Now that the US Presidential election is decided, it’s time for us all to try to anticipate what it might mean for each of us. For some, inflation would be a good thing; for others it won’t be. You know what it would mean for you.
Many people, and particularly investors, seem to be convinced that Fed raises in interest rates will bring on inflation. Why? That’s what has happened in the past.
But we are in a whole new world right now. A world that will be hugely shaped by Donald Trump and company. And by robots which Oxford University experts expect “will replace almost half of all American jobs in the next two decades.”
During his campaign, Donald Trump counted on corporations’ ability to step up and provide new jobs for Americans via funding infrastructure projects using their own money.
Trump soon ran into trouble, halving his estimated spending on new jobs from $1 trillion into $500 billion. My last post, “The Emperor Has No Clothes,” explained why even that estimate might be too much.
The Fed is hoping that an interest-rate rise in the cost corporations pay to borrow capital will bring on a cycle of new investment by corporations. But right now, making capital more expensive will not encourage corporations to spend more.
As of spring 2016, 99% of 2,000 US corporations were deeply in debt. Only 25 large companies hold half of all US corporate cash. Even the amount of cash the richest companies hold is nowhere near the billions of dollars needed for new jobs.
To make things worse, there has been a frantic sell-off of corporate bonds since early 2016 by investors worried about the impact of the Fed’s interest rate rises. Over two trillion dollars in corporate bond wealth disappeared in the last month.
The fact is, corporate spending on investment has decreased during the past decade in favor of share buybacks, corporate buyouts, shareholder dividends, buying from foreign companies and automation of manufacturing.
None of these things creates jobs for Americans. And none of Trump’s indirect incentives for corporations will necessarily change anything in our economy either.
Trump’s carrots and sticks
Trump’s carrots are tax breaks for the wealthy and corporations. These breaks for deeply in-debt corporations will be welcome, but as Trump’s Carrier deal showed, may not stop job loss.
Lower taxes on the wealthy may encourage them to invest, but not in corporate bonds. The corporate debt bubble created by easy money from the Fed is now drying up, and that market is dropping like a stone.
Instead, money is flowing into the stock market, creating another bubble. 2017 is predicted to be a very volatile year, especially dangerous for retail (i.e., individual) investors.
Bonds are no longer the safe haven for investors, but neither are stocks. And the commodities market may also overheat.
We can expect that in the face of fear of the future, use of derivatives for “insurance” purposes by wealthy investors is likely to grow, if they dare to buy them.
What US corporations are unlikely to do is invest in infrastructure.
These projects rarely fully pay for themselves. That’s why they are usually publicly funded by taxpayer monies in the form of local government bonds.
Donald Trump proposes protective trade agreements to keep out foreign goods along with use of higher tariffs and taxation of corporations who buy foreign goods, thus forcing us to buy American-made products.
But all these penalties are based on the assumption that American corporations and consumers will be willing and able to pay for more expensive goods.
As the Carrier “deal” showed, they aren’t.
With corporations so strapped for cash and/or unwilling to invest in jobs, the only alternative is for taxpayers to foot the bill for infrastructure projects. Will this happen?
Many Republican leaders in Congress say they would prefer government funding of infrastructure and reform the US tax code for corporations both in the US and to stop use of corporate tax arbitrage among foreign nations intent on enticing US corporations to move abroad.
However, for years a Republican-controlled Congress has refused to spend tax funds on national infrastructure projects or do anything about closing tax loopholes for the wealthy and corporations.
Suggestions for increasing real wages of workers have been fought against by lobbyists as many corporations seek to lower wages in order to cope with their own debt problems.
The only tax reform Congress seems to favor is eliminating SE and FICA taxes on the self-employed, employees and employers. This would relieve corporations from paying half of FICA tax for each employee.
Politicians could happily dip their fingers into both the Obamacare and Medicare tills paid for by worker/taxpayers for decades, while bragging about keeping the deficit down.
No doubt, “entitlement” funds would quite likely be used to bail out a few large corporations with military contracts.
Will we see price inflation?
Those who believe in miracles may very well increase their prices for consumer goods in anticipation of the immediate future being like past economic booms after Fed interest rate rises.
And certainly those businesses who pay higher costs for borrowing money at higher rates of interest will pass the extra interest-rate costs on to customers.
So, it’s quite possible inflation might arrive – and sooner rather than later.
If so, buying cheap imports now, stocking up on necessary things, and preparing for price increases later in whatever ways is wise.
However, if inflated price increases are built on denial of our huge corporate debt bubble, inflation might well well push this economy into a recession sooner rather than later, i.e., when there is “too little money chasing too few goods.”
This will happen because of the amazing increase in income inequality in the US over the past 30 years.
So, remember that in times of recession, cash is king, while debt usually only brings more debt.