Forget the first 100 days of the Trump presidency - not that they will be all that easy to forget - and begin to ask how the world is going to cope with the remaining 1,364 days.
He has once again taken markets by surprise. The administration is beginning to fishtail and even the keenest of his supporters must be questioning what it is that they actually voted for. The proposed tax reforms are on the table with a cut in corporate tax to 15% from 35% and, under the title of a simplification of taxation for individuals, a bonfire of the deductibles, leaving no more than mortgage interest and charitable donations on the docket. The 10% windfall tax on repatriated profits is there as expected.
But how does one square the circle of reduced taxation with substantial spending commitments and, more to the point, how does one bridge the cashflow shortfall between a sharp reduction in current revenue and projected future growth? The failed healthcare reforms were supposed to throw off US$1.5trn in savings. They are, for better or for worse, gone and now the original tax reforms seem to have been put forward without any suggestion of how they are to be financed.
We have similar experience in the UK where successive governments have made spending commitments funded by spurious efficiency savings, which seem to make sense to bean counters but never seem to materialise in the real world.
A trillion dollars might not be what it used to be but for a country with knocking on US$20trn in central government debt alone - that works out to be around US$165,000 per taxpayer - cracking another US$2bn or US$3bn in order to bridge the period between the implementation of the tax reforms and the putative flow of enhanced tax receipts through projected growth seems a bit stiff, especially during a week when the government is on the cusp of shutting down as the debt ceiling is once again reached.
SUBSTANCE
There is little that is as tricky as projecting economic growth, and the so-called dynamic model that the administration is purporting to apply has us not just filling the gaps between the substance but grappling to find enough substance in order to identify where and how large the gaps are.
If getting the repeal of Obamacare through Congress looked hard, prepare yourself for some flying feathers over the tax reform programme, not least of all as the reform of the deductible list will affect small business people and the self-employed, the core of the Republican electorate. Trump won the elections by stealing the traditional Democrat vote by promising that the Republicans would do Democrat things that the Democrats wouldn’t. He is now caught between a rock and a hard place, unable to please both sides at the same time and risks pissing off both at the same time.
Students of history will be aware that economic conundrums at home are frequently resolved by resorting to martial means abroad. Do I hear the sound of sabres rattling? Funny that, eh?
STATE OF THE NATION
Donald Trump’s rather cavalier attitude towards money, especially other peoples’, is again reflected in his approach to the federal debt ceiling, which will be reached at midnight tomorrow. He might be confident that Congress will pass the revised debt limit but to stand there, shrugging his shoulders and stating that if government shuts down, then it shuts down, is fine and dandy unless you happen to be one of those hundreds of thousands of people who risk getting laid off. The attitude grates badly and is reminiscent of the late Leona Helmsley with her epochal remark “We don’t pay taxes. Only the little people pay taxes”.
Along with the wall, his other great campaign promise was that he would exit Nafta, the “worst trade deal ever done by this country”. As of last night that promise is also toast as he has let it be known that Nafta won’t be scrapped and that it is now a matter of simply renegotiating parts. So the Nafta promise is gone, as is naming China as a currency manipulator. Healthcare reform is also gone along with the declaration that Nato has passed its sell-by date. The new friendship with Russia has hit the rocks, as has the ascendency of Steve Bannon. Let’s see what the next 1,364 days have to bring.
THIEVES LIKE US
I’ve just spent two days back in London again; a couple of lunches, a couple of dinners, a few other meetings and my first successful attempt to swap a little black bus for an Uber cab. (And, just for the record, my Thursday column fell victim to the vagaries of modern technology. My apologies.)
One of the lunches I attended was the annual get together of the teenage scribblers, which took place yesterday in grand old style. Of the four invitees who write for the press only one was able to escape. While tucking into his first pre-luncheon Bloody Mary – not everything in the old City was bad – he commented that he was really supposed to be back in the office on ECB watch. We all agreed that it didn’t really matter where he sat it out as rates were slated to remain unchanged and the reduction in the monthly asset purchase programme to €60bn from €80bn had been adequately covered in the run up to the meeting of the central council. In other words, a big snooze was on the cards and a big snooze it turned out to be.
As usual St. Mario made all the necessary noises about things getting better but not at a speed that would require a change of tack by the ECB, and if there is one thing he said that confirmed our chum’s presence at the lunch was not misguided, it was that “…risks are moving closer to being balanced…”. It was, nevertheless, interesting to hear him repeat that structural reforms need to be stepped up substantially while adding, in case those concerned might have missed the point, other policy actors needed to contribute more decisively. He has presided over the ECB since November 2011 and unless my memory serves me badly, he has been begging the political class to bite the bullet and to get on with urgently needed fiscal and labour market reform.
CONFUSION
The ECB certainly gets a gold medal when it comes to patting oneself on the back although, even with the post-French election rally in risk asset prices, the systemic stresses and strains remain clearly visible for those wanting to find them.
Markets had a mixed session although how much of all of this was simple value dynamics in the run-up to month-end after a week marked by the monster, post-election relief rally of Monday and how much really was due to Draghi’s words is a moot point.
I often feel that markets now no longer suffer from a lack of information but from a surfeit. There is so much stuff out there now – I have been treated to analysts’ forecasts on 38 individual US economic releases this week alone – that it is hard to formulate a clear view based on information. It does, however, leave plenty of room for any number of observers, irrespective of how contrasting their views might be, to find enough factual material to back them up.
BLUE MONDAY
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. In most of Europe it is a long one and it is a rare occasion where the UK is in complete harmony with its mainland friends as the early spring bank holiday coincides with the May 1 labour day holiday. I presume the gods have consulted the public holiday calendar again and that it will be cold and wet. After an unusually lovely, warm and dry April one can at least put on a brave face, take courage and declare “Well, I suppose the garden needed it….”.
Back Tuesday.