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- Is Trump Inflationary?
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Let’s dive in…
I’ve been assuming that the economic policy mix Trump has been laying out of compromising Fed independence to lower interest rates, cutting taxes, and tariffing every good in the world would be inflationary. It seemed to have that effect when Turkey’s President Erdogan tried something similar.
But the point of these posts is to try to figure out what The New Rules of our world are, not to rest on assumptions, so I was intrigued to read some recent posts by the investor, Michael Kao, at Kaoboy Musings.
He sees a strong possibility that Trump could actually contain inflation. His case rests on three pillars: oil, fiscal discipline, and reality.
Oil
In his view, oil is the key commodity behind goods inflation. It’s in pretty much everything so when oil prices go up, inflation goes up. There’s a lot of disagreement about how closely oil and inflation are linked and there’s evidence from the 2010s that they have decoupled.
But as you can see from the chart below, the correlation, while not perfect, looks pretty good from our last bout of inflation.
It also seems logical that the people in the oil business should be happy about Trump getting elected, right? Well, I’m not so sure. As you can see from this chart from Trading Economics, oil didn’t do particularly well from 2016-2020.
The reality is that while you get invited to the White House during Republican presidencies, most oil executives should prefer a more hostile environment. There’s less drilling, less supply, and prices tend to go up.
It’s entirely possible that a Trump presidency unlooses the taps further and prices fall. I’m a little suspicious of this. Biden already did this. US oil production is the highest of any country ever in history. Is there much more that Trump can do? Maybe.
Another key to this theory is the close relationship Trump has with Saudi Arabia. As the second largest producer, the Saudi’s can move markets. Kao speculates that Trump can cut a deal with Saudi’s defacto leader, MBS, to reverse some of the Saudi cuts in oil production in return for a security deal. If that happens, it would lower the oil price even more.
It’s intriguing and I don’t know enough to rate the relative importance of a US security deal to the Saudi’s versus a better oil price. It also probably requires some resolution of the Gaza conflict.
Then there’s Russia. Could Trump usher in a deal on Ukraine and restore Russian trade. Most Russian oil is already reaching the market but making it internationally available might help some. I see some possibility that Trump could at least keep oil price hikes capped.
Spending and Taxes
Another key factor in keeping inflation high would be an unfunded extension of Trump’s tax cuts. The Center for American Progress (no friend of Trump) has estimated a full extension would cost $4 trillion. That’s real money.
One possibility would be canceling some of the spending done during the heady pandemic days of the Biden Administration. I’d assume the Trump Administration would in particular target the Inflation Reduction Act (IRA). The estimates of the spending from the IRA range from $800-$1.2 trillion over ten years.
That’s real money too but not $4 trillion. How much of that $800-$1.2 trillion can be harvest depends on 4 things:
How much has already gone out the door: This is a hard figure to track down. We’ve all heard about $2.5 billion being allocated to build charging stations for EVs with zero actual stations to show for it. But a lot of money has already started going out. Let’s say it’s $200 billion or so. Maybe they can harvest another $400-500 billion as offsets.
How many seats the Republicans win in Congress: Trump needs to sweep both Houses of Congress. He’s got a good chance of doing this but without a majority in both, he’ll need to negotiate a deal and my guess is Dems aren’t going to be eager to slash their prized achievements.
The budget reconciliation process: If Trump has a majority in both Houses of Congress, they can use the budget reconciliation process to get around the 60 votes needed in the Senate to break a filibuster. The requirements are tight but cutting spending and taxes is what reconciliation is for.
Elon and Red States: Elon is donating $45m a month to Trump’s campaign. Is he going to want to see EV subsidies slashed? I don’t think so. There’s also the problem that a lot of the money from the IRA and previous legislation is going to red states that will lobby Trump to keep it.
Political Reality
A final reason Kao might be right is that it’s fine to dream about abstract policies while campaigning but once Trump is in office, political realities reassert themselves.
Every CEO in the country and the world is going to come lobby to stop tariffs in their industry. So it’s not going to be an easy thing to raise them across the board.
It’s also not clear that Trump’s Wall Street friends or Senate friends are going to go along with breaking the independence of the Fed. And there seems to be a little less enthusiasm for tax cuts now in the Republican Party as a whole.
In the end, I still vote that this policy mix is inflationary and I believe underlying trends are inflationary regardless of what policies the next Administration follows but Kao makes a good case and I’m going to keep thinking on it.
Keep growing,
Alan
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