Trump’s Economic Policies Could Crash Markets, Economist Warns

When Donald Trump won the presidential election, most analysts were stunned. It seems that virtually no one expected Trump to actually take the election away from Hillary Clinton; she was ahead in the polls throughout most of the campaign cycle. Trump’s victory left Wall Street almost giddy as investors responded to his campaign promises of tax cuts, financial deregulation and spending on infrastructure. However, a prominent economist is now claiming that Trump’s economic policies could crash the markets.

Respected Economist Fears Trump’s Economic Plans Could Destroy the Markets

Nouriel Roubini is a professor at the Stern School of Business at New York University. Roubini has worked for the World Bank, the U.S. Federal Reserve and the International Monetary Fund. He was also a senior adviser to the former Secretary of the Treasury, Timothy Geithner, and was a member of the Council of Economic Advisers during the presidency of Bill Clinton. Roubini has made a number of accurate predictions in recent years, including his prediction that the housing market would collapse. In February 2017, he speculated that Trump’s economic policies could signal a move away from globalization, global instability and increasing international conflicts that could crush the markets in the United States and around the world.

Roubini Is Leery of Rising Interest Rates and a Stronger Dollar

In his article appearing on ProjectSyndicate.com, Roubini states that Trump’s fiscal-stimulus plan boosted stock prices, but it was also responsible for a hike in interest rates. Higher interest rates typically hurt interest-sensitive spending, including the real estate market and business investments in capital assets. Roubini also claims that the fact that the U.S. dollar has appreciated since Trump’s election could signal the loss of blue-collar jobs, possibly costing as many as 400,000 jobs in the manufacturing industry over time.

Roubini Fears Inflation Is Inevitable

Roubini believes that rising inflation rates could result from Trump’s economic policies. He states that the combination of low unemployment rates and the administration’s fiscal-stimulus plan will drive inflation more than it will drive growth. As Investopedia explains, rising interest rates lead to economic slowing and decreased inflation rates, while low interest rates increase inflation and spur economic growth. Roubini fears that the Federal Reserve will be forced to raise interest rates to combat inflation even though such a rate hike could harm the economy.

Roubini Worries About Trump’s Protectionist Interventions

Trump has shown a willingness to interfere with the corporate sector. He has threatened companies that move manufacturing operations outside of the United States with substantial levies to import their foreign-made products back into the country. He has publicly accused numerous corporations of price gouging, and his restrictions on immigration are making it more difficult for companies to attract talent, particularly in the technology industries.

Roubini Feels Trump’s Stance on Trade Could Harm the Economy

Roubini is concerned that Trump’s tough stance on trade agreements could result in trade wars that could impact markets and economies around the world. In an opinion piece published by U.S. News in March 2016, Mary Kate Cary argued that trade wars and import tariffs will result in higher prices, increased unemployment and rising inflation, thereby hurting the working class and poor the most. Roubini holds the opinion that the enactment of the Smoot-Hawley Tariff Act in 1930 worsened the Great Depression due to the trade wars that resulted.

Roubini Worries That Trump’s Damage-Control Efforts Could Exacerbate Matters

Trump has discussed his intentions to weaken the U.S. dollar, but he has yet to take action in that area. As Bankrate.com explains, a weaker dollar should discourage imports and encourage exports, thereby reducing the trade deficit and stimulating the gross domestic product. On the negative side, a weaker dollar means that American consumers have less global purchasing power. Roubini fears that Trump could take a radical approach to weaken the dollar, leading to panic in the global markets.

Other Predictions About Trump’s Economic Policies

Other analysts have expressed their opinions about Trump’s plans to revitalize the economy. In an article posted on RSM.com, economist Joe Brusuelas states that uncertainty about the status and role of the United States in the global economy could create issues that hurt long-term growth. He also expresses an opinion that “significant tax reform” and changes to enhance productivity will be needed for long-term growth to exceed more than about 1.5 percent. Brusuelas notes that Trump plans to reduce taxes on pass-through entities, which account for approximately 95 percent of the firms in the American economy. This would also help the middle market, which employs about 33 percent of the labor force and represent approximately 40 percent of the gross domestic product.

However, in an article published by TheStreet.com, Emily Stewart states that the reduction in revenue would “skyrocket” the budget deficit. Stewart quotes an analysis of Trump’s plan by the Tax Foundation as showing that federal revenue would decrease between $4.4 trillion and $5.9 trillion. In light of the deficit, creditors could insist on higher interest rates on bonds, spooking the markets.

Some analysts have stated that the Asian economies will suffer the most from Trump’s policies. Japan, China, South Korea and Vietnam produce low-cost products that appeal to Americans looking for bargains on televisions, furniture, clothing, cell phones, stereos, cars and other products. If Trump imposes major tariffs, the prices that Americans pay for these items would increase, which would probably result in fewer sales and economic downturns in these countries.

Not all of the analysts believe that Trump’s economic policies will be disastrous. His plans to improve the country’s infrastructure, for example, are viewed as having long-term economic benefits for the nation. In the short term, infrastructure projects could boost the economy, but the greater benefits could take years to be realized through improved transportation, enhanced cybersecurity and an improved energy infrastructure.

Trump’s tax cuts are also praised by some analysts, particularly his promise to slash corporate taxes. They point out that U.S. corporations pay the highest percentage of taxes of any of the 35 countries that are members of the Organization for Economic Cooperation and Development. Furthermore, an estimate from the Congressional Budget Office states that up to 25 percent of the corporate’s taxes are actually passed on the workers in the form of lower wages, fewer benefits and reduced hours. Corporations also pass the cost of taxes to consumers through higher prices.

It is not uncommon for presidents to alter their positions after they are elected. Sometimes, they find that they must change their plans to win the political support they need for policies that exceed their authority. At other times, they simply discover that their campaign promises relied on incorrect data; after taking office, they may learn information that was not provided to any of the candidates. It is therefore too early to tell what Trump will do or what the consequences might be. However, if you would like to explore the issue in greater detail, you will find numerous educational articles at the Personal Money Store.

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