans did? And will their wages still be able to afford fruit and veg picked by American workers? I doubt it.
It does look as though the Republican party are coming to terms with him and that the relationship will be mutually beneficial. So, is this neo-liberlism somehow reinventing itself and adapting and surviving?
As I think you said in earlier posts, this election result can be seen as symptom of being on a long road to the realisation that the ideas that produced it just do not work. I just wish the end of neo-liberalism would come quicker than that.
A thoroughly depressing, but sadly realistic prediction.
So basically, big cash hoarding businesses will get richer still on rising interest rates, lower taxes, and fat government building contracts. Meanwhile low paid workers will face rising rent/housing costs (interest rates) and inflation, while more and more jobs are replaced by technology to counter wage inflation and lack of available migrant labour?
Just as with Brexit, the anger of working class voters was mostly the result of being lied to for 30 years that neo-liberal policies would make them better off. Now neo-liberalism is out, replaced by neo-nationalism, and once again they are being told that these new policies are to deliver change for their benefit.
Just an observation, but I gather one of the early appointments to Trump’s new anti-establishment era is likely to be a banker from Goldman Sachs. So real change there then. This time it didn’t even cost them as, ironically, senior employees in Goldman were banned from donating any money to Trump’s campaign in the run-up to the election.
Neo-liberalism is dead. Long live Neo-nationalism !
The laws of physics and reality in Trump’s mind are quite different from real reality, he can flip back and forth, up or down and sideways within moments, I don’t expect anything which could be described as a coherent plan or policies for America and world will suffer.
Unfortunately I think there’s a way to go yet, PSR, with more socio-economic pain along the way. You’d have thought 2007 would have been something of a wake-up call but it seems not. Many pundits are predicting another recession within the next 18 months and we’re not yet fully out of the last one. Seeing how he copes with it will be a real test of his capability. Until, then … who knows? After his election who now dares to predict the future?
Trumps says whatever people will cheer when they hear it. There’s no economic agenda in it, other than it profits Donald J Trump.
He’s sometimes right: say enough things, with enough contradictions, and there’s bound to be something, somewhere, that happens to be true.
That aside, the USA has a terrible infrastructure deficit.
Congress won’t let him spend a cent on fixing it. The division and dysfunctionality that got him nominated didn’t disappear the day he got elected.
I will be pleasantly surprised if they can get a budget through the house without the usual train-wreck and another shutdown – even a budget originating with the House Republicans.
What rings in my ears is Trump’s comment a few weeks ago – “It’s only words folks”, in other words I’ll do what I want. He is a man accustomed to doing what he wants when he wants and getting others to do what he wants when he wants.
I’ve found myself thinking exactly that over the past two days, Tony_B. So I wonder what all those who voted for him and loved to chant ‘lock her up’ thought when he was so forthcoming in congratulating Clinton for not just her campaign but her commitment to public service and the state (having called her behaviour worse than Watergate). And then on he goes to Obama, and we hear fair and fine words again. Ditto the meeting with Paul Ryan, and so it goes on. So was there any real meaning or intent in what he said about all these people for months on end? The hatred and disdain he wiped up, and so on. Was it simply saying whatever he thought – or was told – would get him what he wanted – nominated and then elected? He has form in that respect as Alex Salmond and other Scots politicians found when he suckered them with his promises over his “luxury” gold course. If all this really turns out to be ‘just words’ there are going to be some mighty disappointed and peed off voters around. Or is it all just a sham as he basks in the post election glory?
But if only 25% was true it was still pretty nasty
He will survive just fine. He knows that his supporters have a memory span that would embarrass a goldfish. If his supporters do remember a broken promise, he will simply say it was somebody else’s fault, and they will believe him. After all, they know that facts are an elitist conspiracy.
Best analysis I have read to date re Trump, thanks Richard.
re his infamous wall, I wonder if it will be built (or more realistically current infrastructure reinforced) to stop Americans fleeing south rather than stopping Mexicans entering the USA. Worrying times.
🙂
Was in HIGNFY last night that I heard that the Canadian immigration website had crashed because it had been inundated with applications from American citizens??
It’s very funny but could also be quite true.
It was true: happened on election night
I admit I have some quite good and interesting Candaian friends but it would not be my first choice
Denmark though…..
Further thought : In Short, Trump increases his personal wealth at the expenses of ordinary Americans ?
You bet
I wonder if the clever Americans will be developing any self-picking fruit in the near future because it sounds to me as though they will need it.