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It is too early to guess what kind of economic policy the Trump administration may deliver. The markets are crossing their fingers and praying the President-elect will ultimately hand over matters to an experienced team. You can bet on that happening as far as the day-to-day issues are concerned. But the White House’s new tenant will undoubtedly decide on core policy choices. After all, he really believes his talent as a real estate tycoon fully entitles him to gear the economy the way he might run a private enterprise. Convincing him he’s fundamentally wrong might prove to be beyond reach.

Up to now, Donald Trump has committed himself to axe taxes, extensively deregulate, implement a sky-rocketing investment plan and protect domestic jobs through an aggressive trade policy. Many think this will turn into a significant fiscal stimulus enabling the Fed to ditch its current hesitant mood towards implementing rate hikes. Long-term inflation expectations are already climbing to new highs, betting on accelerated growth, while bonds suffer severe losses. The time seems ripe for tighter credit conditions. A move many of the President-elect’s advisors have openly pushed for, blaming Janet Yellen for creating a so-called “false” economy based on a close to zero price of money. So without waiting for the appointment of hawkish members to the Fed Board, they could achieve the monetary policy they are advocating.

But the fiscal drive could be lower-than-expected as private-public partnerships might take up a significant share of infrastructure projects. Furthermore, social spending could see massive cuts dampening overall demand. Even assuming the investment plan might work miracles, fuelling short-term and low-paid job creation on a vast scale, coupling it with sharp tax cuts would feed into fiscal deficits barely sustainable in the long run. Debt could rise to 25% of GDP over the next four years, while doubts grow about how to pay it back. In any event, placing such a glut of bonds is a formidable challenge, especially if surplus countries like China become the target of protectionist measures. Should they lose their ability in the future to pile mountains of dollar liabilities, the whole recovery plan might collapse.

Curbing imports from emerging economies is a self-defeating strategy. Far from refurbishing US industrial power, it would backfire if a global recession takes place. Not to mention the obvious fact that you cannot run a breath-taking public deficit if others fail to wipe your debt issues and the Fed seems ill-suited for its role as buyer of last resort. And so Trumpconomics implemented to the letter leads inevitably to complete instability. The markets’ optimism at the moment is based on the false assumption that the incoming President will not fulfill his threats towards Asia, the neighbouring NAFTA countries and anyone selling more to the US than it buys from it. But his campaign promises, coupled with a fundamental belief in the supreme goal of bolstering domestic production, whatever the price, point to a sharply different scenario. Bullying trade partners will only produce global impoverishment and dramatically increase unemployment both at home and abroad. By the time Mr Trump is aware of the damage his protectionist stance has inflicted on his fellow citizens, it might be too late to redress the situation. His failure to grasp the fact that fostering world trade is a win-win strategy is the worst omen for future prosperity. Running the biggest open economy has little in common with being involved in private business.

It is too early to guess what kind of economic policy the Trump administration may deliver. The markets are crossing their fingers and praying the President-elect will ultimately hand over matters to an experienced team. You can bet on that happening as far as the day-to-day issues are concerned. But the White House’s new tenant will undoubtedly decide on core policy choices. After all, he really believes his talent as a real estate tycoon fully entitles him to gear the economy the way he might run a private enterprise. Convincing him he’s fundamentally wrong might prove to be beyond reach.

Up to now, Donald Trump has committed himself to axe taxes, extensively deregulate, implement a sky-rocketing investment plan and protect domestic jobs through an aggressive trade policy. Many think this will turn into a significant fiscal stimulus enabling the Fed to ditch its current hesitant mood towards implementing rate hikes. Long-term inflation expectations are already climbing to new highs, betting on accelerated growth, while bonds suffer severe losses. The time seems ripe for tighter credit conditions. A move many of the President-elect’s advisors have openly pushed for, blaming Janet Yellen for creating a so-called “false” economy based on a close to zero price of money. So without waiting for the appointment of hawkish members to the Fed Board, they could achieve the monetary policy they are advocating.

But the fiscal drive could be lower-than-expected as private-public partnerships might take up a significant share of infrastructure projects. Furthermore, social spending could see massive cuts dampening overall demand. Even assuming the investment plan might work miracles, fuelling short-term and low-paid job creation on a vast scale, coupling it with sharp tax cuts would feed into fiscal deficits barely sustainable in the long run. Debt could rise to 25% of GDP over the next four years, while doubts grow about how to pay it back. In any event, placing such a glut of bonds is a formidable challenge, especially if surplus countries like China become the target of protectionist measures. Should they lose their ability in the future to pile mountains of dollar liabilities, the whole recovery plan might collapse.

 

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.