US: A sugar-rush for the economy, before long term problems - AmpGFX

In view of the Greg Gibbs, Director at Amplifying Global FX Capital, the policy direction of the Trump administration generates upside risk for US yields and the USD. 

Key Quotes

“They would create a sugar-rush hit for the economy, US asset prices, boost inflation and the USD.  What follows the sugar-rush is potentially far less positive for the US economy and the USD, but that could be years in the making and is less certain.”

“These policies include corporate tax cuts and tax-breaks for companies repatriating profits.  This has helped boost the USD via flows to equities and the potential boost to growth and inflation driven by tax cuts.  More directly, it may boost the USD as companies repatriate offshore profits that may currently still be held in foreign currencies.”

“The fervent America first anti-trade anti-immigration rhetoric is also potentially very positive for the USD.  The USA is the world’s largest consumer, and if it were to employ an isolationist agenda, it has the critical mass to succeed for several years in boosting GDP by relying mostly on its own demand.  But this is inflationary; it will increase the costs of imports and make labor more expensive.  It is potentially very inflationary if these policies are pursued to the extent Trump’s extreme rhetoric suggests.  Higher inflation means higher interest rates, driving up the USD.  More directly, tougher restrictions on imports have the potential to narrow the trade deficit, further driving up the USD.”

“Longer term, an isolationist policy could be very detrimental to the US economy, directing more of its productive capacity to areas where it has a low comparative advantage, such as basic manufacturing. Trump’s support for middle-class workers drives investment to areas where the USA has no natural advantage that does not require new technology.  It risks stagnating progress, pushing the US towards a high-cost country, discouraging new investment over the longer term.”

“Furthermore, the USA’s influence in global economic development will diminish as the rest of the world turns away from the USA to pursue more fruitful economic relationships with other countries.  USA companies that seek to export to other markets will find this more difficult.  In the end, Trump’s vison for making “America great again” may prove to be a massive set-back from which the US takes generations to recover.”