I’ve been analyzing economies and markets since the 1970s, and this is easily the least predictable.
So, call it what you will — chicken or rigged — there are two equally probable outcomes for what President-elect Donald Trump‘s economy might look like in 2017.
The easy way
In the first forecast, Trump gets everything he wants out of Congress — and fast.
A big middle-class tax cut. Revenue-neutral tax reform for higher earners. Big spending on infrastructure funded by public-private partnerships.
A big cut in corporate taxes, and minimal penalty for repatriating foreign earnings. A big penalty for any business sending jobs overseas. Corporate tax revenue rises despite lower tax rates.
All of the sharp edges come off of Dodd-Frank. The Volcker Rule is repealed, freeing banks again to invest for themselves. The Consumer Financial Protection Bureau is moved under Fed control, which begins to un-do its pointless regulations. All Obama executive orders are voided.
Obamacare is replaced by vouchers — same for Medicare and Medicaid — as soon as the vouchers can be printed.
Fannie and Freddie are privatized, and the mortgage supply improves, global buyers snapping up the new securities.
The Fed and markets initially concerned for the inflation potential of stimulus instead realize that productivity will rise so fast that inflation is not a risk.
Real, after-inflation GDP (gross domestic product) by year-end is growing over 4 percent. Wages likewise jump to 4 percent growth, but inflation stays below 2 percent, helped by the strong dollar.
Conditions are so good, unemployment so low, that new immigrants from Canada replace the deportees.
Hard-rock drillers begin to carve the comb-over atop the newest bust at Mount Rushmore.
The hard way
In the second forecast, Trump meets some resistance.
He gets the big middle-class tax cut, and high-earners do, too — but it turns out to be hard to close loopholes.
Corporate taxes come down, also, but the lower rates do not increase revenue.
Businesses stop sending jobs overseas, instead hiring directly over there. Infrastructure spending fails in partnerships, and funding must come from the Treasury.
Congress eagerly appropriates $1 trillion over Trump’s veto. The deficit explodes.
Inflation rises. The Fed tightens. Trump calls for Yellen’s resignation.
All of the stimulus pushes after-inflation GDP to 3 percent, but productivity stalls. Businesses say there is no point in making productivity investments because the world is already drowning in investment and overcapacity. They borrow to buy back their stock.
Wages grow at 3 percent, but inflation doubles to 4 percent. The Fed tightens. Trump calls for Yellen’s resignation.
Fannie and Freddie are privatized, but mortgage rates jump to 6 percent. Housing stops in its tracks, prices falling in most of the country. Trump demands Yellen’s resignation.
The dollar is very strong, so much so that U.S. exports collapse.
Unemployment rises through 5 percent, then to 6 percent by next Christmas. Trump is no longer able to appear in public. Crowds chant outside the White House and Trump Tower, “Lock him up!!”
I suppose there is a middle ground somewhere — most likely disorganized opposition in Congress to the whole agenda.
But whatever the outcome, the odds favor extremes.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
