Friday 10 February 2017

What is the Trumpflation and does it make sense?

Trumpflation is that the market believe that under the Trump administration the US economy will experience a faster growth period as Trump is very likely to deregulate the banking sector and cut the current tax levels and move jobs back to the US. Based on such belief, the US economy will be generated by an expansionary fiscal policy, an increase in investment and an increase in people's consumption hopefully due to the possible tax cut. However, is Trump's such strategy effective in making the US economy stronger?

My opinion is that the large multinational companies and financial institutions will benefit from his policies as they can reduce their costs as the taxes will be cut and there will be less regulation. Therefore, I expect that in the short term the US economic growth may be boosted by the companies and financial institutions growth and expansion. However, in the long term, the US economy has some degree of probability to enter its declining trend, if we compare the current US with Britain from the late 19th century. Britain in the 19th century and the early 20th century, the British empire entered its declining period that it lost its economic and military strength. Britain lost a war in Africa when fighting the local tribes and Britain also lost to Iraq and Afghanistan in the late 19th century and the early 20th century. Many people argue that Britain at the time lost its advantage in its productivity and had a social unrest due to a very wide wealth gap. In order to solve the problems, the British governments under both Liberal PMs and Tory PMs established the base of the future welfare state, including the introduction of minimum wage, pension schemes and etc. Afterwards, Britain remains as a global important country and definitely lost its leader position to America.

The current America has some similarities. The lower middle class and the working class and some middle class people are unhappy about the current situation due to an increase in the wealth gap in the society and the gap can be widened under the Trump administration. Adding to this, America has a close to full employment economy and many people have already been complaining about the system, it could be far worse if a crisis takes place. Moreover, America has got itself trapped inside some conflicts across the world, that could cost many American resources and bring up domestic criticism if America loses in any of the conflicts or makes large sacrifice. However, there are some differences. America has a large land that is able to provide very rich resources, but Britain had some dependence with its colonies. In addition, Britain went through two world wars that significantly damaged the British economy and society; however, once the great powers have nuclear weapons, a large scale war will be more deadly but less likely to take place as no single great power can accept the damage from such large scale war.

Overall, I see that Trumpflation mainly targets at the American large scale companies and financial institutions, to the American society, the wealth gap will be wider and in the long term the economy may be dragged down by the social unrest caused by the wealth gap.

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