Trumponomics

By Shlomo Maital

(from The Economist)

       “Trumponomics” is the economic theory that drives President Donald Trump’s planned economic policies.  It includes low interest rates; tariffs on China, Mexico and Canada, and anyone else that sells more to the US than it buys; expelling immigrant workers; slashing taxes; removing renewable energy subsidies.

          What can we expect?  Here is Olivier Blanchard’s ‘take’.  He is an MIT economics professor, former chief economist of the IMF.

            “….perhaps the most crucial issue is what the Fed will do. If it sticks to its mandate, it will stand in the way of some of Trump’s hopes from the use of tariffs, deportation, and tax cuts. It will have to limit economic overheating, increase rates, and cause the dollar to appreciate.   The big question is thus whether Trump can force the Fed to abandon its mandate and maintain low rates in the face of higher inflation.”

             To explain:  The US already has a huge federal budget deficit,  some 7% of GDP.  US public debt exceeds its annual GDP.  Trumponomics tax cuts and gifts to the wealthy will further hamper revenues and increase the deficit.  Tariffs will make goods and services more expensive for consumers (no, people, it is not the Chinese or Canadians who will pay the tariffs, it is us).  The result will be more inflation, rather than, as promised, less.

           Enter the Fed:  Higher inflation brings tighter interest rates.  Trumponomics is in love with low interest rates.  Result:  A cataclysmic conflict with Fed Chair Jerome Powell, who remains in his post until 2026.  At that time, Trump may try to appoint a non-mainstream new Fed Chair, who will maintain low rates in the face of inflation – leading to more inflation.   

            The US has been successful since 1776, mostly, because its Judiciary (Supreme Court) and its money people (Federal Reserve) have been constitutionally isolated from political influence, in general.  The judiciary now has a Trump majority.  When the Fed too falls into Trumponomics – yikes.  Risk premiums on US bonds rise, as capital markets start to wonder whether the US may, like Nicaragua or South Africa, fall into fiscal decay. 

        Here is Blanchard’s conclusion:   “Fed Chair Jay Powell has made clear he remains committed to the mandate and to staying at the Fed as chair until his term as chair expires in May 2026 (his term as board member ends in 2028). Current Fed board members are unlikely to follow a different line. But one board position opens in January 2026, and Trump could seek to name a more docile board member to the seat. If this is the case, and the board goes along (which is unlikely), the result will be low rates, overheating, and higher inflation. Given the unpopularity of high inflation, not to mention the reaction of financial markets to the loss of Fed independence, this prospect may be enough to make Trump hesitate to pursue this option.”

         Stay tuned!   We are headed for interesting times.