Trump: influenceable, inflammatory, inflationary
Peter Warburton - 17 November 2016
The electoral victory of Donald Trump has brought no greater clarity to the economic and financial outlook than Brexit. From reading a host of commentaries this past week, the Trump economic programme has been interpreted in a dozen different ways. Much of his programme is tentative, some is plainly unimplementable. Some of it would have measurable impacts but much is unfathomable. These early evaluations of the US economic impact are likely to prove very wide of the mark.
I’m going to argue that Trump is, at best, neutral for US real economic prospects and probably negative. Let’s think about three aspects of his putative presidency. First, his political and diplomatic inexperience means that he will need to lean heavily on the knowledge and wisdom of others. We are in the early stages of understanding who he will nominate to high office. All presidents-elect must feel a deep sense of inadequacy and apprehension about stepping up to the role. Trump is especially influenceable. Whose influence will he fall under?
Second, while he has been backing away from his most inflammatory statements regarding the Mexican border wall, the repatriation of illegals and the repeal of Obamacare, Trump remains a diplomatic nightmare. His “Contract with the American Voter” is definitive in relation to trade agreements and in branding China a currency manipulator. We must take his trade protectionism seriously, bearing in mind the history of retaliation and retribution that has accompanied it.
Third, and most important, Trump’s economic programme is much more obviously inflationary than it is expansionary. Protectionism raises the cost of imported items and strengthens domestic pricing power. Cracking down on illegal workers will shrink the labour supply at a time when unemployment is low and under-employment is also diminishing. The infrastructure spending programme will require the hiring of tens of thousands of construction workers who are already in gainful employment. The government will struggle to procure the skilled labour that its projects need.
Trump is a disruptive influence on credit markets. He is no friend of the business elite and it is probably a mistake to think that he is in favour of cutting the average rate of corporate tax of large corporations (which is around 25%). His inflationary policies have already begun to spook the bond and credit markets and this could trigger a major reset in interest rates and a general tightening of credit conditions and loan growth. Trump arrives on a financial markets scene that is distorted and repressed by central bank policies. Disruption of this uneasy truce could bring some violent market ructions, in stark contrast to the confident and placid instant reactions.
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