Trumpenomics? More Likely An Overdue Re-Balance

It is an inherent feature of Trump’s persona is that he only does beautiful. Put simply he claims the credit when things go right, but tries to duck away when things go wrong. So when he claimed the credit for the record rise in US stocks, he also bought into ownership when the market crashes. Whether this is a major correction, a minor blip or a big panic is not yet clear at the time of composing this post. What is clear is that there are some very real problems which may well become a major threat.

As this Blog has pointed out so many times tax cuts, and infrastructure investment go hand in hand. The cuts are the cart to the investment horse. As we all know you should not put the cart before the horse. What should have happened is for the Republicans to formulate and push through a major infrastructure renewal programme of FDR proportions, needed in a country which at some levels and in some places is falling to pieces.   The surge in revenue resulting from the economic reboot, allows tax cuts to hand back to consumers a greater slice of their increased earnings. This they spend. This pushes the economy on an upward trajectory which is secure and dynamic.

Unfortunately the fractured Republican party argued for too long and in the end went for the tax cuts first, which means the Government has to issues bonds, ie  borrow money, to pay for them. It might come good, but it might not. There are the political questions about whether the infrastructure deal will happen. But also there is a big adjustment going on in the world economy.

Money is shifting from assets to production. This is because, since the 2008 financial crash, the US, UK, Japan and later the EU have been buying government bonds on a massive scale with printed money, which then flies into assets, which inflate through stoking demand. Interest rates are held at near zero so investment becomes leveraged because the profits can be eye watering even using borrowed money.

But the programme of quantitative easing is being wound down everywhere and interest rates are likely to rise. Moreover central banks are preparing to sell back into the market their vast stocks of bonds. At the same time as the US has to issue a whole lot of new ones. That will depress the bond market, effectively pushing up interest rates whether the central banks act or not. All of that will weaken the balance sheets of banks. That will make credit tighter and more expensive. You can see the drift. Most likely is a volatile market drifting downwards as capital re-positions towards wealth creation rather than asset inflation, ensuring a better reward for both investment and labour going forward. Leveraged speculators may burn, but most will come through fine.

But it is a dangerous moment. If you hold ready cash you could be in for a killing. But if your company, or you personally  are over borrowed, it might be time  to dust off Plan B. At the end of the day the world economy remains strong. The weakness is in the financial structure underpinning it.