(Mike Maharrey, Money Metals News Service) As we enter the Trump era, there seems to be considerable optimism about the economy’s trajectory.
If you’re a free market person, it’s reasonable to feel optimistic. We will likely see deregulation. We saw that impulse during Trump’s first term, and we’ve already seen it in some of his executive orders. For instance, Trump has already made moves to open oil drilling. We’ve also seen some early signs of fiscal reform with a federal hiring freeze.
But no matter what you think of President Trump, as an objective investor, some things should give you pause. That’s because, under the U.S. system of government, there is only so much a president can do.
Here are three things to consider that could significantly impact the economy that Trump will have little to no control over.
The National Debt
The national debt is climbing at a dizzying pace. As I put it in a recent article, the federal government is hurtling toward a fiscal cliff with its foot on the accelerator.
Trump has talked about cutting government spending, a refreshing change. But he has a long row to hoe.
In the first place, he needs the cooperation of Congress. Given party politics in the U.S., that can be a daunting challenge.
Political incentives work against spending cuts. Talking about spending cuts in the abstract is easy. Cutting specific programs is hard.
That’s due to the nature of politics. Politicians’ primary concern is getting re-elected. That means their focus tends to be on making constituents happy in the short term. Inflicting pain in the here and now is not a recipe for electoral success, and fiscal reform always causes some pain.
Think about it: if you’re a member of Congress, do you want to go back to your district and tell your constituents you slashed a popular program?
As a result, many of the things that need to be cut to make a dent in spending aren’t likely to be touched.
For instance, defense spending makes up a big chunk of the discretionary budget. Do you think they are going to slash the Pentagon with all of the geopolitical tension out there?
I don’t either.
It’s also important to remember that discretionary spending – the stuff in the budget that can be cut – only makes up about 27 percent of overall outlays. To really get to the heart of the matter, you must deal with Social Security and Medicare. These programs are known as “the third rail of politics.” In other words, touching that rail will get you electrocuted. They may tinker around the edges, but it’s more likely Congress will kick the can down the road than produce true reforms.
The other problem is the government always finds some new reason to spend money, whether in a crisis overseas or at home.
We’ve heard budget cut talk before, but remember, every president since Calvin Coolidge has left the U.S. with a bigger national debt than when he took office.
Even with his best efforts, Trump will struggle to change the borrowing and spending trajectory.
Monetary Policy
Trump recently said he will “demand” interest rates drop immediately.
He can demand all he wants, but he doesn’t have the authority to make the Federal Reserve do anything.
I’m not so naive as to think that the Fed is above the political fray, but Powell and Company are concerned first and foremost with the economic stuff, not political rhetoric. And given human nature, Trump’s demands may cause Jerome Powell to dig his feet in deeper.
Trump isn’t wrong. This debt-riddled bubble economy needs a lower interest rate environment to run.
But Trump isn’t right either. The Fed needs to keep interest rates higher for longer to tackle sticky price inflation.
I’ve written about how the Fed is in a Catch-22 – stuck between a rock and a hard place. It needs to simultaneously raise and lower interest rates.
Good luck with that, right?
Trump has no control here. It is what it is. And it is a recipe for more inflation.
Nearly Two Decades of Monetary Malfeasance
Finally, there isn’t much Trump can do about the consequences of more than a decade of monetary malfeasance. He can’t unwind nearly $9 trillion in printed money injected into the economy since the 2008 financial crisis through multiple rounds of quantitative easing (QE). He can’t undo the malinvestments in the economy and the debt bubble created by more than a decade of artificially low interest rates. This monetary malfeasance distorted the economy beyond its breaking point.
Those consequences – an economic crash and perhaps a financial crisis – are going to play out no matter who is in the Oval Office.
It is possible the powers that be can kick the can down the road for a while, but if we look at the trajectory of the economy after the monetary malfeasance of the dot-com era, the bust probably isn’t too far down the road.
Conclusion
While White House policies matter, and they can improve or hinder progress, the economy doesn’t live or die on the back of the president.
It’s important to keep these things in mind as you make investment decisions in the months ahead. A lot of people are selling gold and silver right now, imagining that Trump will turn the economy around and get price inflation under control. But given the things that are out of the president’s control, it might be wise to consider some of these three factors. Be careful not to let your political inclinations cloud your economic judgments.
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
