Trump talks to the believers

Donald Trump delivers his address to Congress, as Vice President Mike Pence and Speaker of the House Paul Ryan applaud. Pic: AFP

The detailed research undertaken by President Donald Trump via his White House email network governed what he told Americans in his address to Congress.

But there was also a hidden message: higher interest rates, which will affect not only America but the rest of the world.

Trump promised the nation more middle class jobs; more pay for the middle class; lower middle class taxes; more law and order (and didn’t that get applause); less legal actions that boost medical costs; improved child care benefits; lower costs for drugs; and one trillion dollars to be spent on infrastructure.

One day Australia will get a prime minister who understands what is required in today’s world, where the middle class has been decimated.

But the process of delivering those benefits to Americans requires a totally different way of approaching the American economy. And as that takes place the investment rules that governed the globe in recent decades are going to change, although I expect the change will take longer than markets expect.

In particular that change is going to mean higher interest rates, so investments strategies based on low interest rates are in jeopardy and in turn that may affect the Australian housing market.

To achieve the promised outcomes for the middle class requires a very different American economic strategy and that is what President Trump is promising to implement.

Markets will have been disappointed by the speech because of the lack of detail on tax issues which are likely to take longer to formulate than many in the market place expect.

Trump made it clear that the new world of America will in part be financed via higher tariffs on imports and/or a declaration that companies that import goods or services will not get tax deductions. (Trump popularised these protection measures via the Harley Davidson bikes which receive high tariffs in many parts of the world.)

The protection measures will raise about half the amount required to execute the corporate tax cuts which are in addition to the middle class benefits.

Trump says that the corporate tax cuts will be “big” but gave no details. He is also planning to give immediate tax deductions for capital expenditure, but interest will not be tax deductible. That was not mentioned. The administration has promised that the tax package, including the protection measures, will be ready to be passed by Congress in August.

Because of the complexity it is probably a good thing that it is delayed.

Very clearly the deficit will rise sharply, especially given the greater defence spending. But the “tariff” measures and the enormous waste to be eliminated from the US public service will be big counter items.

The bottom line of higher wages and higher cost of goods means that the days of low US inflation are well and truly numbered, as are the days of low American interest rates. That will create a boom and, contrary to the sceptics, it will create middle class jobs and higher pay.

What is more important is that it will rekindle the aspirations of lower income Americans that they can in fact “make” it. Vital to the American recovery is the role of independent contractors.

President Trump mentioned the increased funding for female entrepreneurs, but it almost certainly will be expanded to include males.

America will see a resurgence of manufacturing but the manufacturing will not be labour-intensive. Instead it will be the most modern that the world has seen. The jobs that are created will indeed be middle class jobs.

But the real gain comes from the enterprises that swing around these new high technology manufacturing plants. Boom industries will include engineering, steel and concrete, coal and oil/gas, motor and appliances. Massive plants will need to be erected.

China will not need as much Australian iron ore as it has in the past because there will less export to the US.

But the US will need large tonnages of iron ore pellets and Australia will need to look to that market or Brazil will have it made.

There is no point in simply bemoaning that our world has changed. You have to get on with the new rules and the first party in Australia to understand that will win the next election easily.

At this stage it looks like it will be the ALP, because they are promising very similar things to Trump, albeit they come from the left rather than the right.

While the US is attracting corporate industrial investment from around the world we are shutting down our motoring industry and starving our other manufacturing industries of gas while making them afraid of blackouts. And this is the fault of the politicians in both major parties.