Trumponomics

Trumponomics

 

President Trump!   I am certainly excited that the Clinton corruption machine has been dethroned… that new Supreme Court justices will presumably honor biblical values… that we have a president that is presumably not controlled by the Luciferian elite… that WWIII with Russia is off the table…. that the US will stop supporting Islamic terrorist organizations like ISIS.  There is a lot to be excited about.  Unfortunately, I’m not so excited about Trump’s economic policy initiatives.  It is a mixed bag. 

Trumponomics appears to be headed towards a number of good policies:

1.)    Cutting corporate income taxes

2.)    Repealing Obama

3.)    Deregulation of certain sectors

However, Trumponomics is headed towards a number of bad policies as well:

1.)    Borrowing even more from our future for possible economic growth in the short-term

2.)    Starting a trade war  

3.)    Deregulation of the financial sector

Trump’s good economic policies are common sense decisions.  Our corporate tax structure is the worst in the world, and has certainly contributed to the trade deficit problem over the previous decades.  Obamacare is an economic disaster.   And deregulation can only be a good thing for economic growth, in most sectors. 

Financial sector deregulation, however, is a terrible idea.  Give banks more rope, and they will eventually hang themselves and the entire financial system; that is a matter of historical fact.   Trade wars are bad for everybody except for the tiny sliver of population that it is designed to benefit.  And spending more money that we don’t have -- effectively borrowing from the future and making the day of reckoning even sooner -- is not a good idea.   Unfortunately, Trump has inherited a ticking time bomb of an economy (which he has acknowledged himself), and there is no cure apart from a depression or an absolute miracle from heaven.   

 

Trumpflation!

There is already a name for Trump’s fiscal stimulus (i.e., borrow from our future) proposal:  Trumpflation.  Fiscal stimulus is inflationary under most conditions.  Or more appropriately put under these conditions, it is reflationary.   Trump is proposing that we repeat the same policies that have created the largest debt bubble in the history of the world.  

The problem with Trumpflation (apart from the disastrous implications in the long-run) is that there is no such thing as a free lunch.   We are already seeing the downside… skyrocketing bond yields!   Global bond markets lost over $1 trillion in value in the week of the election. 

The 10 year yield has gone from 1.5% in September to about 2.26% today.    That is not good for the economy.   Forget about the Fed funds rate.  What really matters is how much businesses and consumers have to pay in interest, which is reflected best by the 10 year yield.   And what really, really matters is whether the debt bubble can handle higher yields.    Trumpflation could trigger a debt crisis before the inflation makes its way through the economy and into the stock market. 

Speaking of the stock market (which Trump accurately described as a “big, fat, ugly bubble” just a few months back)… the bubble is justified by low bond yields.  The argument goes like this:  “Yes, stocks are extremely expensive based on historical standards, but that is because bond yields are so low.   Stock dividends provide the best yield.”   So what happens when bond yields rise?  Well, if this justification holds, then stock multiples would come down, and therefore the stock market bubble will deflate.     

The problem with Trumpflation is that it can’t happen without bond yields going higher, which is totally counterproductive to the goal (and could very easily trigger a bond market crash and debt crisis); that is, apart from more QE.  The only way it can possibly succeed is if there is money printed to buy bonds to keep interest rates low. 

There you have it.  If Trumps fiscal policies are going to do any good in the short-term (while, of course, they are bad for the long-run), the Fed has to turn the printing press back on.   That is very unlikely to happen outside of a recession. 

 

Trump Trade War

Trump also seems determined to start a trade war.  Trade wars are unpredictable.  How will Mexico react?  How will Europe react?  And the big one:  how will China react?   We don’t know the reaction, but we do know that any reaction is bad for global trade and therefore the global economy.   Trade wars are bad for everybody (except for a small, select group of workers that it is designed to benefit). 

Interestingly, Trump has shown a profound ignorance regarding the Chinese Yuan.  He has blasted China as a currency manipulator.   He would have been right, had he been running for President in 2004!   The reality is that China has spent $1 trillion propping up its currency over the last year, exactly the opposite of manipulating the currency for a trading advantage. 

What if China wants to stick it to Trump?   Then they would simply let their currency be determined by free-market (something that the US was pushing for back in 2004, where Trump’s China policy appears to be stuck in time).   In that scenario, the most informed estimates are saying a 30%-50% crash in the value of the Yuan.   Then Trump might lash out at China, making the matter far worse. 

The Chinese Yuan crash is a long-term inevitability that will have terrible consequences on the global economy.  The Trump election may have just sped up that process. 

 

What Problems Can Trump Actually Solve? 

1.)  The stock market bubble?   Trump cannot change the fact that there is a stock market bubble.   Only a crash, which Trump himself has predicted, can change that. 

2.)  The Debt bubble?   Trump cannot solve the problem of too much debt; that can only be solved through painful deflation, or inflation with financial repression.  But he can probably make the debt problem even worse in the long-run, which could potentially be good for the economy in the short-term, though higher interest rates would counteract that. 

3.)  Sustainable Economic Growth?    There are plenty of common sense things that Trump can do to help the economy, as discussed above.  But the real problems with the economy are low capital spending and productivity due to distorted incentives caused by low interest rates; and, of course, debt and demographics.   Trump will show some improvement compared to Obama, but only a miracle can actually prevent the inevitable economic stagnation that comes from over-indebtedness, demographics, and counter-productive monetary policy (which Trumponomics requires more of.) 

4.)  Postpone the next recession?   Maybe.   Trump certainly can’t eliminate the business cycle.   But making the debt problem even worse could postpone the next recession for a while.  Then again, Trumpflation could trigger a bond market crash, which could bring the entire house of cards crumbling down sooner rather than later. 

 

Conclusion

The historic election of Donald Trump has certainly changed things.   Trumponomics will provide some common sense improvements in the economy.   But that is not enough to change the big picture of an inevitable economic crisis in our future. 

The implications of Trumpflation have caused a significant bond market sell-off and moderate stock market rally.  If Trumpflation is combined with Fed money printing before the next recession, this stock market bubble will continue to inflate.   However, that doesn’t appear to be politically feasible. 

Rising bond yields are bad for the stock market valuations, bad for the economy, and if it turns into a bond market crash, it could lead to the next phase of the financial crisis.   Anything could happen if yields keep rising like this. The fact that a trade war could be starting may set off the ticking time bomb that is the Chinese Yuan.   

For all that has changed, there is a lot that hasn’t.  There is a stock market bubble.  There is a debt bubble.   We are in the age of stagnation, at best, and another recession is on its way.   Trump hasn’t changed that. 

If you think that the election of Donald Trump was miracle, you are probably right.   It was a miracle for the Supreme Court.   It was a miraculous blow to the ungodly elite.   However, it was NOT an economic miracle.  

If you are believing for an economic miracle, you need to keep praying.  Trump can’t save us from the economic crisis that is in our future.   Only God can do that.