Here is the economist’s dilemma of 1962, 1971 repeated in 2017. Does the US economy have resource slack, warranting a stimulating policy, harvesting mostly an increase in growth and jobs rather than imports and inflation? Or is it already at or near full employment and any belated stimulatory policies will run the US economy hot to the point of overheating, harvesting initially a growth and job burst but ere longer faster inflation, higher imports, rising bond yields and interest rates and an overvalued Dollar?

The Yellen Fed this past year has been cautiously in favour of allowing the US economy to slowly run hot. The gradual pace of recuperation these past seven years has kept inflation exceptionally low, the growth rate modest, and job and income growth slower than hoped for. A function of confidence, low business investment growth and low productivity growth.

With the US economy approaching full employment, in terms of people fully employed and underemployed people reabsorbed, and accepting the still low participation rate as a function of changing demographics, the Fed has accepted there isn't much slack left. But with inflation and business investment low, allowing the economy to perform strongly for a while seemed appropriate to ensure a more fully absorbed labour force and revived inflation rate so that it can carry an interest rate normalisation.

Into these carefully laid plans one Donald J Trump is parachuted as president-elect in late 2016. His message? We are going for growth and jobs in 2017-2020. But in a way that reminds of being at the bottom of a recession, with lots of unemployed resources ready to be reabsorbed, but no confidence ready to do so rapidly.

What did Trump encounter on the stump trail, or what did his electorate find in Trump? Trump found lots of angry people and hardship cases flocking to his crass standard on the election trail. But were these all unemployed, or where there many among them with tough lives, but not necessarily unemployed or even underemployed relative to their education standards, skills, talents, abilities?

Some might be lifted to better jobs in a rising economy. Many might find their real incomes lifted in a rising economy as supply shortages manifest. But all the hard luck in the world doesn't necessarily translate into the ability to sustain a much faster performing economy.

Although a sharp-witted businessman, Trump isn't necessarily reading the economy right. The bond market until a week ago was prepared to believe in a very slow recuperation rate, limited inflation take-off and modest job growth allowing bond yields to be very low, and capturing the Fed his year with this very insistent reading of things. The Fed was going to be very slow in raising rates, though probably not as slow as the market thought after years of steady own conditioning.

When, at this very delicate stage of proceedings, one suddenly throws the rudder and orders full steam ahead, it doesn't stay without consequences. Talk of very big tax cuts and big fiscal spending on infrastructure, implying a large policy switch in favour of fiscal leading and monetary policy becoming secondary (and defensive), send out a very loud message.

Much larger budget deficits ahead caught the US bond market offside, the 10yr yield in a matter of a week jumping from 1.8% to over 2.2%, with more to go. Here were both higher borrowing demands and inflation looming, which current bond yields simply didn't price correctly.

The equity market doesn't seem perturbed, only hearing about the growth and not fearing a little inflation. Here comes stronger earnings growth, especially in lighter regulated, more favoured sectors, and those undertaking infrastructure.

Of the two, the bond market is the more realistic (but then it was out on a limb at 1.8% yields where 3-4% would have been more ‘normal’). And now is the time for the equity market to get greedy. It apparently is still reasonably priced historically, and therefore with scope for overheating as night blindness strikes it (only seeing the earnings growth potential, not so clearly seeing the looming road blocks).

Trump will take off in a swirling mix of faster growth and more jobs in 2017. The bond market will keep fearfully repricing yields higher, especially as Trump will also want to rejig the Fed, not necessarily a safety first signal. And equities will acquire Dollar signs and higher price/earnings ratios, especially favoured sons getting less regulation.

And economists? They will be noting accelerating inflation in an economy classically starting to overheat and needing to slam on brakes before we are too deep into the Trump presidency. You think he will be open to that message? Like Nixon before him? Not likely.

A delightful opportunity for economics lecturers around the world next February to entertain their first-year students with a ready-made macro disaster in the making on their very doorstep, and jeopardizing their own job prospects two-three years down the line.

After which it will be time to  turn to the micro aspects of Trump’s proposed trade and immigration “America First” policies. Some of that could be positive (allowing greater access to global talent) but for now remains in the fine-print. It is the aggressiveness of any trade policies and possible currency wars that could allow laboratory-conditions to imitate reality.

Meanwhile, political science majors and sociologists should also be having a ball of a time with the geopolitics and class warfare aspects on show. Text book stuff coming alive in front of your very eyes.

Cees Bruggemans

Bruggemans & Associates, Consulting Economists 

Website  www.bruggemans.co.za

Email. economics@bruggemans.co.za

Twitter  @ceesbruggemans

LinkedLn