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Trump Will Need Miracle to Hit Economic Growth, Budgetary Targets

Trump Will Need Miracle to Hit Economic Growth, Budgetary Targets

 (Getty/Ty Wright)

By    |   Monday, 27 February 2017 07:20 AM

Investor attention will be mainly focused on the United States with President Donald Trump addressing Congress Tuesday and Fed Chair Janet Yellen speaking on Friday at the Executives Club of Chicago.

Trump’s address to Congress will undoubtedly be on top of investors’ attention as they will be looking for more details of the forthcoming policy agenda.

Last week, Treasury Secretary Steven Mnuchin hinted that China is not going to be fast-tracked as a currency manipulator, but that it’s going to be assessed in the normal way as the Treasury does. This means there would be no announcement on the issue before the regular Treasury biannual report to Congress on “foreign exchange policies of major trading partners of the United States” is released and which is due in April.

If this is so, then the risks of an imminent trade conflict between the U.S. and China and other countries will disappear from the front burner, but will not have gone away.

Nevertheless, the Financial Times reported the Trump administration is exploring legal ways by which the new administration could circumvent the World Trade Organization’s (WTO) dispute system and if successful, Washington could use it to level trade sanctions against China and other countries.

That said, over the weekend, Mnuchin was hinting at the coming budget proposals, which can be summed up as:

  • Increasing spending on the military,
  • No changes to entitlement programs,
  • Cutting taxes.
  • Reducing the deficit.

Trump's budget proposals will require that his policies will engineer a "trend rate of growth" of around 4 percent this year.

Now, never forget, trend growth is a function of productivity growth and population growth and to achieve a 4 percent trend growth this would require:

  • a productivity miracle.
  • a massive increase in immigration into the United States, which would also tend to raise productivity.

If these proposals are seen by investors as a way of raising the deficit, and this regardless of what pronouncements are made, then that could be a serious reason for concern.

The higher budget deficit, all things being equal, will make the United States increasingly dependent on foreigners for funding, rendering the dollar more vulnerable, which is not what most investors think at present what could happen.

Discussions about trade protectionism are of course also relevant.

It is still not clear if the Trump administration intends to pursue an aggressive consumer tax increase in the “guise” of a tariff border tax. The revenue from that may mitigate the deficit, but is a direct tax on lower income Americans and it may also prove damaging to spending as well as raising inflation.

While immediate action on trade protection taxes are not that likely, tomorrow’s Congressional speech by the president may give us some kind of a statement of intent.

So, we’ll wait and see.

There are also durable goods orders data today, including various measures of capital spending. The problem is that economists keep coming back to is that capital spending data does not reliably capture what is happening in capital spending because more and more capital spending will show up as consumer spending. A smart phone can enhance an employer’s productivity, but it is still likely to be classified as consumer spending rather than capital spending.

Over in Europe, the ECB just released its statement on monetary developments in the Euro area for the month of January. The annual growth rate of the broad monetary aggregate M3 stood at 4.9% in January 2017, after 5.0% in December 2016. The annual growth rate of total credit to euro area residents stood at 4.6 percent in January 2017, compared with 4.7% in December.

These numbers confirm that an ECB tapering is not on the cards for the near future.
M3 is the ECB’s preferred broad measure of money supply while the private sector lending counterpart is usually seen as the most important element of the M3 report. 

Finally, the Netherlands is to hold a parliamentary inquiry into its future relationship with the euro after an “unanimous” vote in parliament supporting a motion tabled by Pieter Omtzigt of the opposition Christian Democrats.

The inquiry asks the Council of State, which is the Dutch government's legal adviser council, to examine all the “political and institutional options” for the future of the euro, listing the advantages and disadvantages, and up to and not excluding withdrawal or “Nexit.”

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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Trump's budget proposals will require that his policies will engineer a "trend rate of growth" of around 4 percent this year.
investor, fed, trump, growth
Monday, 27 February 2017 07:20 AM
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