America’s Big Gamble

Written by:

Harsh Goela

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We all know  that Donald Trump has been elected  as President  by the   people of America who were dissatisfied  with the present  governance and wanted a change. The last decade has seen no growth in terms of income and employment  and to top it all there was  terrorism and political instability like Brexit. Out of  frustration, the Americans have voted him in, for his radical thoughts  to change the  economic situation. Donald Trump has promised during his campaigns that he would cut  taxes and spend huge amounts in infrastructure. He  has also committed to keep  ‘Americans First’  in terms of employment and business opportunities and move  towards protectionism in economy.

Similar  economic  and  political  policies  were  adopted by  Ronald Regan ,  the then President  of  USA. ( 1981-1989). However if we compare the two periods,  they look very   different .

  1. When Ronald Regan took over as President, The USA’s Debt\GDP was 35% as against 104% now in 2016. If  huge amounts have to be spent in infra structure to rev up growth and income, it would cause large Fiscal deficits.  At the current level of  104% Debt\GDP, there seems no scope to go up further and if  Donald Trump  does it could lead to Debt/Bond bubble to burst and take the US into recession. In 1980’s Ronald Regan  had a lot of scope to spend.
  2. Secondly, during Ronald Regan’s time, interest rates were at about 16% and he had a lot of scope to soften the monetary Policy, whereas, Donald Trump will take over  with the interest rates at  near zero levels since 2008. There seems certainly no scope for the interest rates to come down.

Donald Trump strategy to spur growth in investment &  consumption & income seems difficult,  given the current macroeconomic  parameters.

Therefore,  we advice that one should be in no hurry to buy equities as it seems likely that we will get a chance to enter equities at  lower levels.

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