Alan Ruskin, Macro Strategist at Deutsche Bank, suggests that a comparison of the Reagan and Bush fiscal expansions provide a sobering tale for those that think all fiscal stimuli are born equal.

Key Quotes

“It is helpful when a fiscal stimulus takes place in the early stages of recovery and has an asset cycle tailwind like the Reagan 1983 package, compared to the temporary 2001/3Bush tax cuts that followed the longest recovery in history and an equity bubble already in a state of collapse.Though far better than the circumstances facing Bush, the current mature growth and asset cycle offer a cautionary note about the efficacy of fiscal policy.”

“What does this all mean for the USD?

Nonetheless there are at least six important reasons why a fiscal stimulus in current circumstances is much more helpful for the USD than the underwhelming FX response of the Bush years, even if the set-up is not nearly as conducive for the currency as the early Reagan years.

i) the real broad TWI is ~10% below the levels when the 1st round of Bush tax cuts hit, suggestive of more USD upside in this cycle.

ii) the cyclically adjusted US C/A deficit is not signaling FX overvaluation, and our last FEER based valuation metric, dominated by the US external accounts still had the USD cheap. This is partly because of a much improved energy balance.In the Bush tax cut years, the C/A deficit was already over 4% of GDP, and above 5% of GDP in 2004.

iii) the asset cycle is working modestly with and not against the grain of the fiscal stimulus.

iv) there is very little spare capacity, so a small acceleration in growth will encourage a quick reappraisal of potential inflation pressures from the Fed.

v) the US will likely enact the largest fiscal stimulus of any of the G10 countries, and unlike past Fed cycles, will be the only G10 Central Bank tightening in 2017.

vi) It takes so little to be a high yielding G10 currency in a world of unusually low nominal and real rates.

There are of course numerous uncertainties on the scale and the breakdown of a Trump fiscal stimulus, not to mention FX and trade policies.What should not be in doubt is that the backdrop for a fiscal stimulus is significantly friendlier for the USD than the early G.W Bush years,even if not nearly as favorable as in Reagan’s first term, when Volcker reestablished Fed credibility.”

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended content

Recommended content

Editors’ Picks

EUR/USD steadies near 1.0550, looks to post modest weekly gains

EUR/USD steadies near 1.0550, looks to post modest weekly gains

EUR/USD has lost its bullish momentum after having climbed above 1.0570 with the initial reaction to the US data in the American session and retreated toward the mid-1.0500s. On a weekly basis, the pair remains on track to close in positive territory. 


GBP/USD struggles to hold above 1.2300

GBP/USD struggles to hold above 1.2300

GBP/USD has edged lower following a jump above 1.2300 in the early American session on Friday. The market mood remains upbeat ahead of the weekend with Wall Street's main indexes posting strong daily gains on upbeat US data. 


Gold stays below $1,830 as US yields edge higher

Gold stays below $1,830 as US yields edge higher

Gold continues to fluctuate below $1,830 on Friday and looks to close the second straight week in negative territory. Fueled by the risk-positive market environment, the benchmark 10-year US Treasury bond yield is up more than 1% on the day, limiting XAU/USD's upside.

Gold News

Why Cardano could surprise over the weekend

Why Cardano could surprise over the weekend

ADA  set to close out the week with a gain on the workday trading week and over the weekend? Central banks signaled that the rate hike cycle is ending, meaning less stress and tight conditions for trading, opening up room for some upside potential with Cardano set to pop above $0.55 and test a significant cap.

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!