The following is a summary of our recent interview with Richard Duncan, which can be accessed on our site here or on iTunes here.
Will Donald Trump be a disaster for the US economy? Yes, says one economic expert, especially if it leads to a spike in interest rates.
In a recent interview, Macro Watch editor and video blogger Richard Duncan discussed his recent presentation to institutional investors titled, “Trump’s Recipe for Disaster,” with FS Insider.
Duncan says that if Trump fulfills his economic campaign promises, interest rates will spike, leading to credit contraction that would in turn crash asset prices. Ultimately, Trump’s economic policies could decimate the US economy, sending it “back into a 2008-style recession or worse.”
Trump has proposed a package of corporate tax cuts, increased government spending, and a series of trade policies that prioritize increased tariffs. “Those policies are going to be extremely inflationary,” Duncan said, adding that Trump’s three-pronged strategy will almost surely raise interest rates.
“Interest rates are really the key to what’s going to happen to the global economy and the US economy going forward,” Duncan added. He noted that since the 1980s, rates have dropped from about 20 percent to 2.5 percent. Lower rates fuels more affordable credit, and when people borrow more, they spend more — in other words, credit growth drives economic growth. On the other hand, when rates go up, credit contracts, people spend less, and recessions are inevitable.
Trump’s promise to increase military and infrastructure spending while cutting taxes would also contribute to the disastrous recipe, skyrocketing the current projected budget deficit of $520 billion up to $800 billion by next year. That's a major cause of concern for Duncan.
“When the government borrows more — all other things being the same — that tends to push up interest rates,” he said. However, Duncan points out that over the past few decades, all other things have not been the same. Over that time, the US has experienced larger capital inflows (which are related to the current US trade deficit). The account deficit balanced out the trade deficit — if one was, say, $500 billion, the other would match that figure.
“With so much capital pouring into the country, it pushed up bond prices and pushed down bond yields. It pushed down interest rates and that allowed credit to expand excessively,” Duncan said. Now, Trump has pledged to eliminate the current account deficit. Last year, that account deficit was $500 billion, which meant the US had $500 billion in capital inflows — enough to finance the budget deficit.
"If Trump eliminates the trade deficit, that will eliminate capital inflow,” Duncan warned. Such a move would make it more difficult to finance the budget deficit at lower interest rates while also pushing up interest rates, contracting credit, and crashing asset prices — stocks, property, and gold, for example.
Although the stock market climbed following Trump’s election, Duncan points out that the uptick was fueled by the promise of short-term fiscal stimulus — the government borrows more, spends more, and cuts taxes. However, doing so will simply drive government borrowing higher and increase the national debt. That could drive some economic growth by boosting stock prices, but the government would essentially be financing tax cuts.
Trump’s plans to eliminate banking regulations passed post-2008 may also drive up bank stocks and provide some economic growth, but this would likely lead banks back into risky practices that initially led to the recession.
Trump’s proposals to levy a 45 percent trade tariff on Chinese imports and 25 percent tariff on Mexican imports also spell disaster, Duncan noted: “those policies are going to be extremely inflationary. If you put a 45 percent tariff on [goods from China], all those goods are going to be 45 percent more expensive, and you are immediately going to get a significant spike in inflation rates.”
Click here to listen to this full interview with Richard Duncan: Trump's Recipe for Disaster
