Wednesday, February 22, 2017

Trump versus the Markets

From Fortune:

"Trump has a totally different vision. In his mind, the plan will create a virtuous cycle of investment and durable growth. Companies will spend heavily on capital investment, and as they expand, pull millions of working-age folks who've quit the labor force back into offices and factories. The surge in capex will raise productivity through purchases of efficient machinery, and innovative technology that makes supply chains more efficient. That combination would cause production and the labor force to expand in tandem with demand for both products and workers, thus holding real prices in check. It's obvious, however, that both investors and the Fed think that a surge is prices is far more likely than the supply side revolution that Trump promises. The evidence is the rate rise that's already occurred as a harbinger of inflation to come. If a surge in the labor and output doesn't occur, the spike in growth will fade quickly. "You're juicing the economy for a short period," says Ashworth, "but it can't grow at 3% without high inflation because productivity and labor can't keep up. You run up against hard constraints." In that scenario, the Fed is forced to raise rates even further to stanch inflation, causing a recession. "We haven't repealed the business cycle," says Doug Duncan, chief economist at Fannie Mae. "This is already one of the longest expansions on record.""

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