Romeny-Perry Competition.

From last week from Bretton Woods Research:

Romney-Perry Competition

Romney-Perry Competition Good for Markets: We think that Mitt Romney out-pointed Rick Perry last night because he emphasized his new cap gains tax cut and promised to protect social security and not re-appoint Ben Bernanke.

On Tuesday, Mitt Romney unveiled his new economic platform, and the highlight was a plan to eliminate taxes on capital gains, interest and dividends for individuals earning less than $200,000 per year. We have yet to see Rick Perry’s plan, but Romney’s step forward should compel a smart counter by the Texas Governor. Unfortunately, Romney’s platform would also call on the Treasury Department to classify China as a ‘currency manipulator’, which would enable the U.S. government to place tariff sanctions on Chinese imports until the yuan is significantly revalued. While it is in China’s best interest to appreciate the yuan (in order to immediately extinguish the Fed-engineered inflation that is negatively affecting its economy), Romney’s plan is misguided as it could spark trade tensions with China. Additionally, John Boehner, as House Speaker, has prevented any anti-China tariff-related proposals from reaching the House floor. Romney, as president, could side with Democrats on the issue and sway enough Republicans to out-maneuver Boehner.

The trade sanction idea from Romney reaffirms, in our opinion, his propensity during this campaign to appeal to the populist vote and to avoid the appearance of appealing to wealthier Americans. This has been Democratic strategist David Plouffe’s advice for President Obama. Romney, for example, continues to avoid tax cut proposals on the highest income earners, and has instead chosen to propose reducing the corporate tax rate to a level that even Democrats are seeking while only eliminating tax rates on capital for the “middle class” and lower. Anyone who understands the philosophical underpinnings for eliminating the capital gains tax would know that its elimination would be most powerful if done for all Americans including the wealthiest Americans who have the most capital to invest.

Romney’s appeal to the populist vote has been beneficial, though, with respect to his new-found criticism of Fed policy, compared to last April when he supported it. During last night’s debate, he said that he would not re-appoint Ben Bernanke to head the Federal Reserve, stating that he thought the Fed has ‘over-inflated’ the economy.

Despite Romney’s flaws, he has made marginal improvements in his economic platform which is especially important as it will likely push Perry to be even more aggressive and bold. Consequently, we continue to view the Romney-Perry competition for the nomination as good for U.S. assets, and especially important to buffer U.S. financial markets from the European debt crisis.

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