political economy

Trump Move Towards Establishment: Reduced Risk of Triggering Inflation

The Trump administration continues to show that it is moving towards the center and towards a somewhat establishment or consensus type of policies. They are hemmed in by the moderate Republicans in Congress who won’t dare cut the existing welfare state benefits such as the ACA, etc. because they would lose their seats, and are also boxed in by the Freedom Coalition members who that hate growing deficits. Trump will not be able to engage in massive deficit fueled stimulus nor will he be able to cut costs and use the savings to finance a tax cut, thus depriving taxpayers of stimulus because they won’t get real net tax cuts. The administration seems to be moving towards recruiting more professional

April 10th, 2017|mayflowercapital blog|Comments Off on Trump Move Towards Establishment: Reduced Risk of Triggering Inflation

Gridlock May Be Disinflationary

    The future of politics is that Congressional Republican leaders don’t want Trump to boss them around or gain control so these leaders will maintain the status quo of the Senate filibuster and thus allow it to help the Democrats to block legislation, thus creating gridlock that is coming from inside of the Republican party but which can be blamed on Democrats.  Then Trump will be unable to create dramatic fiscal stimulus and will end up being a do-nothing president. House Speaker Paul Ryan doesn’t want to unite with Democrats to create a majority voting block that can bypass the Freedom Caucus. By announcing that policy he is basically refusing to play politics with Trump and is allowing the Freedom

April 4th, 2017|mayflowercapital blog|Comments Off on Gridlock May Be Disinflationary

Will Tax Cuts Create Inflationary Stimulus?

    The Trump administration seeks massive tax cuts to stimulate the economy. The textbook economic response is that tax cuts stimulate the economy and cause inflation. However generic textbooks assume debt loads are much lower than today’s debts. High debts act to slow down consumption so the extra after-tax income from a tax cut may simply go to debt service instead of simulative consumption. The other problem is that the political will by Congress to cut taxes is lacking. When Reagan was elected in 1980 the tax code had no inflation indexing and thanks to the horrific inflation of the 1970s tax rates for moderate income workers were pushed into high brackets thus creating an unearned windfall for the IRS

March 28th, 2017|mayflowercapital blog|Comments Off on Will Tax Cuts Create Inflationary Stimulus?

Political Developments Imply Lack of Stimulus

    The defeat of the Republican’s anti-Obamacare bill today implies that the Republicans, including Trump, will be heading in the direction of a traditional Republican Establishment doing-nothing type of regime instead of a dynamic, aggressive libertarian agenda of deep budget cuts and deep tax cuts. It is far too dangerous for elected Republicans to remove traditional welfare state benefits such as Social Security, Medicare, food stamps, etc. The same applies to the ACA subsidy for health insurance. The rural, low paid, blue collar workers who voted for Trump may have no choice but to depend on Obamacare because health care at age 55-64 can cost $15,000 a year a person and lower-middle class people might only earn $30,000 thus making

March 24th, 2017|mayflowercapital blog|Comments Off on Political Developments Imply Lack of Stimulus

Rates Dropped Since Fed Increased Them Last Week

     Last week the Fed raised the Fed funds rate 0.25% when the ten year Treasury Note was 2.6%. Today stocks crashed down 1.2%. Now the ten year Note yields 2.44%, a drop of 16 basis points since the Fed‘s rate increase. The market has decided that the Fed’s tightening will be disinflationary so the market has cut the yield for long term bonds. The result is a flattened yield curve, which is a bearish sign for stocks. The House of Representatives Tea party members appear ready to block Trump’s healthcare legislation. The implication is that Trump will be unable to make substantial changes and thus he can’t implement inflationary stimulus infrastructure building programs or inflationary tax cuts. The structural

March 21st, 2017|mayflowercapital blog|Comments Off on Rates Dropped Since Fed Increased Them Last Week

The Political Basis For Creating Inflation

The great inflation of 1965-81 can be traced to the Roosevelt New Deal of the Great Depression where every attempt was made (including efforts by Herbert Hoover) to inflate the economy out of the depression. These measures should have been dismantled after the 1941-45 war. Instead many features were kept in place thus creating conditions that helped create the 1965-81 inflation era.  During The New Deal, WWII, and on through the regime of president Johnson from 1930 to 1968 the Democrats were solidly in control (except for a brief time in 1954) and the Republicans often went along with their polices. Basically the country was united around a consensus of New Deal style government manipulation of the economy to cure

February 2nd, 2017|mayflowercapital blog|Comments Off on The Political Basis For Creating Inflation

Tax Cuts and Import Duties: How Will They Affect Investments?

The Trump administration seeks tax cuts on personal income and tax increases on imports. Assuming a taxpayer gets a three percent tax cut but also loses the deductibility of state income tax (which is 9.3% to 13.3% in California) they may not get a net income tax cut. If a consumer earns $100 and gets $67 after-tax and spends 20% on tangible goods subject to the Border Adjustment Tax they may pay 35% in hidden taxes (paid by the corporate importer) on the 20% that they spend on goods. That’s 7% of their after-tax income or about 4.6% of before-tax income, enough to wipe out the personal income tax cut benefit. If someone owns a corporation they will experience lower

January 24th, 2017|mayflowercapital blog|Comments Off on Tax Cuts and Import Duties: How Will They Affect Investments?

Will Trump Create a Boom, Making Interest Rates Rise?

Interest rates are influenced by inflation and by growth rates. When economic activity increases that increases the demand for funds, which makes the “natural real” rate of interest rise. If Trump can make the economy grow at 3.5% instead of 2.0% the extra 1.5% growth could translate into a similar increase in interest rates even if the growth were non-inflationary. A rough estimate is that rates in the pre-2008 era were the sum of inflation and real GDP growth, so a 1.5% surprise increase in growth implies a 1.5% surprise increase in interest rates. This could make the ten year Treasury bond drop 13% in value. Bond investors should not obsess with only watching inflation because there are other reasons

December 21st, 2016|mayflowercapital blog|Comments Off on Will Trump Create a Boom, Making Interest Rates Rise?

Stocks Hit A New High: Will Tax Cuts Make Stocks Go Way Up?

Yesterday various stock indexes hit a new all-time high. Should you buy? One school of thought is to use momentum trading and buy when a trend has developed and simply follow the trend. The other school of thought is that this is very risky since fundamentals indicate stocks are too high. I prefer to use fundamental economic analysis. Based on ratios such as price to earnings, price to sales, price to GDP stocks are roughly worth about 1100 for the SP, half of the current price. They will fall 50%, although it may go higher before falling. There is no guarantee that they won’t first go higher for irrational emotional reasons.  The proposed tax cuts will enrich those rich enough

November 22nd, 2016|mayflowercapital blog|Comments Off on Stocks Hit A New High: Will Tax Cuts Make Stocks Go Way Up?

Solving The Problem of Low Cost Foreign Competition: Will it Hurt U.S. Investors?

A trade war could damage the value of bank stocks, bonds, loans and damage export sales, leading to a deep recession. The new administration will seek to help workers by restricting foreign trade in the hopes of undoing the problems caused by the importing of low cost imported goods from low wage countries. The problem with that is that it is closing the barn door after the horse has left. The situation has changed. Now the true problem is not low wage EM countries, rather it is that automated robotic workplaces are the wave of the future. There will plenty of jobs for college graduates in the future but there will be a lesser number of good quality blue collar

November 21st, 2016|mayflowercapital blog|Comments Off on Solving The Problem of Low Cost Foreign Competition: Will it Hurt U.S. Investors?