A race is on. In one lane is the Trump Train driven by sound economics, but volatile leadership. In the other is the languishing economic fall-out from the Great Recession. The first train over the line will define the Trump presidency, says Nick Turner.  

The last few weeks have been pretty good for President Trump. From successfully orchestrating a Democratic defeat over the 'Schumer shutdown', to a State of the Union address that built on his bravura Davos performance, The Donald has been on something of a roll. But this is not just the usual brand of Trump's braggadocio, underpinning the White House's confidence is the performance of a US economy now apparently "roaring" after the "anemic" (sic) growth of the Obama years.

Assessing the success of 'Trumpenomics' after little more than a year in office might seem premature, but Trump has pointed not just to gains in the stock market (in spite of last week's blip) but record employment and rising GDP as the fruits of his policies. Critics, fairly, have pointed to the trend in employment growth under his predecessor and have tried claiming the more robust economy as Obama's legacy. However, this ignores the real differences in economic policies between the Republicans and the Democrats and obscures the role of the current President. Just as many put the stock market boom down to that old Keynesian favourite of 'animal spirits', this misunderstands how market expectations, rational or otherwise, are created by a business friendly administration.

Former Reagan speechwriter Peter Robinson has argued that to properly evaluate the Trump Presidency, one has to ignore the Tweets and look 'under the hood'. Here Trump's experience as a CEO, the filigree that made an otherwise implausible candidate a Presidential contender, can be seen in evidence: Trump hires the best he can get. Unlike haughty foreign policy wonks, many now pillars of the 'Never-Trump' movement, economists tend to be less choosy over their political allies, and Trump's economic team has some pedigree. The successful tax reform is a particular triumph for Kevin Hassett, Trump's pick for Chair of the Council of Economic Advisors, whose extensive work on corporate tax cuts predicted the bonuses and rising wages seen since the Bill was signed. But the man wearing the biggest grin is not even a White House official.

Larry Kudlow, like Robinson an alumnus of the Reagan White House, was one of the few to publicly support the wildcard candidate during the primaries and co-authored Trump's economic plan with a group including Steve Mnuchin, now Treasury Secretary. A disciple of Arthur Laffer, Kudlow serves as a crucial link between the GOP, the White House and Wall Street. Kudlow's friendships with both House Speaker Paul Ryan and Kevin Brady, Chair of the influential Ways and Means committee, ensured the Republican Better Way Agenda was compatible with the then candidate Trump's proposed supply-side reforms. As a former CNBC news anchor and still a regular commentator, Kudlow ensured the markets knew exactly what to expect from President-elect Trump; shocked as they were at his victory, investors knew where to reposition and swiftly did so.

Tax cuts, massive deregulation and freeing up federal land for energy production form the core of Trump's economic agenda, at the least it is Making America Competitive Again. And while tariffs have recently been raised on solar panels and washing machines, there has been no Smoot- Hawley Tariff Act to crash the economy, a victory for Kudlow's supply-siders over the economic nationalists, represented by the ousted Steve Bannon. Yet even Kudlow is surprised at the dynamic response from corporate America, with Apple leading the way in using repatriated funds for investment excitedly hailed as "a modern-day Marshall Plan for the United States economy".

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However there are reasons to be less optimistic, and not just after switching to CNN. The Kudlow thesis, as argued in his book JFK and the Reagan Revolution, is that the secret of American prosperity lies in low taxes and 'king dollar'. It was the key to President Coolidge's economy in the 1920s, provided the revenues for the Great Society in the 1960s and fuelled the boom of the 1980s and 90s. So far, so rosy. Yet the dollar is an ageing monarch and while it does not necessarily have to be strong, it should be stable. However, the dollar fell throughout 2017 and just had its worst January since 1987, not helped by ambivalent comments by Mnuchin while attending Davos.

Enter the Federal Reserve, just as Chairman Janet Yellen makes a timely exit. The Achilles heel of the Coolidge economy, as Friedrich Hayek noted at the time, was the artificially low interest rates set by the Fed. Yellen, like Ben Bernanke and Alan Greenspan before her, has presided over a period of historic low interest rates which has prevented the US economy from deleveraging since

the Great Recession a decade ago. Nor can the effects of Quantitative Easing (QE), or modern day money printing, just be wished away. Savings rates are at all-time lows while household debt levels are higher than in 2008, meanwhile the US National Debt has doubled. The suspicion clouds the horizon that the Fed just re-inflated a bubble rather than allowing the economy to take its medicine. Unsurprisingly, the Fed expects inflation to increase this year and markets have already priced in interest rate rises, but can an economy addicted to cheap credit really take them? Recall it was rate rises, the expiration of so-called teaser rates, that popped the sub-prime bubble a decade ago.

Another problem is the bond market, which Greenspan himself has called a bubble. The Chinese government, one of the biggest holders of US debt, has indicated it will not be buying any more Treasury Bills, which leaves fewer actors willing to hold them other than the Fed itself, hardly in line with the stated policy of shrinking their balance sheet. Of course Beijing could react to Trump's trade or North Korean policies by actually selling, forcing the Fed to buy its own paper to prop up the dollar. Such a reversal of Fed policy could be the signal that crashes the bond market, the stock market or the dollar. In extremis it could crash all of them together, bringing the sort of sovereign debt crisis envisaged in Lionel Shriver's The Mandibles.

Such a doomsday scenario is unlikely. The US is still the engine of the world economy and China is not yet as powerful as is often supposed, nor does it want to bankrupt its biggest customer. Trump's restructuring of the American economy back towards free enterprise and away from Obama's over-regulated European model should see investment-led growth continue. Even after recent falls the stock market still has enough froth that it might stand another correction without affecting the economy, investors buying the dip and sailing merrily on. But the debt mountain hangs like the proverbial sword over the US economy. Should it fall precipitously and severely, the Democrats could retake both houses of Congress and the White House. With a Bernie Sanders- style socialist blaming the free market and tax cuts for the rich for what really are the results of previous feckless spending, then Shriver's 2029 timeline becomes more plausible.

The President has claimed ownership of the economy, he cannot now disown parts of it. So a race is on. In one lane is the Trump Train, fuelled by sound economics but driven and conducted by an unprecedented and unpredictable President "part Andrew Jackson, part Theodore Roosevelt and part P.T. Barnum". In the other is the massive hangover from 2008, delayed by the hair of the dog of near-zero interest rates and QE. If the economic train can build up enough speed it may keep ahead of the economic swamp, growth solves so many problems. But an awful lot has to not go wrong for terminal velocity to be reached.


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