Trump-onomics Distilled

Trump’s signature policy proposals – fiscal stimulus, a more restrictive immigration policy and trade protectionism – are bullish for the US dollar and bearish for bonds.

The Tax Policy Center estimates that Trump’s tax plan alone would increase the federal debt by .2 trillion over the next ten years (excluding additional interest). We doubt that Congress will approve anything close to that. Nevertheless, even if he gets one quarter of the revenue and expenditure measures that he is seeking, this would be enough to boost aggregate demand growth by 0.5-1.0% per year over the next two years.

Trump’s campaign rhetoric focused on combating illegal immigration. The pool of unemployed low-skilled workers has largely evaporated in recent years. Since illegal immigrants are generally poorly educated, stricter immigration policies would raise the wages of low-skilled workers. As such workers tend to have the highest marginal propensity to consume, this would further boost aggregate demand.

Listen to Will Trump Cause a US Debt Crisis?

The executive branch has a lot of discretion over trade policy. The threat of punitive measures is likely to dissuade some US companies from moving production abroad. On the flipside, the fear of losing access to the US market might persuade some foreign companies to relocate production to the United States. Moreover, higher trade barriers would further raise real wages for low-skilled workers.

Bottom Line: In sum our Global Investment Strategy believes Trump’s policies could cause the US economy to overheat, forcing the Fed to hike rates more aggressively.

About the Author

randomness