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Larry Summers And Goldman: Uhh You Guys Know Who We Just Elected, Right?

A sobering reality-check following last week's market binge.
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Image courtesy World Economic Forum

Image courtesy World Economic Forum

In a repudiation of months of market expectations, stocks surged following Donald Trump’s presidential victory last week. It felt kind of like Stockholm syndrome in fast-motion, or two homely strangers stuck on a desert island checking each other out in advance of what they know will be a long, long few years.

The logic for the rally, which reversed an 800-point drop overnight in the Dow, was that Trump’s plans to boost infrastructure spending while slashing regulations and taxes would stimulate the economy. No longer, it seemed, was the market pricing in the uncertainty that surrounds a candidate capable of changing his mind on a major policy 3 times in thirty seconds.

But now in the sober light of the week after, a few economic sages are stepping forward to put a damper on the enthusiasm. Take Larry Summers, who noted in the FT Monday the possibility of Trump’s plans backfiring. “Initial market responses to major political events are poor predictors of their ultimate impact,” he wrote.

The late MIT economist Rudiger Dornbusch made an extensive study of the results of populist economic programmes around the world, finding that while they sometimes had immediate positive results, over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump programme given its design errors, implausible assumptions and reckless disregard for global economics.

Summers took aim particularly at the infrastructure spending program, which focuses less on New-Deal-style public works and more on tax credits for equity investments. Toll roads: yes! Public school maintenance and air traffic control system modernization: not so much. 

In sum, Summers wrote, there’s less reason for optimism than initially supposed: “Not even US presidents with political mandates can repeal the laws of economics.”

Meanwhile, analysts at Goldman Sachs have put forward a Trump presidential scenario in which a dreaded 1970s phenomenon comes roaring back. Not fondue, not shag carpeting, not even key parties: stagflation.

“The positive fiscal impulse from his tax reform and infrastructure proposals could provide a near-term boost to growth and, depending on the specifics, could have positive longer-run supply side effects,” the analysts wrote. “However, other proposals could lead to new restrictions on foreign trade and immigration, which could have negative implications for growth, particularly over the longer term.”

In the worst scenario, trade battles with China and Mexico bring heightened tariffs, higher consumer prices and rising inflation – all of which take a bite out of economic growth and the average worker’s take-home pay. In that case, Goldman’s analysts see real GDP growth potentially dropping below 1 percent, with unemployment climbing to 5.3 percent.

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But not to fear! None of this changes the fact that Trump and his team have promised to slash corporate taxes and take Dodd-Frank to the woodshed. Whatever happens, your bank stocks are safe.



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