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 and more centrist types like Gary Cohn, Kevin Hassett, and Jared Kushner and removing less qualified advisors like Bannon, KT McFarland, Mike Flynn. A similar thing happened to Obama where he was newly inaugurated he was so inexperienced and lacking in gravitas and wisdom that he had to recruit establishment centerists like Rahm Emmanuel to be his Chief of Staff and thus the Obama administration became much more centrist than what its election rhetoric implied.
The ultimate outcome of Trump’s move towards traditional establishment policies means that there will not be any massive deficit spending or massive tax cuts, instead only some wimpy, fake news, petty tax cuts paid for by raising taxes on some group that lacks political clout. It may be possible that Trump gets considerable influence with picking new members of the Federal Reserve and through those members he somehow pressures them to expand the money supply. But as long as this country has a banking system based on granting credit only to credit qualified borrowers then only well qualified people and businesses that don’t need that much financing will be able to get loans. (There are exceptions to the bias in favor of credit qualified lending but those exceptions that allow subprime type of loans are so restricted they can’t contribute much to expanding the economy). Simply expanding the money supply through QE doesn’t create growth or inflation and is actually deflationary and is a covert form of increasing taxes on savers which leads to recessions.
One thing Trump might try is to stimulate the economy through ultra-lose monetary policy. In order to facilitate that he would need to get Congress to change banking laws and order banks to grant loans in a political manner to unqualified borrowers who could then use the increased money supply. This is what stimulated China to have enormous growth. Developed democratic countries like the U.S. and northern Europe refuse to do this and it seems unlikely that bankers would go along with it in the U.S. That type of action is unlikely to be sanctioned by a Republican Congress, nor are they likely to sanction extreme deficit fueled fiscal stimulus. To do that would require a Congress full of Bernie Sanders types.
The Developed world’s bank lending policies share in common an insistence to lend only to well qualified borrowers. In Japan they waived this policy during the great real estate bubble of the 1980’s and suffered a terrible debt bubble so now they won’t allow this.
Also the era of credibility or at least the growth in credibility for central bank monetary policy making is over. It has been exhausted by the errors of QE and ZIRP and has backed itself into a corner. The Fed is trying to extricate itself from this corner without admitting they were wrong. They can’t afford to admit they were wrong because they need to maintain gravitas to be effective and make their placebo work. Thus even if the new appointees to the Fed were rabid advocates of money printing they might find it is difficult for them to press on in the face of an incoming tide that is coming from a new era of anti-monetarist sentiment.
Central banks mistakenly assumed that if a rate cut from 9% to 4% in a mild recession could cure the economy that also meant a 5% rate cut done during a deep recession, when borrowers have huge debt balances, even when the rate cut must go through the zero-bound line and become negative, would also work. But it didn’t work in 2011-2014 (it worked a little in the darkest days of the crash of 2009 during QE1); it can’t work now.
The Trump administration may end up as a do-nothing administration simply because fiscal policy can’t function when debt loads and government spending are too high and central banking has maxed out its credibility (especially in other countries like Japan, China, the EU) and the Fed’s gravitas is in decline. To really stimulate the economy through either radical fiscal policy or by increasing the money supply (facilitated by reckless lending) both the president and Congress would need to be non-establishment leftists motivated by trying to cure a Great Depression. This could only happen if the country first went through a repeat of the Great Depression. But then the new Congress would greatly increase taxes, which would be deflationary.
Investors need independent financial advice about the risks of a relying on a Trump stock market boom only to find out that not much stimulus happened. Assuming that the Atlanta Fed forecast of 0.6% GDP occurs and that this leads to recession, then the absence of stimulation should lead to a full on stock market crash, nearly zero inflation, and a continuation of a bond bull market for another year or two.