Commentary: Markets are viewing Trump's economic plan as reflationary

Based on market reactions to the surprise Trump win, it appears that markets believe that the new administration will be able to do something that the Fed has been unable to do for eight years. Push inflation higher.  Initially, when it became apparent that Trump would win the election, shell-shocked investors piled into Treasurys causing yields to plunge. The dollar also fell sharply against the Japanese Yen and Euro.  Another big factor in the dollar's fall (and the fall in yields for that matter) was the idea that the "Trump shock" would delay the Fed's plans to raise interest rates this December.    

However, all these moves reversed and then some when Trump delivered a conciliatory victory speech and outlined a bold infrastructure program that many liberal Democrats had pushed Hillary Clinton to embrace earlier in the campaign. This new spending, combined with large across the board tax cuts will greatly increase the Federal budget deficit. Economics 101 tells us that higher deficits have multiplier effects across the entire economy and accelerate growth and inflation. In fact, the Fed has been all but pleading with Congress to loosen fiscal policy so that it would have an easier time achieving its employment and inflation goals. 

So the dollar is up, yields are up, and stocks are way up. Higher deficits will speed boost growth and allow the Fed to go ahead and raise rates next month. Higher deficits will increase private sector income, which means higher private sector spending, leading to higher corporate profits.  

I know Democrats are traumatized, and conservative Republicans will be aghast to hear that big deficits and bigger government will give a much needed lift to the economy. On a personal note, I voted for Mrs. Clinton. Trump's shameless opportunism and race baiting disqualified him in my book. But just because the election didn't go my way doesn't mean I am going to forget basic macro-economic theory.