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 Caucus to have a gridlock causing veto-like power.
Increasingly it seems that Trump is moving to the center in terms of trade, immigration, taxation, etc. Additionally, he is hemmed in by Republicans who don’t want radical change as well as by Republicans who are determined to avoid a growing deficit. The bottom line result will be gridlock rather than dramatic change.
In many cases gridlock is good. If gridlock means no changes it could mean it successfully prevented implementation of rash and dangerous policies that could trigger an inflationary recession such as trade barriers that raise prices and create global recession. Gridlock could lead to tighter fiscal and monetary policy thus increasing unemployment, lowering inflation, and lowering interest rates, and reducing the fuel that inflates the stock market bubble, which could lead to a cleansing crash. Such a crash is a necessary part of capitalism that allows for future dramatic growth. With suppression of a needed crash incompetent incumbent businesses block the way for new challengers who might offer better results.
There is a huge and unsolvable disagreement between the House Freedom Caucus versus Trump where Trump is a non-ideological person who loves getting deeply in debt with huge projects; by contrast the Freedom Caucus members are firmly determined to avoid contributing to budget deficits and also resistant to being dictated to by the White House.  As Trump’s popularity fades this will reduce the chances of moderate House Republicans to keep their seats and thus they may have to move to the center to get elected in 2018; some will probably not survive. If after the 2018 elections the House has a very narrow Republican majority that can be easily by thwarted by rebellious Freedom Caucus members then the House Republicans won’t be able to implement Trump’s plans and the Senate, using filibusters, will also be unable to implement them. Thus Trump’s rule could be like figurehead president Gerald Ford in 1976.
Whatever fears the market had after the election that Trump would control Congress and implement inflationary fiscal policy are now not valid. Instead the most likely outcome is a weak, rudderless post-bubble economy with a tilt towards hard money (especially since the Federal Reserve is on a rate hiking campaign), disinflation, and stagnation rather than towards a gridlock free Congress that offers a massive amount of fiscal stimulus.
Looking at a chart of interest rates for the 10 year Treasury, much of the past five years except for a deep dip in rates in 2012 and 2016 rates were fairly close or slightly lower than the current 2.35% range. Over the 12 months before the surprise of the election the rate averaged 1.8%. I think the rate will move back to the pre-election average close to 2.0%.
Look at the U.S. Great Depression of the 1930’s when the Democrats had a total monopoly on power yet were unable to produce enough stimulus to cure the depression in 12 years. Then in Japan, after the great bubble burst in December, 1989 their stimulus programs have always, for 27 years, failed to truly stimulate and thus their no growth economy remains trapped in a post-crash disinflation despite gigantic growth of government debt. If these two case histories show how hard it is to create sufficient stimulus, then how can the Trump administration, elected with an ultra-narrow margin of 77,000 popular votes in the three Rust Belt states that gave him the Electoral College victory, to get its stimulus legislation and health care goals passed by Congress.
Investors need independent financial advice about the risks being fooled by rumors of fiscal stimulus.

2017-04-04T15:16:08-07:00 April 4th, 2017|mayflowercapital blog|Comments Off on Gridlock May Be Disinflationary

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Donald Martin has a B.A. in Accounting and M.B.A. Finance, and has passed the rigorous CFP® exam and met the experience requirements needed to become a CERTIFIED FINANCIAL PLANNER™ professional. He has been employed in the financial services industries for 30 years and has been investing for his own account for 38 years. Donald Martin’s 19 year career in lending prepared him for fixed income analysis, Securities analysis, and macro-economic analysis used for investing. Donald Martin founded Mayflower Capital in 1993 to provide independent financial advice and implementation of advice about loans. In 2005 Donald Martin changed the company’s mission to providing independent financial advice about investments and financial planning and stopped providing loan services. Donald Martin has a B.A. in Accounting and M.B.A. Finance, and has passed the rigorous CFP® exam and met the experience requirements needed to become a CERTIFIED FINANCIAL PLANNER™ professional. He has been employed in the financial services industries for 30 years and has been investing for his own account for 38 years.