Among Donald Trump's cabinet appointments, the most important for investors is the Secretary of the Treasury, who will guide Trump's economic policy.
Scott Bessent is well-qualified for the role and was considered the front-runner for the position following the election. However, he had to win “Knife Fight”According to the Wall Street Journal, he was able to win the position because he was competing against several other candidates backed by Trump supporters.
The civil war had nothing to do with it. Bessent qualifications. He has a strong background in economics and finance, having earned a bachelor's degree from and subsequently taught at Yale University. After working for George Soros for two years, he now runs his own macro hedge fund, Key Square.
His former boss is Stan Druckenmiller supports Mr. Bessent“Having worked for me and George for many years, he has been exposed to everything that the Secretary of the Treasury has to deal with.''
When Mr. Bessent takes over the Treasury Department, he will face a number of tasks. The first is an extension of the debt ceiling, which expires at the end of this year. That would be easy because Republicans control both houses of Congress and Trump won't threaten to shut down the government.
The next task will be to clear the way for Congress. Extending key provisions of the Tax Cuts and Jobs Act Something that is set to expire. During the presidential campaign, Mr. Trump said he supported lowering the marginal tax rate for corporations from 21% to 15%, adding a number of proposed tax cuts along the way.
Bessent's reputation is that he“Fiscal hawk”'' His stated goal is to reduce the federal budget deficit from about half of GDP to 3 percent. So how can he get there?
AEI's Michael Strain says it's a top priorityIt would extend tax breaks for businesses and allow them to fully deduct certain investment costs in the year in which they are incurred. Passage of this provision would likely increase capital spending, but it could also increase budget imbalances and the federal debt.
Strain believes there are three revenue streams to offset the loss of revenue. These include: Inflation Control Act of 2022allowing some of the tax cuts from 2017 to expire to increase revenue from households and pursue more fundamental tax reform.
My personal opinion is that President Trump is campaigning to lower personal taxes, and Paul Ryan's appetite for tax reform has diminished significantly since he resigned as Speaker of the House in 2018. The latter two options, then, are unlikely. If so, it may be difficult to suppress it. budget deficit.
But the biggest challenge he faces is related to President Trump's international economic policy, which calls for the largest tariff increases since the 1930s.
The problems in today's international arena are similar to those in the mid-1980s, when the United States had large trade and budget deficits and a strong dollar forced American multinational companies to outsource production overseas.
At the time, President Reagan had authorized Treasury Secretary James Baker to enter into agreements with America's major trading partners. They included: plaza agreementaimed at causing an orderly decline in the US dollar; ruble agreement Aimed at stabilizing the dollar.
In contrast, President Trump's approach is to act unilaterally and pressure America's trading partners to reduce their bilateral trade surpluses. If they did not comply, he threatened to raise tariffs on imports from China by 60% and on all other countries by 10 to 20%. This week he threatened to force Tariffs on Mexico, Canada and China Through an executive order on Inauguration Day.
According to Brookings' Wendy Edelberg and Maurice Obstfeld, the value of products subject to price increases in 2023 will be 10 times more than in the early stages of the trade warFrom 2018 to 2019.
This could be a tough challenge for Mr. Bessent, who is trying to balance keeping financial markets calm while achieving the Trump administration's goals.
Before the election, he said tariffs were a negotiating tool to extract concessions from America's trading partners and should be phased in over time. This seemed to put his view at odds with that of President Trump's former trade czar Robert Lighthizer likes bold action.And implement higher tariffs quickly.
Since the election, Mr. Bessent has made some adjustments to his stance, bringing it in line with Mr. Trump's. infox news interview“The truth is that tariffs have a long and storied history as a revenue-raising tool and a way to protect America's strategically important industries,” he said. “We've added a third leg to the stool: tariffs.” Tools with our trading partners. ”
The test going forward will be what he does if investors worry that tariffs will hurt the U.S. and global economy.
One thing President Trump wants is to see stock market performance as a measure of his success. During the trade war with China from mid-2018 to mid-2019, he stopped the escalation after the market sold off.
The next round of tariff hikes could be much larger, and stock market valuations could be much higher, making markets even more vulnerable this time around. In that case, Mr. Bessent's task would be to persuade Mr. Trump that withdrawing from the trade war is essential to maintaining the positive image that many voters have of his handling of the economy.
Dr. Nicholas Sargen is an economic consultant with Fort Washington Investment Advisors and affiliated with the University of Virginia Darden School of Business. He has written three books including “.Investing in the Trump Era: How Economic Policy Impacts Financial Markets.”
