The economic impact of changing fiscal policy
Many have been commenting on Trump's economic plan. Jefferies analysts had a short note. Michael Every of Rabobank’s note was posted to Zerohedge. I also read the transcript of Bloomberg Businessweek’s interview with Trump on June 25th. It looks like Trump wants to re-industrialize the US.
From the sit-down with Bloomberg;
BLOOMBERG BUSINESSWEEK: Well, thank you for spending time with us. I want to start by asking a broad question: What kind of economy do you want for the American people in terms of innovation, opportunity and global competitiveness?
TRUMP: Well, I think manufacturing is a big deal…
His tool to accomplish the task of rebuilding manufacturing in the US will be tariffs.
Understand that no nation in the world engages in free trade. Every nation uses different tools to prevent the free flow of goods and services. All these tools are inflationary for their populace and create distortions in the global economy.
Tariffs increase the cost of importing finished goods. To prevent this act from creating overwhelming inflation, the costs associated with manufacturing and doing business in the US have to become cheaper. One way the Trump administration is going to attempt to reduce costs is by making energy cheaper and more abundant.
TRUMP: So inflation was caused by energy.
While the inflation was actually caused by the wild increase in M2, the Biden administration didn’t help anything by stifling the oil & gas industry. Lowering energy costs lowers cost-of-living.
BLOOMBERG: If you’re reelected, would you allow Jerome Powell to serve out his term through 2028?
TRUMP: Yes, I would.
Trump then gets into a quick discussion about tariffs.
BLOOMBERG: Back on China, economists have said about 60% tariffs on China would essentially end the US-China trade relationship. What would that mean for companies like Nvidia, Qualcomm, Apple who have supply chains there?
TRUMP: You know, I had it at 50% and I’ve never heard the 60. And everyone always says, look at Smoot-Hawley and oh, look what happened. Well, Smoot-Hawley was after the Depression started. So if you go back, I told you to read about William McKinley. William McKinley made this country rich. He was the most underrated president. And those that followed him took the money. Roosevelt took the money and built, you know, the whole thing with the parks and the dams. But McKinley made the money and he was truly the tariff king. And I don’t do this based on my knowledge of him, although I’ve learned about him after the fact.
Tariffs do two things. Economically, they’re phenomenal. And a lot of people will say, Oh, that’s terrible. It’s very dangerous when you say that because you probably have your views and a lot. I can’t believe how many people are negative on tariffs that are actually smart people. It does two things: Economically, it’s great. And man, is it good for negotiation. I’ve had guys, I’ve had countries, that were potentially extremely hostile coming to me and say, ‘Sir, please stop with the tariffs. Stop.’ They would do anything. Nothing to do with economic, they would do—you know, we have more than economic, we have other things like let’s not go to war. Or I don’t want you to go into war in another place.
Trump has kindled a deeper interest in McKinley for me.
Here is a good speech on Mises.org by Joseph R. Stromberg. Joseph speaks more towards McKinley’s expansionist foreign policy than the President’s fiscal policies but still informative.
I also went back and listened to Rothbard’s History of Money and Banking starting at chapter 25 through chapter 33 (chapter 30 was especially informative).
We see the addition of JD Vance to Trump’s presidential ticket also shows his desire to bring back manufacturing. Here is a clip of Vance quizzing Fed Chair Powell about the dollar’s reserve status and the hampering effect of a strong dollar policy.
On top of the tariffs, Trump wants lower taxes. He says, “Fifteen would get us down to being about the lowest” and that lower taxes would incentivize businesses to re-shore dollars and build manufacturing plants in the US.
For this to work, the administrative state has to go. Reducing federal spending is a fulcrum that this plan hinges on. Deficit spending has to be ended immediately. The current administration's deficit spending has crowded out the private sector and slowed the Fed’s progress on inflation. Cutting the government employees that create and enforce the arbitrary and the ever changing rules is a must. The death of Chevron helps here. Could we finally see the meme from the Apprentice come to life?
Austin Padgett had a great tweet about eliminating the bureaucracy in a Trump administration.
“Javier Milei demonstrated that slashing regulatory bureaucracy is a solution to existential inflation. We can lower spending more easily by drastically cutting the cost of food, housing and medicine than through politically unpopular austerity, or getting a balanced budget out of Congress.
Trump understands the problems, the opportunities, the constraints of the system and the special interests. He knows doing just a few good things like in 2016 won’t be enough to alter our course, guarantee a future for his kids or forge a positive legacy. In his RNC closing speech, Trump leaned on deregulation and energy production as the solution for being able to start bringing down the debt, and for the first time he asked ‘with great humility’ that we become excited for the future.”
I think we’ve seen some of the headlines that draw back the curtain and show which constraints on the economic system will be the first to go.
This policy plan has the ability to create a boom in US manufacturing which would also favor the financial sector. I’m worried about US oil and gas companies as the Trump administration’s goal is to lower oil prices through a reduction in restrictions. I’m not confident that the cutting of red tape is going to make up for the loss in revenue from lower prices. Howver, this will be a big boon to companies that spend large amounts of money on oil & gas like plastics, logistics companies, airlines, and shipping companies.
I’ll let Trump have the final word.
One thing I’ll say about a Diet Coke, I have never seen anyone thin have a Diet Coke.