The news is full of Trumpestuous nonsense. Denials of Russian involvement in our election devolved into a tweetstorm lasting for days, apparently without sleep, causing many to question his mental health and/or drug use. You can read about this nearly anywhere, so consider this the main attraction of the circus.
Away from the noise there is a lot more going on, of course. As we have said here before, the real stories will be away from the nonsense presented front and center. For all of our reasonable worries about his stability and allegiances, Trump poses a far greater danger to our nation.
Where we should reasonably be about to enter a great period of economic activity, it is still entirely possible to screw it up.
The latest voice of concern over Trump’s policy proposals is Larry Summers, economic policy advisor to many Democrats and sometime key voice of reason. His list of concerns is useful mainly because it touches on how exactly this could be screwed up.
While an overhaul of corporate tax code is certainly warranted, a huge slash with nothing in return has the potential to be a disaster. If corporate profits rise dramatically, as they would almost certainly do, there would be a corresponding rise in US stocks. While this would put more money into circulation and help many things, it would do so primarily for top income earners. That’s not where we need it.
Any great increase in economic activity will result in inflation at this point. The Federal Reserve is ready for this and intends to raise rates further. That’s a good thing, generally, as we need to get to the point where there is a reasonable return on any loan to offset the risk, causing more loans to be made. In other words, there is a chance that in an inflationary world the spiral already has all the fuel it needs to get out of control.
That’s when the Fed really steps in.
The main effect of higher interest rates will thus be an strengthening of the US Dollar. If you’re in manufacturing, or at least hoping to bring manufacturing jobs home, that’s the worst thing possible. All other developed nations have been engaged in a “currency war” of a kind, keeping their own currencies low to encourage exports. A stronger US Dollar means we lose.
What is the net effect of these combined efforts? More money at the top and fewer jobs at the bottom. Income inequality only gets worse – and there is real inflation in danger of eroding what gains workers have.
On the flip side, Trump promises tariffs on imports. It seems unreasonable that this could possibly happen, given a genuinely Republican Congress, but the threat is real. The Mexican Peso has dropped 14% since the election on fears of such new taxes, which is to say everything made in Mexico just became 14% cheaper. The threat of tariffs thus has precisely the opposite effect anyone actually desires.
But it makes for good theater at home, especially in a 3AM tweet. Expect more of this nonsense.
How could we screw up the coming good times? Again, it’s based on solid progress on wages combined with relative financial stability. Keeping the pressure on wages along with great uncertainty is the best way to mess it up, especially when there is only strong upward pressure on the US Dollar.
Which brings us to the other things Trump has promised, a repeal of Dodd-Frank. While this legislation is far from adequate, it does require financial institutions to maintain reasonable deposits and not take unreasonable risk. Removing these controls while simultaneously amid other uncertainty and rising interest rates is a recipe for additional risk to be taken on.
Would another collapse be far behind? In this environment, probably not.
There is indeed a strong threat to good times coming. It’s a threat formed in 140 character bursts in the wee hours of the morning. It’s nowhere near as sexy or interesting as the thought of Putin directing our foreign policy, but it’s at least as dangerous.
Will 2017 actually be the year we turn the corner? Perhaps not. And that is very, very sad.