Investors got really excited about Trump’s fiscal policy proposal lately. It seems that the 30 years of bond bull market might reach its end, or at least take a break, as investors started to dump bonds on higher inflation expectations. While global central banks tried to generate economic growth and higher inflation for years now, they might not be satisfied with the outcome.
Alright, lets see the facts first. Real money supply doubles since the Great Financial Crisis, mainly due to QE programmes, partly to higher money demand on behalf of households, and deleveraging of the advanced economies. Meanwhile, output gaps are closing. However, overall demand is still sluggish, rather the lack of investments, demographics, and human capital depreciation contributes to a lower potential GDP level and narrowing the gap. One way or another, extra capacity shrank in the economy, easing deflationary pressures, which isn’t homogen in the first place. For instance just take a look at housing, education, or health care numbers.
Subsequently, on top of all of this, comes the new fiscal stimulus, promising infrastructural developments (roads, bidges, The Great Mexican Wall, etc.), and tax cuttings. Eight years after the GFC, economy at full employment, output gaps shrinking. However, one shouldn’t be blinded by the macro picture, the manufaturing sector (consisting of many of the new President-elect’s supporters) still struggling with a production slack. The sector still recovers from cyclical(?) unemployment, low labour force participation rates, and high overcapacity.
Although the fiscal spending could consume much of this overcapacity, benefiting the sector, but again, the rest of the economy is running on (nearly) full steam. The spillover effects would just increase the prices through economic bidding, but wouldn’t bring any significant amount of new products on the market in the short run given the constraints. In real terms manufacturing workers would bring less home, which would certainly increase employment, but the overall sector would almost certainly be worse off. The already working people would give up more than the new entrants earn.
Conclusively, the policy can more than easily end up harm the economic interests of the people it aimed to help, and could cause a spike in short term inflation number, since the rest of the economy is facing constraints. Or maybe I totally misunderstood the new policies intention, and it only wants people to look at nice big numbers.