A Donald Trump Presidency

Frugal Ron avoids doomsday scenarios and pessimism in general. Donald Trump’s nomination as the Republican presidential candidate changes all this. If elected, his presidency will be a disaster due to flawed policies, his character and his personal decision-making.

Predictions

Deporting many of our most productive citizens will hurt  our economy and raise unemployment. In the dairy industry, the exodus of Hispanic workers will shut down or dramatically reduce the productivity of many large dairies. This will cut what I call “white employment”. These are the nutritionists, veterinarians and people involved in the processing industry that will find themselves out of work. This scenario will repeat itself countless times in other industries.

Restricting  trade will bring back inflation. Old oligopolies (industries controlled by four or fewer players) will have more power to raise prices. Will GM, Ford and Chrysler build more factories and hire more workers? Not likely, much less risky to just raise the prices on the cars they sell.

And, what about bringing more jobs back to America? The rules don’t change. Our Trade Balance will equal our Net National Savings. If we borrow more from other countries, we’ll keep having a negative Trade Balance. If we restrict imports with high tariffs, you can bet our trading partners will reciprocate with higher tariffs on our exports. This will destroy many of our export focused industries.

More predictions

As we get within a month of the election and if poll numbers show Trump is winning, expect a sell off in the stock market.  Most stock market investors accurately perceive what a Trump presidency will bring.  Where will the money go? For those with most of their money in retirement accounts, they can’t pull the money out as cash without paying significant taxes or penalties. Most of this money will transfer into money market accounts. Investors with more liquid stocks may be converted to cash that can go in bank safe deposit boxes.

If Trump wins the presidency, it is logical to assume Republicans will maintain control of the House and Senate. Because of his electoral mandate, Congress will give him pretty much of what he demands.

Trump’s disaster

Donald Trump has promised a massive tax cut. None of the above will have near the  impact on our economy or the rest of the world’s as this cut in government revenue. According to the Citizens for Tax Justice, this plan will increase the federal debt by $12 trillion over the next decade. As if we haven’t already concentrated enough wealth,  the highest one percent of earners would get $4.4 trillion of the tax cuts.

http://ctj.org/ctjreports/2016/03/donald_trumps_tax_plan_would_cost_12_trillion.php#.V54hhJMrIQ8

Frayed, but still flying.
Not the only thing frayed in a Trump presidency.

Numerous other articles on this website find tax cuts related  to higher deficits and higher unemployment. The Reagan/Bush tax cuts eventually resulted in a recession and higher unemployment.  The Bush/Clinton tax increases and eventual balanced budgets coincided with the most widespread peacetime prosperity the US has ever known. The George W. Bush tax cuts and huge spending increases ended the party and eventually ushered in the worst economic recession in our lifetimes. Barack Obama’s tax cuts added on to Bush’s gave us the biggest deficits in our history with little unemployment decline. The dramatic improvement in the US economy came during Obama’s second term after he shrunk the tax cuts and consequently lowered the federal deficit. The lesson from all this is crystal clear. The Trump tax cut will bring us a recession. Unfortunately, this will be the least of our problems.

Trump’s quandary

From history, we know that the US economy’s private sector does not have the resources to finance  $trillion government spending deficits. According to the Congressional Research Service, in December 2015, total publicly held debt was over $15 trillion. Foreigners held over 40 percent of this debt with Mainland China owning over 20 percent and Japan owning over 18 percent.

http://www.fas.org/sgp/crs/misc/RS22331.pdf

In ordinary times, we can count on these usual lenders financing our Net National Savings deficit. However, a Trump presidency will not be ordinary. Trump pledges to “renegotiate unfair trade deals”. He has promised to tear up the North American Free trade Agreement (NAFTA).  Unfortunately, NAFTA never was a free trade agreement. It is hundreds of pages of trade restrictions.

Consequently, NAFTA never had much impact on the US economy and abandoning it will make little difference to the US. Mexico’s smaller economy will feel more impact. Much more important, is Trump’s promise of a 30 percent tariff on Chinese made goods if China fails to renegotiate their US trade pacts.

The insanity

If we take a moment to think this through, here is a country (US) that owes another country (China) $1.25 trillion telling their lender that they are going to put a 30 percent tariff on the lending country’s goods. And, by the way, we also want to borrow several times our current debt over the next decade!

We can expect the Chinese response will be something we can not print in a family publication. The net result is that most, if not all, of the foreign sources of debt financing will be closed to a Trump run United States.

Donald Trump certainly won’t admit to a mistake. So, with his federal government hemorrhaging $100 billion per month because of his tax cut and domestic lenders only able to finance about 60 percent of this, he has few choices.

According to the Center for Tax Justice, eliminating 94 percent of the federal government’s discretionary spending would cover the cost of the Trump tax cut. But, Trump needs to continue defense spending at a high level since he will need the military to carry out his round-up of 11 million illegal immigrants for deportation. He also needs to increase funding for his “second to none” domestic intelligence and the “universal high quality day care” promised at the Republican convention. Cost cutting doesn’t seem to be part of the plan.

A second option is to do nothing and let the markets take care of the problem. The market’s solution are much higher interest rates. Double digit interest rates will probably draw in enough private funding to cover his deficit. This will dry up funds for private investment and raise interest costs dramatically for home and business owners.

The third option is to have the Treasury Department simply print more money (lots more money) and then lend it to the federal government. This sounds like a logical Trump solution.

Trump’s inflation

While the second option listed above is highly inflationary, the third option is hyper inflationary. Inflation is the scourge of bad government and something we’ll have to accept with a Trump/Republican government.

Inflation changes the value of existing debt. Debt holders are very sensitive about this sort of thing. If annual inflation is at 15 percent, that means the value of their debt is dropping by 15 percent annually. Lenders aren’t going to tolerate this and they will unload their securities at a loss. When private and foreign government holders of $15 trillion in Treasury securities unload them in a hurry, this will cause a meltdown of the entire global financial system.

A summary or a doomsday?

There is typically a huge difference between realists and alarmists. A Trump presidency will result in close to identical projections from both.

If Trump and Republicans cut taxes an average of $1.2 trillion annually for the duration of his term in office and combine that with high tariffs, conventional sources of foreign capital will not be available. Without that source of cash, the federal government will drive up interest rates and or print outrageous amounts of cash to satisfy its need for money. The resulting panic in the global lending market will be catastrophic.

 

 


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