Reflation Is The Order Of The Day

Trump’s victory is giving markets the relief they need.

The unanticipated election of Donald Trump has, in a sense, afforded a relaxing sigh of sorts for global markets, i.e., Trump’s proposals to cut taxes, rebuild America’s infrastructure, and keep interest rates relatively low has investors salivating. Prior to Trump’s victory, investors and global economies feared the possibility of a deflationary period whereby the increase in growth would be offset by central banks raising interest rates. However, wages, in the US at least, are still rising, while corporate profits remain robust.

Predominant economists expected a fall in economic output with the election of Trump and presumed right-wing election victories in Europe – the latter still being a stark possibility. As of now, the picture actually presents itself to be quite positive. One such reason behind the markets continuing to boom is Trump’s anti-regulatory agenda, massive investment in infrastructure and government, and in all honesty, his pro-business rhetoric. Putting it simply: big business feels good with Trump in power.

And while Trump ran as a Republican, he should not be labelled as the prototypical “conservative” as his big government policies are surely more centrist, and even more, ironically, Keynesian. Trump’s infiltration of the Republican Party in the most recent election changed the ideological trajectory of the party – in 2010, the Tea Party wing supported candidates who would cut government spending across the board. Trump is, in-fact, cutting government spending, but, this is a facade as more money will be spent on military, infrastructure, and security.

Trump will disappoint many of those in his rabid base who seek to retract from international trade and policies that benefit global markets. This portion of Trump’s support don’t appear to have much leeway though – maybe from the standpoint of influencing Trump’s stances on social issues – because Trump is likely going to increase government spending to an extent that increases the deficit. As of today, Trump put forth a plant to raise military spending by $54 billion dollars, which is arguably one of the largest jumps in spending since the War in Iraq.

What coincides with this increase in military spending are contracts with private defense firms. This, again, will contribute to even higher profits – all this transpiring during a bull market. Incidentally, signs of deflation have not yet come to fruition. If Trump continues to bloat the size of government without offsetting cost in other federal departments, while also asking the central bank to print more money, interest rates will remain low. If interest rates remain low, banks will continue to foster an environment of spreading capital around, leading to more growth. All in all, Trump’s election could contribute to a global boom. For now, Mr. Recession will have to remain on the bench; reflation trade is on schedule.

 

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