What Does a Trump Presidency Imply for The Credit Market?
Stock-Markets / Financial Markets 2016 Nov 16, 2016 - 06:29 PM GMTBy: Nicholas_Kitonyi
The US just voted Donald Trump to become the next president in the process shocking the world after going against all odds. Many people, including the media, polls, analysts and statisticians had predicted that Hillary Clinton would win the election, but in the college electoral vote she was resoundingly beaten by Trump.
While several people will be trying to look at how this all happened. It would be of much interest to look at the implications on the various aspects of the US economy and especially the financial sector. Trump was very vocal on his perceptions of America’s relationships with foreign nations during his presidential campaign and up to this moment, he has done nothing to indicate that it was all for nothing—but a political ploy to woo voters.
Who owns the US debt?
China, which is one of America’s biggest export destinations, has already threatened to respond in kind should the US impose trade obstacles between the two countries. In addition, China is also among America’s leading creditors accounting for more than 30% of the country’s foreign debt.
The U.S. debt to China was at $1.185 trillion, as of August 2016. That equates to 30% of the $3.948 trillion in Treasury bills, notes, and bonds held by foreign countries. The rest of the $19 trillion debt is owned by either the American people or by the U.S. government itself. Unless the US wants to revert to having nearly 100% of its debt owed to the government and its citizens, it may not be a wise thing to impose trade boundaries against China.
Currently, the U.S. citizens and American entities, such as state and local governments, pension funds, mutual funds, and the Federal Reserve own 67.5% of the debt. Increasing that figure could set the country on a deadly path especially considering President-elect Trump’s other propositions.
What’s Trump’s stand on interest rates and taxes?
Trump has been quoted on occasions expressing his views on the country’s current interest rate levels. Most of those times he has indicated that the current interest rate levels are very low for no genuine reason and that they should be increased. While he appears to have since softened his stance, there is no telling that once he is inaugurated he won’t make those changes.
This could have devastating effect on economy if not done cautiously, especially considering his plans on taxation. Trump has expressed that he intends to lower taxes. That does not go down well with his plan to impose trade restrictions on foreign countries especially ones that contribute significantly to the national debt.
How could this affect the American citizens?
Taxation and debt are sources of revenue for the country, so if you cut down taxes and impose measures that could reduce funding from foreigners via debt while at the same time increasing interest rates—it could cause an economic meltdown.
That would mean squeezing money out of the economy which for the one and only good reason would boost inflation. However, as many credit monitoring experts would say, the impact on citizens may not be as positive.
This is because increased base interest rates would lead to an increase in lending rates thereby increasing the cost of debt for the American citizens. In addition to this, increased inflation makes products more expensive and given the fact that the US economy could be under extreme pressure following the implementation of Trump’s plans, things could become very tricky.
The credit market is a crucial element of any economy. Businesses and people fund most of their developments and investments using debt. As such, by making credit more costly in an economy that is yet to recover fully from the global financial crises of 2008/2009, it could be counteractive to the progress that has been witnessed over the last few years.
Conclusion
In summary, the US is not off the hook yet. The country is currently the best performing economy amongst other developed economies, but one of the reasons why that’s the case is because it has followed a cautious path in trying to stimulate growth.
The inflation rate still remains low, which implies that increasing interest rates massively could humper economic growth. Furthermore, with a majority of other developed countries still experiencing the global financial crises aftershocks—and struggling—America could still be prone to a potential ripple effect should the situation escalate globally.
By Nicholas Kitonyi
Copyright © 2016 Nicholas Kitonyi - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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