Inflation in the USA under Donald Trump

A listener to my weekly radio interview on Emerald 4HI has asked my opinion on the effect that the election will have on inflation in the USA under Donald Trump.

Briefly, it is still too early to give an informed opinion as a lot of his policies are unknown and remember, that he does not have absolute power. Everything has to be approved by Congress.

That sounds like I am answering questions like a politician but what effect will his policies have on inflation?

The USA have enormous problems with debt, but there is good debt and bad debt. If you borrow money to renovate your home and increase its value, that is good debt, whereas if you borrow money to buy a new car that will one day be worthless, that is bad debt.

For decades the USA has spent little money on infrastructure such as roads and bridges. One election promise Trump will keep is to spend on infrastructure and use American steel, labour and concrete in the process.

Has there been any indication of how much good debt, for infrastructure, they might borrow?

There is talk of over $3 trillion in the next 4 years. Even though this might be regarded as good debt, in simple terms it means printing more money. The only backing for the US dollar is “In God we Trust” and this, in turn means the currency in circulation is diluted and the outcome of this is an increase in inflation.

Will increased inflation in the USA be good or bad?

Before I answer that, regardless of what Trump or the Republicans do, I see the future influence of the United States of America as an economic superpower diminishing, and the value of the US$ will diminish accordingly.

I know that is a pretty big call however whilst you cannot survive by taking out new credit cards to pay off old ones, the USA cannot keep paying its bills by printing money.

The only reason that the US$ has any value is because it is still the world’s major trading currency. If Germany wants to buy oranges from Brazil they do the deal in US$ and the USA happily prints the money for them to do the deal.

Why will this situation change? Actually, it is already changing and is doing so at an increasing rate. Already China and Russia are not using US$ for most of their trade.

Isn’t this determined by the International Monetary Fund (IMF)? Yes and therein lies the problem.

The IMF and China are pushing for the creation of a new global reserve currency. Actually, it won’t be a currency. They are calling it a “special drawing right”, known as SDR , but the SDR is neither a currency nor a claim on IMF.

When did all this happen?

It started back in 1969. The IMF created the SDR as an international reserve asset to supplement its member countries official reserves. That was 47 years ago so where is it up to now and how can they be used?

SDR’s can be exchanged for freely usable currencies. The value of the SDR is based on a basket of five major currencies. For the first time in October, this year (2016), the Chinese RMB were included in this basket.

The five major currencies that are now used as a base for the value of SDR’s are:

The US dollar
Euro
The Japanese Yen
Pound Sterling
Chinese RMB

I predict that this will be the beginning of the end regarding the value of the US Dollar.

To sum up, I am predicting that at some time in the near future, the US$ will cease being the world reserve currency, it will then lose its value resulting in high inflation in the USA.