Wednesday, 14 December 2016

Trump could be playing with fire

Apropos yesterday's post on viewing the last Presidential election  Menzie Chinn looks at potential GDP in the USA and finds Trump does not have a lot of leeway to play with so to speak.

Even a mildly expansionary fiscal policy ( and remember Obama's fiscal policy at present is in fact contractionary) would mean an uptick in inflation as output cannot rise any much  further.
this means Trump will be fighting the Fed (who will not fight back).

It is further evidence the markets are wildly optimistic on what Trump will do.

However there is a strong caveat to all of this.

It is always wise to wait and see what politicians  actually do rather than listen to their talk.
Trump after all has shown himself to be a typical politician since his win. His policy stance was all over the place. Will it be so when he is in office if not what exactly will he ditch?

At this stage we simply do not know and therefore are making a lot of assumptions.

I am with Brad De Long and Simon Wren-Lewis (See yesterday's post) on Trump's fiscal policy but everyone should admit we are all in the dark. What if Trump actually changes his expenditure to what Clinton advocated?

Update

I am further reminded markets would get very nervous when the Executive targets the Fed. Yes indeed I do think that is one thing markets can count on.