Trump/Pence, and the Coming Economic Boom

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In May, we at Bretton Woods Research advised clients that Donald Trump was going to be elected President in November and spark a new bull market. We wrote:

...we believe that the U.S. stock market is very likely on the verge of a strong bull market for one crucial reason: Donald J. Trump. We expect Trump will be elected President in November, and will usher in a powerful bull market that stocks may begin to sense and start discounting later this year.

Remember Bartley's "Seven Fat Years?" We're going to see them again.

We argued that every new Administration in the modern era has leveraged the momentum of an election to implement sweeping economic reforms in its first year. And with a Trump White House, the cornerstones of the changes in 2017 would be pro-growth tax reform supported by House Ways & Means Chairman Kevin Brady and Speaker Paul Ryan, and a Federal Reserve put on notice to no longer damage the economy and financial markets.

Today, the case for a Trump bull market is further supported by Trump's choice to add Governor Pence to the GOP ticket.

The Reagan boom, those "seven fat years", was ignited by supply-side principles which espoused that the magic formula for prosperity is sound money, low taxes and limited regulation. Pence understands these ideas as well as anyone in Washington.

In November 2010 before the Detroit Economic Club, Pence outlined a powerful supply-side solution to repair the American economy. He called for an end to the Federal Reserve's dual mandate and a return to price stability, as well as a re-think of the international currency system including a debate "over gold and the proper role it should play in our nation's monetary affairs." He also called for a flat tax that eliminates the AMT and taxes on capital gains, dividends and estates, and insisted on periodic reviews of regulations with an economic impact of $100 million or more.

These are the foundations of a Jack Kemp-style, 21st Century pro-growth plan.

What is most noteworthy of Pence's economic philosophy is his elevation of the monetary issue. As he stated in 2010, "Sound monetary policy is the foundation of our prosperity."

Dr. Art Laffer has similarly noted, "If regulatory policy is important by a factor of one, then fiscal policy is important by a factor of 10, and monetary policy by a factor of a hundred."

Behind the growing sense that the American Dream is fading into a distant memory is failed monetary policy. Simply look at the evidence of the two most recent monetary eras: the 1948-1971 Bretton Woods period versus 1971 to present.

As Rich Lowrie of Put Growth First has shown, real incomes for the bottom 90% of wage earners grew 85% during the 23-year post-War period; whereas between 1971 and 2012, income adjusted for inflation for the bottom 90% has been flat.

During the Bretton Woods Era, the dollar was kept stable, enabling the private sector to enjoy stable material costs and a stable unit of measurement to encourage investment. As a result, productivity kept pace with wage growth. Labor and management were arguably on the same ladder of prosperity.

In the Post-Bretton Woods Era, however, policymakers neglected the dollar, which led to an explosion in commodity prices and a mistaken focus at the Federal Reserve to prevent wage growth from filtering into the CPI. With the Federal Reserve concertedly focused on limiting wage increases during the last 40+ years, it should be no surprise that wages have not grown during this time for the vast majority of American workers.

In a 2014 speech about whether a new international monetary regime was necessary, former Federal Reserve Chairman Paul Volcker said "surely events have raised, whether we want to admit it or not, some fundamental questions that have been ignored for decades." In that speech, Volcker also stated, "I think we can agree that the absence of an official, rules-based, cooperatively managed monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth."

To his credit, Mr. Trump is attuned to the implications and power of monetary policy. More than anyone on the campaign trail, he has warned about the precariousness of financial markets and the economy today, as well as the impact of erroneous Fed policy and currency machinations by our trading partners.

A Trump presidency and Kevin Brady's campaign to form a bipartisan Centennial Monetary Commission to examine U.S. monetary policy and recommend a course for future policy are creating the genuine possibility of pro-growth monetary reform in the coming years. If so, the stars are aligning for a potential replay of the Reagan years where the combination of improved monetary and fiscal policies set the stage for a prolonged economic boom.


Paul Hoffmeister is chief economist for Bretton Woods Research. He can be reached at

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