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May 2016 Economic Overview

US Zone

The tug of war between the Fed trying to force rates higher and the rest of the world trying to fight off recession continues with no let-up in sight. The US economy grew at 2.4%, faster year end 2015 than thought. The consumer is spending with home-buying especially rosy. But corporate earnings, with the fall in oil prices, have some challenges not just domestically, but also internationally. The global nature of financial markets and the dollar’s critical role within them requires the Fed to go slowly. Its planned additional hikes might well tip America and much of the rest of the world into recession. Even as household wealth grows on strong new job creation, ongoing struggle in Europe and Japan and the slowdown in China have limited how fast US activity can move. Raising interest rates well above the global level may be inviting destabilizing financial flows and an economy choking rise in the dollar. The Fed should tolerate rising inflation, it is preferable to imploding portfolios and risking a recession.

The Bizarre rise of “Trumpism” is frightening. The rest of the world thinks he and his supporters are mad. What, must he and they be smoking?

trump-rally

What might a Trump economy look like?

He makes up policy as he goes along, departing from party orthodoxy. He insults our largest trading partner, China, calling them ‘currency manipulators’. And he wants to force them to eliminate ‘illegal’ export subsidies. He will ‘force’ Mexico to pay for the improbable wall he proposes to build on the border of Mexico, despite the President of that country saying, “No way Jose.”

On taxes he wants sweeping cuts, higher standard deductions, lower dividend and capital gains taxes, and he wants to cut corporate taxes to 15%.

While most economists say such a program would lead to a huge increase in the federal deficit, Trump claims lower taxes will stimulate the economy. Meanwhile, he also calls for a balanced budget that will require huge spending cuts.

He is also going to beef up the military and spend more on Veterans and immigration controls. He claims that he will save $300 billion on Medicare. How he will accomplish this, as usual, he is short on details.

Funding his tax cuts would require unimaginable spending reductions. His program is unimaginable as it is improbable.

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