QUESTION: Martin– Your models seem to predict a Trump win. Given Trump’s stated preference for low interest rates, how does that jive with rates needing to go up to normalize things and save pensions in the next year or two? Would the Fed have to give in to President Trump?
ANSWER: Keep two things in mind. First, the president has no power over interest rates. Secondly, neither does the Fed. The Fed at best can control short-term rates, but the entire point of QE was to influence the long-end. Additionally, whatever people say when running for office has no real bearing.
Furthermore, keep in mind we published that projection before Trump even announced he was running. So this has nothing to do with Trump personally or what he says, and it should not be taken as an endorsement. One person cannot change the direction of the world alone. The reason Trump may win is that the Democrats are still in denial. The Republicans have had to swallow their pride. Trump has brought in millions of new people; Hillary has not. The Democrats have not figured out that the grassroots are fed up with career politicians regardless of their party. This disconnect within the Democratic Party has some speculating that the FBI will charge Hillary to clear the way for Biden. That would be a problem because Bernie supporters would get really pissed off. But this is the clash between the rulers and the great unwashed.
Trump is flexible. He will bend to the problem of pensions and agree that higher rates are needed. So I do believe Trump would be better for the economy for he would make decisions based on private sector experience rather than theory and dogma from career politicians. Let’s face that much. We have not had anyone in politics with private sector experience for at least 85 years.
We are in a period of deflation right now which means people are hoarding cash and not spending rashly. They do not have confidence in the future so they are holding back and saving for that rainy day. Everything goes nuts when they realize government is incapable of controlling anything.