Economy under Trump

A word about Trump’s economic ideas.

As far as I can gather he will do a combination of Reaganomics and protectionism.

Reaganomics:

  • Borrow money and finance tax cuts with it
  • Hope that the tax cuts refinance themselves through the Laffer Curve effect; i.e. that a reinvigorated economy makes up for the shortfall
  • This worked in part for Reagan but with a delay of about 4 years (it takes some time for the economy to react)

Protectionism :

  • Has been used successfully by USA since about Lincoln, Germany at the same time, Japan since about 1950 and China since about 1995 to build up their industries.
  • As opposed to IWF globalism it has a proven track record of building up economies.
  • As it increases prices of imported goods it temporarily reduces the buying power of the average Joe. After a delay of a few years, the wealth of the citizenry should grow again as now the supply of homegrown industry output should benefit the population.
  • In my opinion tariffs are a perfectly legitimate way to finance a state – comparable to a VAT.
  • You usally run into retaliatory tariffs when exporting but that does not stop the buildup of your own industry – it only resists it to an extent, dampening the speed.

So a re-industrialisation of the USA is perfectly possible. It will take time though. Let’s say 4 to 5 years.

During this period massive debt issuance will be necessary. Even if Trump cuts down on state bureaucracy expenditure – which I’d like to see; I love to see the culling of bureaucrats – the US will likely issue 1 trillion USD of debt a year until it can reduce its trade deficit.

Also notice the Triffin Dilemma: IF you have the reserve currency you NEED to export that currency to the world – which means, you HAVE to have a trade deficit – just so everyone around the world HAS your currency.

If the USA wants to stop issuing further debt she automatically stops exporting her currency; and the role of the USD as reserve currency ends.

Given Trump’s position and the role of the USD it is safe to say that the USA must spiral ever deeper into debt for at least the first term of his presidency. This would of course have happened under democrats as well – only that the money would have been squandered, not invested in a re-industrialization.

And if his protectionist agenda actually takes hold, the role of the USD as reserve currency will end. No nation that built itself up by protectionism was at the same time issuer of the world reserve currency – The USA under Lincoln and after him was an emerging economy, the world reserve currency was the UK’s Pound Sterling.

Losing reserve currency status in turn means: Other nations are not required to hold your treasury bills. And that would lead to a rapid drop in price for US treasuries –  and dropping prices for treasuries are equivalent to a rising bond interest rate. This will lead to a crisis of US debt and enforce a devaluation of the currency and the debt, or an outright currency reform.

All these developments are already ongoing. You can see it in the dropping percentage of world trade denominated in USD. And, they are inevitable as the debt spirals out of control.

The same holds for the EU and the EURO of course, maybe to a bigger extent – as only the nordic countries in the EU actually work – and the ECB, led by an Italian, prints about 100 bn EUR a month. So, I’m not trying to show that Americans are more stupid than Europeans: Both parts of the Empire have been running on Keynesianism for the past 2 decades and it’s reached breaking point.

So how to survive all this on an individual level? Well, don’t keep all your assets in cash – don’t trust government paper. It’s unbacked promises, Trump or no Trump. Trump himself would openly tell you that. You can use it for daily business, for the time being, but it’s no store of value.

Stocks? Way overprized through leveraged buybacks. Government bonds? Ridiculously overprized through the buying programs of the Central Banks.

That leaves real assets. The only underprized real asset in the West are Silver and Gold – we have a bubble in housing and in farmland.

Closing words? I’m in XETRA-Gold since 2013. Which is a German Gold Bond redeemable in physical Gold; issued by a company owned by the Deutsche Börse; and it counts legally like Gold which means I don’t pay any taxes on profits I make when buying or selling it.

 

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23 thoughts on “Economy under Trump”

  1. Here’s another guy who predicts a market crash under Trump; suspecting Trump was allowed to win so the necessary crash can happen and Trump’s politics be blamed.
    http://www.zerohedge.com/news/2016-11-10/he-won-because-elites-want-him-there-global-economy-will-collapse

    I agree with him insofar as the US stock market is kept sky high artifically through financial intervention of the Central Banks (money is seeking yield and must buy stocks even though the P/E multiple is very expensive already; companies use cheap credit by Central Banks to buy back their own stock, inflating the stock price in the absence of real earnings : resulting in Walking Dead companies, awaiting the inevitable Schumpeterian destruction – and only walking as long as constantly injected with new credit)

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  2. Again, Dirk, protectionism does not help you industrialize (think broken window fallacy here; you see the visible but don’t see the ‘what might have been yet still better’ had the market been left alone. The US industrialized because of its having a healthy enough economic environment, despite the tariffs; and whenever they raised them too high, everyone was worse off than if they’d let things be. Tariffs are fine, but the Laffer curve hits them too. Our problem is that our businesses are over taxed and over regulated (redundant). We need a low, flat tax (10% tops), a massive culling of the bureaucracy, elimination of all business taxes, and a temporary net, mostly private. BIG Government is Evil.

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    1. “Again, Dirk, protectionism does not help you industrialize (think broken window fallacy here; ”

      Then why did it work for the historic examples I mentioned? Bastiat addresses the immediate effect for a repair to damage – using resources up to restore the status quo.

      If, instead of repairing a broken window, the money had gone into building a railroad connecting two cities, you would in the end have a brand new railroad.

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      1. Which, by definition, means that the ‘invisible’ next greatest thing since sliced bread gets strangled in the crib to fund something visible, yet not necessarily the best use of capital goods. Just say NO to protectionism. Say YES to tax reduction across the board, the elimination of *all* business taxes (businesses can’t, don’t, and never have paid taxes), and regulatory reform that eliminates all of the unnecessary ones (the vast majority) and minimize the costs of the few that are necessary (keeping in mind that to the extent a regulation really is necessary, the market will do it on its own).

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      2. Well that’s Utopian. You know it ain’t gonna happen. *I* would prefer it sure. But given the real world, I just pose the question: If income tax is viewed as a legitimate means of the state, and a VAT is, are tariffs not also. The extremist free trade faction can in my opinion NOT claim automatic victory for their position.

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  3. One other thing, and I need to confirm it. I’ve heard that the US became the world’s largest economy shortly after that bloody War. In other words, the US wasn’t an emerging economy at the time of Lincoln, it had emerged at the top then.

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    1. Cd, the US was going to be a dominating economic power even prior to the Civil war. The opportunity was too great, regardless of all else. It still is. And, that’s why protectionism can work in the US. We have need of nothing outside our borders, yet, much of the world has need of what’s inside our borders. At the moment, I agree with Dirk. Were we to engage in real protectionism, you would see a dramatic increase in industrialization in the US. But, of course, it would be logarithmic. To what degree, I can’t say.

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  4. No physical thing, outside of your mind, is a store of value. Your mind is where the valuation calculation takes place. It is personal, subjective, and only true when a purchasing decision is made actual.

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  5. Expect an infusion of cash to the US as companies repatriate offshore accounts when the government lowers the tax rate. This can happen quickly and will help in the short run. Long run: As your post explains – lots of big unknowns.

    Industrialisation — I do not expect this to work well with respect to lots of well paying jobs in places that have lost industrial jobs. As with farming 125 years ago, machines and other innovations replaced labor. Whether growing grains or tree fruit, the many laborers are gone.
    Now, companies can “print” parts for autos or most anything else. “Smart” machines can assemble the parts. Another view is to search for info on how Amazon dot com handles “fulfillment” centers. Notice, they are not called “warehouses” because that concept is out-of-date.
    The US is short of medical people (nurses, especially at the moment), and airplane pilots. Neither are wealth creators. Nor are infrastructure projects.

    What will create wealth?

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    1. “Expect an infusion of cash to the US as companies repatriate offshore accounts when the government lowers the tax rate. ”

      Good point!

      As to industrialization/manufacturing business:
      It still creates many jobs. Factories just produce more with less people.
      Notice how many cheap and complex gadget every one of us buys compared to say the 1960ies – back then even expensive TV sets still had wooden frames.

      3D printing is not a panacea yet: Injection molding the same part over and over again will likely be always way cheaper and faster. Think about the number of movements a 3D printer has to make. You don’t want to wear it out doing something that simple injection molding can do in a heartbeat.

      Consider the car industry: A modern car has a hundred times the subsystems a car in the 1950ies had. There are huge numbers of specialty suppliers. Back in the 1950ies most parts of a car were made at the car factory itself. Today you have entire companies that make only locks or only doors.

      Why don’t you eat the cake of German supply industry? Because you can’t compete.
      Why does Germany not eat the cake of Intel? Because we can’t compete.
      Oh and Intel shipped all the manufacturing jobs out because of the EPA. This can potentially be reversed.

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      1. I see unemployment as an inefficiency. Removing it increases the efficiency of a society. so it is always the preferrable course of action. If protectionism is used to achieve it, it is still a more efficient society than before.

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    2. Hmm, infrastructure doesn’t create wealth? I’m pretty sure the railways did and do create wealth, as does our highways, pipelines, bridges, etc ……

      In the history of the world, can we point to a time where automation actually decreased the amount of jobs available? Indeed, automation has always increased jobs. Sure, there are less laborers in the fields, but, there have been an exponential increase in laborers necessary to process the harvest. And, so it is with automation at every point in the history of mankind. We automated automobile manufacturing. ….. that didn’t lead to a decrease in jobs, it directly led to an increase throughout a plethora of industries. We automated mining, that didn’t lead to a decrease in workers, it increased them. Why? Because the more stuff we can make and the more stuff we can do creates a demand for more workers ……. ALWAYS!

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      1. Ok, that’s the Julian Simon argument which is true in a philosophical sense. I am talking about existing infrastructure of a nation state. Getting from the idea to a crossnational high speed rail infrastructure takes a number of years , lots of man-hours and capital. After that you start to recoup that investment.

        I’ve been involved with many multi-year projects and it’s a PITA to get ANYTHING big finished.

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  6. Here’s another link with some arguments against unfettered Free Trade.
    http://www.zerohedge.com/news/2016-11-14/you%E2%80%99ll-only-understand-trump-and-brexit-if-you-understand-failure-globalization
    Noteworthy: Mentions a study that claims specialization of a national economy – as happens under Free Trade – offers disadvantages compared to a diverse national economy as the latter is more adaptable.

    This reminds me of Vox Day’s argument against Free Trade: That a 3% annual mobility of workers between nations (which would be equivalent to worker mobility between states in USA – which is a free trade zone between the states) would simply wipe out all nation state identities within a generation and is therefore untenable. And without that mobility, specialization of national economies just leaves all those unemployed that don’t fit into the new specialized economy.

    So Ricardo’s basic assumptions when he invented the theory of Free Trade just don’t hold.

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    1. I agree. I am also convinced that he will be the person best suited for bankruptcy proceedings of the USA (not being Anti Trump here: The current debt is not his fault).

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  7. Some will say, we the USA are so good and agile we will come through this. I agree! But there is NO WAY you *AND* the US Dollar will come through *both*. – It’s too late. 106% of GDP debt. Federal debt alone.

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