Ten con­se­quences of Trump

Financial Mirror (Cyprus) - - FRONT PAGE -

The good news starts with US growth, which will al­most surely ac­cel­er­ate well above the 2.2% av­er­age an­nual rate dur­ing Pres­i­dent Barack Obama’s sec­ond term. This is be­cause the Re­pub­li­can aver­sion to pub­lic spend­ing and debt ap­plies only when a Demo­crat like Obama oc­cu­pies the White House. With a Re­pub­li­can pres­i­dent, the party has al­ways been glad to boost pub­lic spend­ing and re­lax debt lim­its, as it was un­der Pres­i­dents Ron­ald Rea­gan and Ge­orge W. Bush. Thus, Trump will be able to im­ple­ment the Key­ne­sian fis­cal stim­u­lus that Obama of­ten pro­posed but was un­able to de­liver.

The re­sult­ing deficits may be de­scribed as “sup­ply-side eco­nomics,” rather than Key­ne­sian stim­u­lus, but the ef­fect will be the same: growth and in­fla­tion will both in­crease. As the US econ­omy runs into the lim­its of full em­ploy­ment, ad­di­tional growth will push in­fla­tion higher, but that bad news can wait un­til 2018 and be­yond.

Sec­ond, sen­si­ble tax re­forms, such as an amnesty for multi­na­tional com­pa­nies that repa­tri­ate for­eign prof­its, will fi­nally be­come law. The Repub­li­cans’ hege­mony will en­able easy agree­ment on tax cuts fi­nanced mainly by higher pub­lic bor­row­ing, rather than by fac­ing down spe­cial-in­ter­est lob­bies’ re­sis­tance to the elim­i­na­tion of ex­emp­tions and loop­holes. Th­ese tax re­forms will cre­ate even big­ger bud­get deficits, which in turn will stim­u­late more growth and in­fla­tion.

A third boost to eco­nomic growth will come from dereg­u­la­tion. While bat­tles over en­ergy and en­vi­ron­men­tal laws may dom­i­nate the head­lines, the big­gest eco­nomic im­pact will come from re­vers­ing bank reg­u­la­tions. As banks are en­cour­aged to loosen lend­ing stan­dards, es­pe­cially for mid­dle-in­come house­holds, an up­swing in res­i­den­tial con­struc­tion and debt-fi­nanced con­sump­tion should add fur­ther growth im­pe­tus. Ex­ces­sive dereg­u­la­tion could cause a re-run of the 2007 fi­nan­cial cri­sis, but that, too, is a risk for 2018 and be­yond.

Fourth, Trump could be good for geopo­lit­i­cal sta­bil­ity, at least in the short term. Trump’s pref­er­ence for trans­ac­tional re­alpoli­tik over Obama’s lib­eral in­ter­ven­tion­ism should sta­bilise re­la­tions with Rus­sia and China as the world is di­vided into spheres of in­flu­ence. Trump could give Rus­sia freer rein in Ukraine and Syria in ex­change for re­straint in Cen­tral Europe and the Baltics. China’s in­evitable dom­i­nance in Asia could be ac­cepted, pro­vided it avoids out­right wars with Ja­pan, Taiwan, and other coun­tries whose se­cu­rity is, in the­ory, guar­an­teed by treaties with the US. The Mid­dle East is bound to re­main a caul­dron of geopo­lit­i­cal un­rest; but, even here, Trump’s pref­er­ence for lo­cal strong­men over “democ­racy pro­mo­tion” could re­store a de­gree of sta­bil­ity (at the cost of hu­man rights).

Fi­nally, Trump’s elec­tion could force Amer­i­cans to recog­nise flaws in their own democ­racy, even as they aban­don global “democ­racy pro­mo­tion.” The fact that Trump lost the pop­u­lar vote by more than two mil­lion could re-en­er­gise ef­forts to re­form the Elec­toral Col­lege – ef­forts that al­ready have re­sulted in the nec­es­sary leg­is­la­tion in states rep­re­sent­ing 61% of the re­quired votes. And the over­whelm­ing op­po­si­tion to Trump in trend-set­ting states such as Cal­i­for­nia and New York could en­cour­age their vot­ers to elect leg­is­la­tures to coun­ter­act fed­eral con­ser­vatism with pro­gres­sive state laws on is­sues rang­ing from air qual­ity and health care to abor­tion, treat­ment of im­mi­grants, and gun con­trol.

Now for the bad news. For the first time since the 1930s, the US has a pres­i­dent who views trade as a zero-sum game. Trump’s pro­tec­tion­ist cam­paign rhetoric may not have been meant lit­er­ally, but if he fails to de­liver any of the trade curbs that he promised, Repub­li­cans will suf­fer a back­lash from what is now their core voter con­stituency, vot­ers in de­clin­ing in­dus­tries and re­gions.

US global lead­er­ship is there­fore bound to shift away from free trade, glob­al­i­sa­tion, and open mar­kets. No­body can pre­dict the full ef­fects of the big­gest regime change in global eco­nomic man­age­ment since the 1980s; but they will surely be neg­a­tive for emerg­ing economies and multi­na­tional com­pa­nies, whose de­vel­op­ment models and busi­ness strate­gies have as­sumed free trade and open cap­i­tal flows.

A sec­ond, more im­me­di­ate, threat stems from en­act­ing large tax cuts and boost­ing pub­lic spend­ing in an econ­omy al­ready near­ing full em­ploy­ment, which im­plies ac­cel­er­at­ing in­fla­tion, higher in­ter­est rates, or prob­a­bly some com­bi­na­tion of the two. Given the like­li­hood of ad­di­tional trade pro­tec­tion­ism and mea­sures to re­move im­mi­grant work­ers, the in­crease in in­fla­tion and long-term in­ter­est rates could be quite dra­matic. The im­pact on fi­nan­cial mar­kets will be dis­rup­tive, re­gard­less of whether the Fed ag­gres­sively tight­ens mone­tary pol­icy to pre-empt ris­ing prices or lets the econ­omy “run hot” for a year or two, al­low­ing in­fla­tion to ac­cel­er­ate.

With the US econ­omy grow­ing faster than ex­pected and long-term in­ter­est rates ris­ing, ex­ces­sive strength­en­ing of the dol­lar is a third ma­jor risk. Even though the dol­lar is al­ready over­val­ued, it could move into a self-re­in­forc­ing up­ward spi­ral, as it did in the early 1980s and late 1990s, ow­ing to dol­lar debts ac­cu­mu­lated in emerg­ing mar­kets by gov­ern­ments and com­pa­nies tempted by near-zero in­ter­est rates.

Fourth, the com­bi­na­tion of a dol­lar squeeze and pro­tec­tion­ism spells big trou­ble for de­vel­op­ing coun­tries, with the pos­si­ble ex­cep­tion of some rel­a­tively closed economies such as Brazil, Rus­sia, and In­dia, whose de­vel­op­ment strate­gies are less re­liant on free trade and for­eign fi­nanc­ing.

Fi­nally, the most dan­ger­ous con­se­quence of Trump’s vic­tory may be its con­ta­gion ef­fect on Europe. Just as Bri­tain’s ref­er­en­dum proved un­can­nily pre­dic­tive of Trump’s win, Trump looks like a lead­ing in­di­ca­tor of pop­ulist up­heavals in Europe, which could trig­ger another euro cri­sis and threaten the breakup of the Euro­pean Union. The next anti-es­tab­lish­ment vic­to­ries, ac­cord­ing to opin­ion polls, will be in Italy’s con­sti­tu­tional ref­er­en­dum and Aus­tria’s pres­i­den­tial elec­tion. Glob­al­ists can only hope that the polls again turn out to be wrong – but in the op­po­site di­rec­tion.

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