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Mohamed El-Erian Weighs Trump’s Good and Bad Sides

Many economist accept Trump's tax cuts were, though abused by large companies, some boost to the economy. They could have been much better targeted as a stimulus plan many agree too, of course. His failure to get a huge infrastructure program through is a real bummer and has a lot to do with his demand for funds for his wall, and or other of his junk. His trade war has no doubt slowed the economy irregardless of how it performs. On that last, Trump's trade war will ironically not hurt the American economy as much as it hurts other smaller ones, and/or less entrepreneurial ones.

The Allianz chief economic adviser sees possible reasons to celebrate — and plenty to worry about — in Trump’s economic policies.

Dan Weil

March 13, 2017

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If the focus is on deregulation, infrastructure spending, and tax cuts, economic growth could be boosted by both the supply side, including productivity growth, and the demand side, thanks to fiscal expansion. That fiscal expansion “would also allow for an orderly normalization of monetary policy,” El-Erian says.

The other possibility is less positive. If protectionism wins out and leads to trade wars, the outcome could be stagflation, “that nasty combination of low growth and high inflation that the advanced countries haven’t experienced since the early 1970s to early ’80s,” El-Erian says.

In terms of their impact on financial markets, the “good” Trump policies would boost stocks and the dollar because of stronger growth, higher inflation, and capital flows to the U.S., the economist figures. “It would also push government yields higher while containing risk spreads on emerging markets and corporate bonds, including high yield.”

The “bad” Trump policies would have a quite different effect, he says. “They would be detrimental to stocks, with more ambiguous effects for the dollar.” Slower growth is bearish for the dollar, but a trade war and higher inflation might buoy the greenback. In the bond market, “government yields would find themselves in the midst of a tug of war between the impact of lower growth on one hand and higher inflation and less foreign bond buying on the other,” El-Erian says.

Trump isn’t the only source of potential trouble for financial markets and the global economy, El-Erian says. There’s the risk of political turmoil in Europe with the rise of the xenophobic right wing. “And there’s a possibility of the dollar getting too strong too quickly, thus fueling political issues at home and dislocating” foreign governments and corporations with heavy dollar-­denominated debt burdens, he says.

https://www.institutionalinvestor.com/article/b1505ql0h10dcl/mohamed-el-erian-weighs-trumps-good-and-bad-sides