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Forex Fundamental Analysis

Thu,17 Nov 2016-   FundamentalOutlook


Before saying whether Donald Trump, the new U.S President is a Keynesian or not, one should know what the Keynesian school of thought basically is?

A British economist John Maynard Keynes was the one who settled or in simple words invented the Keynesian school of thought in 1930’s in response to apprehend the “Great Depression”. The Keynesian theory is a theory of economy’s total spending and its impact on inflation and output. Keynes gave the idea that to pull the global economy out of depression the best way is to fuel Aggregate Demand by increasing government expenditures and by lowering the taxes. That’s the reason this school of thought in economic terminology is called “Demand side” theory as its main emphases was on the economy over the short run.

Now the question is how Trump is Keynesian? One answer to this question is on the basis of previous information and experiences it is evident that whenever a Democrat in U.S is settled in The White House, the Republican demand that every single dollar of spending should be equipoised by cuts and when Republican is in White House, there is massive spending and gigantic tax cuts. And as from previous information Trump will do the same again as being the new Republican President in town. As an interview formerly this year to Fortune Trump has no plans to reduce debt as it’s not a priority for him. Even the campaign of Donald Trump was on the implementation of 1 trillion$ infrastructure program, massive tax cuts (aimed largely for the wealthy class) and an expensive border wall for immigrants. As in his victory speech he said

“We are going to fix our inner cities, and build our highways, bridges, tunnels, airports, schools, hospitals”, further he said, “ We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it” and this makes the markets in a little doubt as where Trump will spend money at---INFRASTRUCTURE??.

Another interesting thing is that from August, the Fed officials pinpointed many a times that “some combination of more encouragement for private investment, improved public infrastructure, better education and more effective regulation is likely to promote faster growth of productivity and living standards”. As US has old school Keynesian i.e., both Fed Vice chairman and chair now a new entry of a Keynesian is at White house as well. But the fun part is that this union of Keynesians won’t last long between Fed and Trump as both parties are in favor of same policy mix (gradual interest rate climbs and aggressive fiscal easing) and such policies mostly never end well. As if this fiscal monetary easing going to push unemployment below the natural rate of inflation and unemployment then Fed has to tighten monetary policy by hook or by crook which will result for a boom bust scenario for US economy for one to two years and then Fed will kick this boom out by in a hostile way by hiking interest rates.

A very famous proverb that suits the current situation is “to a man with hammer, everything looks like a nail” so how Trump will execute his plan is an interesting and important thing that no one is completely sure about as there are a lot of assumptions and expectations (definitely not good ones) for the new US President.

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Aimen Tayyab

Financial Analyst