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If American conservatives have an intellectual hero, it might well be Friedrich Hayek — and rightly so. More clearly than anyone else, Hayek elaborated the case against government planning and collectivism, and mounted a vigorous argument for free markets. As it turns out, Hayek simultaneously identified a serious problem with the political creed of President-elect Donald Trump.

One of Hayek’s most important arguments in his great classic, “The Road to Serfdom,” involves the Rule of Law, which he defined to mean “that government in all its actions is bound by rules fixed and announced beforehand.” Because of the Rule of Law, “the government is prevented from stultifying individual efforts by ad hoc action.”

In “The Road to Serfdom” and (at greater length) in “The Constitution of Liberty,” Hayek distinguished between formal rules, which are indispensable, and mere “commands,” which create a world of trouble, because they are a recipe for arbitrariness. When formal rules are in place, “the coercive power of the state can be used only for cases defined in advance by law and in such a way that it can be foreseen how it will be used.”

Like the rules of the road, formal rules do not name names. They are useful to people who are not and cannot be known by the rule-makers — and they apply in situations that public officials cannot foresee.

Commands are altogether different. They target particular people and tell them what to do. (Think Hitler’s Germany, Stalin’s Soviet Union, Mao’s China, Castro’s Cuba.) They require the exercise of discretion on the spot. As examples, Hayek pointed to official decisions about “how many buses are to be run, which coal mines are to operate, or at what prices shoes are to be sold.”

Hayek offered two arguments on behalf of the Rule of Law. The first is economic: If the government’s actions are predictable, then people are able to plan. In his famous formulation, “the more the state ‘plans,’ the more difficult planning becomes for the individual.” If officials are issuing commands, it will become much harder for people to have the kind of security that is a precondition for economic development and growth.

Hayek’s second argument, moral in character, involves a specific value: impartiality. When the Rule of Law is intact, public officials act behind a veil of ignorance. If the government does not know who will be helped or hurt by what it does, it cannot play favorites or take sides. For Hayek, the state should never specify “how well off particular people shall be and what different people are to be allowed to have and to do.”

Many late 20th-century conservatives, including Ronald Reagan and Margaret Thatcher, have been drawn to Hayek’s arguments; the same is true of contemporary figures like Paul Ryan and Ted Cruz. In sharp contrast, President-elect Trump prides himself on his skills as a dealmaker, and he wants to use those skills to “make good deals” for the American people. There is a real risk that in practice, presidential deals, deliberately done on an ad-hoc basis, will turn out to be Hayekian commands.

Consider in this regard Trump’s participation in the highly publicized agreement with Carrier Corp., a manufacturer of air-conditioning and heating equipment, to keep operations in the U.S. in return for tax breaks. Or consider Trump’s negotiation with Boeing Co., which brought down the cost of the Air Force One program.

There is a legitimate argument (long pressed by Democrats) that Medicare should negotiate prescription drug prices with pharmaceutical companies. But Trump’s endorsement of that argument undoubtedly stems, in part, from his enthusiasm for the role of Dealmaker-in-Chief.

In the abstract, of course, no one should object if the president is able to secure better deals for the American people. A successful negotiation is not a command. But unlike a candidate or a president-elect, a president has coercive power. Any negotiation is inevitably undertaken under the shadow of that awesome power.

A succession of “good deals” by the executive branch might garner impressive headlines, but Hayek’s analysis offers a serious warning. Exactly which companies will end up with favorable or unfavorable deals, and why? A dealmaking executive branch, interacting with those in the private sector along multiple fronts, will be tempted to reward its friends and punish its enemies — and it will have plenty of ways to do exactly that.

In a world of presidential deals, companies are going to have horrible incentives — to curry presidential favor in countless ways, to act strategically, and to make promises and threats of their own, so as to avoid unfavorable treatment from government and to obtain optimal concessions from it. That’s nothing to celebrate. On the contrary, it is a road to serfdom.

One of Hayek’s enduring achievements was to clarify the importance of government neutrality and forbearance, not through anything like laissez-faire, but by avoiding commands in favor of clear, general, stable, predictable rules on which the private sector can rely. A Dealmaker-in-Chief might turn out, in practice, to be a Commander-in-Chief in precisely the sense that Hayek deplored.

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A recent study found 50% of occupations today will be gone by 2020, and a 2013 Oxford study forecasted that 47% of jobs will be automated by 2034. A Ball State study found that only 13% of manufacturing job losses were due to trade, the rest from automation. A McKinsey study suggests 45% of knowledge work activity can be automated.

94% of the new job creation since 2005 is in the gig economy. These aren’t stable jobs with benefits on a career path. And if you are driving for Uber, your employer’s plan is to automate your job. Amazon has 270k employees, but most are soon-t0-be-automated ops and fulfillment. Facebook has 15k employees and a 330B market cap, and Snapchat in August had double their market cap per employee, at $48M per employee. The economic impact of Tech was raising productivity, but productivity and wages have been stagnant in recent years.

And the Trumpster…

Trump’s lack of attention to the issue is based on good reasons and bad ones. The bad ones are more fun, so let’s start with them. Trump knows virtually nothing about technology — other than a smartphone, he doesn’t use it much. And the industries he’s worked in — construction, real estate, hotels, and resorts — are among the least sophisticated in their use of information technology. So he’s not well equipped to understand the dynamics of automation-driven job loss.

The other Trump shortcoming is that the automation phenomenon is not driven by deals and negotiation. The Art of the Deal‘s author clearly has a penchant for sparring with opponents in highly visible negotiations. But automation-related job loss is difficult to negotiate about. It’s the silent killer of human labor, eliminating job after job over a period of time. Jobs often disappear through attrition. There are no visible plant closings to respond to, no press releases by foreign rivals to counter. It’s a complex subject that doesn’t lend itself to TV sound bites or tweets.

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The strength of the US dollar is forcing China down a path it has been trying to avoid for years, pushing it to slow the money machine that has propelled its economy since 2008.

The course of this path could mean strange and terrible things are in store for economies around the world. A slower, weaker Chinese economy — and the resulting weakness of the yuan — will create competition for other developing-market exporters in a race to the bottom.

This is a moment many China watchers have been waiting for — it just didn’t come how, when, or why they thought it would.

The money machine is China’s state-run banking sector. Through loans, the banks pumped cash into the economy at an unprecedented rate — as the rest of the world watched and worried. The International Monetary Fund harped on China’s debt for years, and across Wall Street, money managers have often gotten slaughtered betting on China’s demise (in one way or another) as debt climbed to 280% of GDP.

China’s leadership seemed to not hear these concerns until recently, when officials did something very strange: Party leaders got together to tell apparatchiks down the chain that they needn’t worry about hitting growth targets.

This means that a country infamous for its obsession with hitting the numbers is setting them aside in the face of mounting debt.

You can see where this change comes from: At the end of 2016, the US dollar started rising, the yuan started weakening, and people started to quickly take money out of the country to keep their savings from losing value.

Now “we are in uncharted territory,” Charlene Chu, a famed China analyst at Autonomous Research, wrote in a recent note titled “The war on outflows.”

We are now seeing that as the US gradually ends its postcrisis monetary easing program, China will be forced, in some measure, to do so as well. In many ways, though, the country is not ready.

To understand how it’s ever so slowly falling apart, we have to understand how the Chinese economy held together in the first place.

After 2008, the Chinese government kicked off its own program to avoid the global financial crisis. It did not do it the way the US did, though. Instead of having its central bank buy bonds, the Chinese government instructed its banks to lend. And they did, adding 30% or more credit to the economy every year, according to Chu.

Now there is 165 trillion more yuan ($23.8 trillion) in circulation than there was eight years ago. At the same time, the value of the yuan has remained virtually the same — an unnatural state in economics, to be sure.

The result has been an increase in purchasing power for Chinese people — a promise the Chinese Communist Party made and kept.

But it also created an imbalance between the increasing amount of yuan in circulation and the steadiness of the currency’s value that “will only continue to grow if the CNY does not weaken materially and China’s financial sector continues to expand at double-digit rates,” Chu wrote (emphasis ours).

Now, keep in mind that a double-digit expansion of the banking sector is something of a jog considering what China’s used to.

“Total banking sector assets in China will increase [by 30 trillion yuan] to [228 trillion yuan] in 2016 alone, and another [100 trillion yuan] will be added to this by 2020 if the banking sector grows at 10% per annum, which, we would note, would be the lowest growth rate on record,” Chu wrote.

Last month, $82 billion left China, as the government was forced to fix its currency lower and lower against the dollar and people worried about the value of their assets.

And despite the fact that China’s leaders have tried to tell the world that the yuan is now fixed against a basket of currencies, not just the dollar, it doesn’t matter. We still live in a dollar world.


Now instead of growth, the Chinese government’s main concern is keeping capital in the country. To do so, it has instituted several capital controls for individuals and corporations, but, of course, there are always ways to get around things like that.

Plus, holding the yuan steady comes at a cost. The Chinese government is spending its foreign-exchange reserves to prop up the currency. Right now it’s holding about $3 trillion, but Chu sees this working for only the next two quarters. A more permanent solution must be found.

So the government also has to think about attracting money to the country, and that’s where the gears of this great money-making machine start to ever so slowly grind down.

One way China can attract money is by raising interest rates, which would have consequences for all the borrowers who have taken on unprecedented levels of debt.

The flow of yuan around the country would tighten, cooling the property market. This is important. Property-market growth is part of what turned 2016’s rocky start into a net positive year for China.

“Liquidity and market risk vulnerabilities in the financial sector will be more on display,” Chu wrote. In other words, some of the hands that distributed yuan around China would be impaired, taking a toll on the country’s heavily indebted corporations.

This is why the Chinese government is being forced to prepare its people, and the world, for a slowdown. For the world, this ultimately means deflation — a force it has been fighting since the start of the financial crisis — as the yuan declines and other countries try to keep up (or down). All China can do in the meantime is what it’s doing right now: fixing the yuan higher, no matter what the dollar does.

Regardless, as the economy slows the currency will glide down. It will have to. Chu estimates that if the government continues to support the yuan against market pressure, it could blow through its foreign-exchange reserves in a couple of years.

Some caveats, of course

Two things to keep in mind here. First, the dollar could weaken.

“I do think that it’s likely to be supported by the Fed raising rates again, but I really doubt that the dollar [index] is going to make it above 120,” Jeff “Bond King” Gundlach of DoubleLine Capital predicted in his most recent monthly investment outlook presentation.

That, of course, would take pressure off the yuan and help with outflows. But this wouldn’t stop this process; it would only slow it. No matter what happens, the Chinese economy is building up dangerous debt levels that must be dealt with, and China has acknowledged that the economy’s growth will slow. The imbalance between the yuan in circulation and its value remains, and that in and of itself will push the yuan’s value down.

“One thing that is increasingly clear to us is that the world’s largest source of monetary easing since 2008 won’t be passing through in the way it has been, whether that is from a closing of the gates on outflows or a fall in the purchasing power of Chinese companies and individuals through a weakening of the exchange rate,” Chu wrote.

Second, this will happen incredibly slowly. The catastrophic credit event that Wall Street’s wildest minds have wondered about is unlikely to happen. The Chinese government has control over too much of its economy and can pull and push levers such as interest rates and manipulate the money supply however it likes.

Increasingly, economists think China will look like a poorer Japan, declining into drudgery in unexpected ways to ease its transition into a painfully slow-growing economy.

Either way, it isn’t entirely a mystery where we’ll go. What’s more unprecedented is how we’ll get there.

China has shown its hand. We now know what a dollar can do — and how little China can do to stop it.

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The first thing you need to know is that the rest of the world has borrowed a lot of dollars the last eight years. About $4 trillion, to be exact. Since 2008, dollar loans to non-bank borrowers outside the United States have gone from $6 trillion to almost $10 trillion, with emerging marketsmaking up the majority of that increase. Their dollar debts, according to the Bank for International Settlements, have actually more than doubled during this time from $1.7 trillion to $4.5 trillion. And that makes them particularly vulnerable to the vicissitudes of the currency markets. Think about it like this. If you borrow in dollars but earn most of your money in something other than the dollar, then your debts will get harder to pay back any time the dollar increases in value — which it really has the last two and a half years. Indeed, on a trade-weighted basis, the dollar has shot up 26 percent against a broad basket of currencies since the middle of 2014.

That should only continue under President Trump. Why? Well, the Federal Reserve’s latest minutes show that it thinks Trump’s tax cuts, if they happen, will force it to raise rates faster than it thought it would just a few months ago. Otherwise, the Fed worries, the economy might start to overheat a little. So that means our interest rates should be even higher compared to the rest of the world’s than they already are, which, in turn, should push the dollar up even more than it has already gone.

It’s hard to say when, but at some point emerging market borrowers are going to have trouble paying back their dollar debts if the dollar keeps going up — especially if we put up tariffs that make it harder for them to earn dollars in the first place. A country like Brazil, which is currently mired in its greatest recession since the 1930s and has borrowed the second-most dollars of any emerging market, might have to choose between an even worse economic crisis and a financial crisis. That is, it could keep propping up its currency at the cost of growth, or it could let it fall against the dollar and see its borrowers default.

Even China might not be immune. It has the ugly combination of the highest dollar debt in the developing world and a currency that has been sliding against the greenback for over a year now. In the worst case, it might have to bail out a bunch of borrowers who can’t handle the combination of a stronger dollar, a slightly weaker economy and tariffs that take away some of their export markets.

It wouldn’t be that different from the Latin American debt crisis in the early 1980s. Then, like now, poorer countries had gone on a dollar borrowing binge. And then, like now, a surging dollar made those debts harder to pay off — until they couldn’t be. That not only sent those countries into a lost decade, but also almost brought down the American banks that had lent them so much money.

Although it’s not just Brazil and China that might cause some sort of crisis. It’s us too.  That’s not, though, because the dollar might get too strong, but rather that the mortgage market might get too crazy. Trump, you see, has said that “it’s so hard to get mortgages nowadays” that we need to get rid of the post-financial crisis rules restricting them.

This is one place where he agrees with GOP orthodoxy. Against all evidence, conservatives have insisted that it wasn’t Wall Street, but really the government that caused the housing bubble — basically Reagan über alles — and have been looking for ways to neuter the newly created Consumer Financial Protection Bureau as a result.

The problem, of course, is that going back to a Wild West mortgage market only invites the kind of abuses we saw 10 years ago, particularly when there’s pent-up demand for new housing that could easily turn into a bubble.

Past, in other words, really might be prologue. Trumponomics might just be Bushonomics on steroids. A financial crisis waiting to happen.

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In the midst of so many economic fallacies being repeatedly seemingly without end, it may be helpful to return to some of the most basic laws of economics. Here are ten of them that bear repeating again and again. 

1. Production precedes consumption

Although it is obvious that in order to consume something it must first exist, the idea to stimulate consumption in order to expand production is all around us. However, consumption goods do not just fall from the sky. They are at the end of a long chain of intertwined production processes called the “structure of production.” Even the production of an apparently simple item such as a pencil, for example, requires an intricate network of production processes that extend far back into time and run across countries and continents.

2. Consumption is the final goal of production

Consumption is the objective of economic activity, and production is its means. The advocates of full employment violate this obvious idea. Employment programs turn production itself into the objective. The valuation of consumption goods by the consumers determines the value of production goods. Current consumption results from the production process that extends to the past, yet the value of this production structure depends on the current state of valuation by the consumers and the expected future state. Therefore, the consumers are the final de facto owners of the production apparatus in a capitalist economy.

3. Production has costs

There is no such thing as a free lunch. Getting something apparently gratis only means that some other person pays for it. Behind every welfare check and each research grant lies the tax money of real people. While the taxpayers see that government confiscates part of one’s personal income, they do not know to whom this money goes; and while the recipients of government expenditures see the government handing the money to them, they do not know from whom the government has taken away this money.

4. Value is subjective

Valuation is subjective and varies with the an individual’s situation. The same physical good has different values to different persons. Utility is subjective, individual, situational and marginal. There is no such thing as collective consumption. Even the temperature in the same room feels differently to different persons. The same football match has a different subjective value for each viewer as can be easily seen the moment when a team scores.

5. Productivity determines the wage rate

The output per hour determines the worker’s wage rate per hour. In a free labor market, businesses will hire additional workers as long as their marginal productivity is higher than the wage rate. Competition among the firms will drive up the wage rate to the point where it matches productivity. The power of labor unions may change the distribution of wages among the different labor groups, but trade unions cannot change the overall wage level, which depends on labor productivity.

6. Expenditure is income and costs

Expenditure is not only income, but also represents costs. Spending counts as costs for the buyer and income for the seller. Income equals costs. The mechanism of the fiscal multiplier implies that costs rise with income. In as much as income multiplies, costs multiply as well. The Keynesian fiscal multiplier model ignores the cost effect. Grave policy errors are the result when government policies count on the income effect of public expenditures but ignore the cost effect.

7. Money is not wealth

The value of money consists in its purchasing power. Money serves as an instrument of exchange. The wealth of a person exists in its access to the goods and services he desires. The nation as a whole cannot increase its wealth by increasing its stock of money. The principle that only purchasing power means wealth says that Robinson Crusoe would not be a penny richer if he found a gold mine on his island or a case full of bank notes.

8. Labor does not create value

Labor, in combination with the other factors of production, creates products, but the value of the product depends on its utility. Utility depends on subjective individual valuation. Employment for sake of employment makes no economic sense. What counts is value creation. In order to be useful, a product must create benefits for the consumer. The value of a good exists independent from the effort of producing it. Professional marathon runners do not earn more prize money than sprinters because running the marathon takes more time and effort than a sprint.

9. Profit is the entrepreneurial bonus

In competitive capitalism, economic profit is the extra bonus that those businesses earn that fix allocative errors. In an evenly rotating economy with no change, there would be neither profit nor loss and all companies would earn the same rate of interest. In a growing economy, however, change takes place and anticipating changes is the source of economic profits. Business that does well in forecasting future demand earn high rates of profit and will grow, while those entrepreneurs who fail to anticipate the wants of the consumers will shrink and finally must shut down.

10. All genuine laws of economics are logical laws

Economic laws are synthetic a priori reasoning. One cannot falsify such laws empirically because they are true in themselves. As such, the fundamental economic laws do not require empirical verification. Reference to empirical facts serve merely as illustrative examples, they are not statements of principles. One can ignore and violate the fundamental laws of economics but one cannot change them. Those societies fare best where people and government recognize and respect these fundamental economic laws and use them to their advantage.

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An underappreciated idea in economics is what I call the capital/labor ratio. This ratio is not really some kind of numerical statistic, but rather, a way of thinking about problems and solutions. It can be used to illustrate some of the difficulties of free trade, and also, what we should do about them.

From the beginnings of industrialization, around 1780, people wondered if machines would replace human labor, and thus lead to mass unemployment and disenfranchisement. If one person with a steam-powered spinning machine could replace 100 people using old-fashioned spinning wheels, what would happen to those 100 people?

If there was only one spinning machine, then 99 people might be destitute, or be reduced to low-value menial work, like sweeping the factory floor or raking the factory-owner’s yard. They are underemployed. The economy would actually grow. It would have not only the output of the spinning machine, equivalent to the previous output of all 100 people, but it would also have the output of whatever those 99 people ended up doing. Although the one person operating the spinning machine would be very productive, their wages would not be very high, because they could be replaced at any time with one of the 99 low-paid underemployed people. The average productivity of all 100 people would still not be very high.

This is a situation where there is just a little capital – one spinning machine – and a lot of underemployed labor.

However, if there were 100 spinning machines, then all 100 people could be very productive. The output of the economy would be much higher – a hundred times higher than when everyone used old-fashioned spinning wheels. Wages would be high, because you could not get the output of the machines without the employees to run it. Capital would compete for limited labor with higher wages. Any new investment would have to bid away labor from the textiles business, by offering a higher wage; consequently, to be profitable, that labor would have to be used in a manner even more productive than in the textile business. The toilets would still have to be cleaned, and the factory owner would still pay to have the leaves raked from his yard, but he would have to pay a high wage for it.

This is a situation where there is a lot of capital – 100 spinning machines – and no underemployed labor.

“Job destruction” is a normal part of economic expansion, wealth creation, increasing productivity and higher wages. It takes fewer and fewer people for more and more output. But this must be matched by “job creation” – and not just low-paid/low productivity jobs, which consume a lot of labor to create a product or service that can’t be sold for very much, but high-paid jobs which themselves represent the investment of large amounts of capital, to create high productivity.

 Factors such as the end of centrally-planned communism in both China and the former Soviet sphere, or cheap telecommunications which have enabled people from India to make use of their English skills, have radically increased the amount of underemployed labor available in the increasingly globalized world economy. It turns out that a lot of manufacturing is not all that hard. Who would have thought that the miracle of the two-terabyte hard drive could be created by Malaysians, or the iPhone 7 by Chinese? The developed economies, such as Germany, Japan and the United States, have been driven toward manufacturing of capital goods rather than consumer goods, and also, a few industries (like chemical production) where so few employees are needed that labor costs are a minor factor.

Free trade can be a little like the spinning machine. It now takes one person with container ship to create what used to take 100 employees to do.

Our retail stores are filled with a profusion of goods from China, Mexico or Malaysia. We don’t see the complicated capital goods, which are mostly purchased by big corporations. These are things like telecommunications equipment, electric power generation and distribution equipment, the defense industry, the barcode and conveyor-belt systems used in the warehouses of or UPS, equipment for the medical industry like MRI scanners or laboratory test equipment, hardware for the oil and gas or mining industry, the huge industrial plants that make yogurt and beer, or the commercial software that helps it all to function. These kinds of high-value products are the likely future of American manufacturing.

What American labor – the middle class, and the below-middle class – needs today, most of all, is capital investment. This is best accomplished by making the U.S. a great place to do business. It should include tax reform, such as the 15% corporate tax rate that president-elect Donald Trump has proposed. Eventually, this should be extended to everyone, a flat income tax with a rate also around 15%. It also means a rollback of regulatory burdens, which is especially choking off the smaller companies that have always accounted for most job creation. Ideally, it also means a stable dollar – in U.S. history, this means a dollar linked to gold – which does not confuse the capitalist system of prices and returns on capital with monetary distortion, manipulated interest rates, and wild exchange-rate swings. We need real investment in the real, nonfinancial economy, not weird asset bubbles, financial chicanery, and all the other elements of “malinvestment” that arise from unstable money.

This will create a situation where there is a lot of capital investment, relative to available underemployed labor – a situation similar to the 1950s and 1960s.

Where will that capital investment go? It will go, of course, to wherever the return on capital is the highest. This might mean the kind of high-value manufacturing I’ve described. But, we might find that we have enough stuff. People would rather spend their next dollar on something interesting to do. Much of the new investment might be in a variety of services. These would be high-value services. These could be in healthcare and education, for example. But, they could also be in things like restaurants and hospitality. A high-end hotel resort, or a high-end restaurant, takes just as much labor as the low-end versions. The difference is capital – a Four Seasons costs a lot more to build than a Motel 6. Instead of a spinning machine that radically increases the production of cotton cloth, our increasing productivity might express itself as a profusion of high-end restaurant and travel options – if that is what provided the highest return on capital.

Related to all of this is the raw increase of capital itself. The earliest economic writers understood that it was the steady increase of capital invested that made societies wealthier. They always focused on capital accumulation. More spinning machines. This capital investment is the flip side of savings–more savings means more investment. Decades of Keynesian promotion of “consumption” has led to a diminution of savings, and thus, domestic capital creation. This capital deficiency is remedied somewhat by imported capital – a “current account deficit” – but that is problematic on many levels. For one thing, a lot of small business creation arises from personal capital (personal savings), and also friends and family. The local accountant, chiropractor, marriage counselor, construction contractor or rental-apartment investor might never become listed on the NYSE, but these kinds of high-value service businesses, multiplied by the hundreds of thousands, can form the foundation of middle-class prosperity. They are largely locked out other sources of capital, including their local banks, until they reach sufficient size and stability. None of this happens if everyone, and their friends and family, are deep in credit card, automobile and student loan debt; or if oppressive regulatory burdens make it impossible for small businesses to form.

Much more capital investment requires much more capital to invest. This will have to be the foundation of any economic revival in the U.S., whatever trade or tariff policy may be. Without it, nothing much will be accomplished.

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Now here are The Ten Surprises of 2017. I will discuss them in detail in my February essay.

1. Still brooding about his loss of the popular vote, Donald Trump vows to win over those who oppose him by 2020. He moves away from his more extreme positions on virtually all issues to the dismay of some right wing loyalists. He insists, “The voters elected me, not some ideology.” His unilateral actions throw policy staffers throughout the government into turmoil. Virtually all of the treaties and agreements he vowed to tear up on his first day in office are modified, not trashed. His wastebasket remains empty.

2. The combination of tax cuts on corporations and individuals, more constructive trade agreements, dismantling regulation of financial and energy companies, and infrastructure tax incentives pushes the 2017 real growth rate above 3% for the U.S. economy. Productivity improves for the first time since 2014.

3. The Standard & Poor’s 500 operating earnings are $130 in 2017 and the index rises to 2500 as investors become convinced the U.S. economy is back on a long-term growth path. Fears about a ballooning budget deficit are kept in the background. Will dynamic scoring reducing the budget deficit actually kick in?

4. Macro investors make a killing on currency fluctuations. The Japanese yen goes to 130 against the dollar, stimulating exports there. As Brexit moves closer, the British pound declines to 1.10 against the dollar, causing a surge in tourism and speculation in real estate. The euro drops below par against the dollar.

5. Increased economic growth, inflation moving toward 3%, and renewed demand for capital push interest rates higher across the board. The 10-year U.S. Treasury yield approaches 4%.

6. Populism spreads over Europe affecting the elections in France and Germany. Angela Merkel loses the vote in October. Across Europe the electorate questions the usefulness of the European Union and, by the end of the year, plans are actively discussed to close it down, abandon the euro and return to their national currencies.

7. Reducing regulations in the energy industry leads to a surge in production in the United States. Iran and Iraq also step up their output. The increased supply keeps the price of West Texas Intermediate below $60 for most of the year in spite of increased world demand.

8. Donald Trump realizes he has been all wrong about China. Its currency is overvalued, not undervalued, and depreciates to eight to the dollar. Its economy flourishes on consumer spending on goods produced at home and greater exports. Trump avoids punitive tariffs to prevent a trade war and develops a more cooperative relationship with the world’s second largest economy.

9. Benefiting from stronger growth in China and the United States, real growth in Japan exceeds 2% for the first time in decades and its stock market leads other developed countries in appreciation for the year.

10. The Middle East cools down. Donald Trump and his Secretary of State Rex Tillerson, working with Vladimir Putin, finally negotiate a lasting ceasefire in Syria. ISIS diminishes significantly as a Middle East threat. Bashar al-Assad remains in power.


Every year there are always a few Surprises that do not make the Ten either because I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are “probable.”

11. Having grown weary of Washington after a year in the presidency, Donald Trump moves the White House to New York from April to December and to Palm Beach from January to March. He makes day trips to the Capitol on Air Force One for legislative and diplomatic purposes.

12. The Democratic Party is sharply divided on strategy, with Bernie Sanders and Elizabeth Warren arguing for a shift to the left and others wanting to remain in the center. A lack of leadership gives rise to widespread speculation about sharp losses in the 2018 congressional elections.

13. Donald Trump’s intimidation tactics prove effective in discouraging companies from moving some U.S. manufacturing abroad, but he fails to bring jobs back. The wage differential is just too great. This becomes his biggest first-year disappointment.

14. Trump’s first major international confrontation comes, not unexpectedly, from North Korea. Kim Jong-un threatens to set off a nuclear bomb in the mid-Pacific, calling it “a test.” Trump’s advisors try to restrain his desire to punish the country severely.

15. India comes back into the investment limelight. Its economy grows at 7% and corporate profits for established companies are strong. Its stock market leads other large emerging countries, along with China.

16. Trump’s efforts to get out of the Iran deal fail. The other countries signing the agreement believe Iran’s weapons-grade nuclear production has been restrained and force the U.S. to remain a participant.