I'm going to explain why Donald Trump's economic plan is going to work, but before I do I want to just point out that the headlines this morning are saying the payroll surge is bolstering the chance of a Fed rate hike.
Who has been saying that all along? Me. Recall that rate-hike "concerns" completely evaporated over the past two months. You even had some of the most hawkish Fed observers as well as some FOMC members talking, or hinting at, more cuts or another round of QE.
Meanwhile, I have been saying all along the economy would remain decent, government spending was picking up and the Fed would be on track for at least two more rate hikes this year, if not three.
Now, on to Trump.
There's been a lot of criticism over Trump's plan, the cornerstone of which is to levy massive tariffs on countries like China, Mexico and Japan. Before I get into the $1,200 iPhone meme that you hear going around everywhere and the fallacy of that argument, I want to tell you quickly and easily why this plan is going to work.
Very simply, it's about sectoral balances. I've covered this concept on several posts here. Sectoral balances refer to a simple accounting identity (identity means that's just how it is) that says the financial balances of the three sectors of the economy -- domestic, government and foreign -- must all sum to zero.
For example, if the federal government runs a big deficit, which it has been doing for a long time, then the domestic and foreign sectors are running surpluses of equal magnitude. In other words, if the government is spending $500 billion more than it is taking in (a $500 billion deficit), then the domestic and foreign sectors, combined, have received $500 billion. Together they have a $500 billion surplus.
On the other hand, if the domestic and foreign sectors are running a deficit (spending more than their income), the government sector is running a surplus. By the way, this is exactly what happened under Bill Clinton. When he pushed for surpluses, he threw the private sector into deficit. The private sector had a negative balance under the final years of Clinton and yet he and others talk about that as some kind of virtue. It most certainly was not. Many in the private sector are still trying to climb out of that hole.
The essence of Trump's plan is this: Rather than the federal government running deficits, Trump wants to shift the deficit spending to the foreign sector by imposing large tariffs. Under that arrangement, the U.S. domestic sector and federal government would run surpluses.
It can absolutely work.
All that would happen under Trump's plan would be that the sectoral balances would look different. They'd be "rearranged," for lack of a better word. There's nothing bad about that; it would just make the world economy look different.
Now about the meme where people are saying iPhones will cost $1,200 if we made them here in the U.S.A. Perhaps that would be true (although I doubt it); however, even if it were true, the fact that we were making them domestically would mean the number of manufacturing jobs would increase and people would end up earning more money. As a result, the relative, or real, cost of buying the iPhone (measured in labor hours necessary to buy one) could actually come down.
Remember, it's not just about cost, it's about income, too. Rich people are not that concerned with cost. They shop at Tiffany (TIF) and Piaget and Bergdorf Goodman and Prada and they spend like crazy. (You usually don't see wealthy people lining the aisles at Wal-Mart, WMT, or Dollar Tree, DLTR.) Why? Because they have the income to pay more and let's face it, the expensive stuff is usually a lot better.
If people earned more money, which is Trump's goal, then the real cost of that iPhone or whatever product we're talking about would go down, not up.
The bottom line is this: Trump's plan will work. I should also mention I have only described one small part of his plan. He also wants to rebuild our national infrastructure, which we sorely need, and he wants to implement single-payer health care and maintain or even increase Social Security for seniors. This is on top of the fact that he is for normalizing relations with Russia, which probably ends the prospect of WWIII, which by any measure is a really good thing.
What's the best way to play a Trump presidency? I think it's to buy small-cap stocks because these are the businesses -- domestic firms -- that would benefit the most from the broader population receiving a game-changing increase in incomes. It's realistic and it would definitely work. It's a great plan.
