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Monday, November 7, 2016

President Donald Trump?

The possibility captivates us all...

... but even if he wins, there may be little foreign private investors should do about it.

The elite of the economics profession regards the prospect of a President Trump as an unmitigated disaster.  This is no surprise.  Two core tenets of economics are that freer trade and freer labour markets (including immigration) facilitate faster economic growth and wealth generation.  The uneven allocation of that wealth generation in recent decades probably explains much of the Trump phenomenon.  Donald Trump favours both protectionism and tight immigration controls.

Last week, a group of 20 American Nobel laureates in economics signed an open letter in support of Hillary Clinton saying:

Donald Trump … offers an incoherent economic agenda. His reckless threats to start trade wars with several of our largest trading partners, his plan to deport millions of immigrants, his trillions of dollars of unfunded tax cuts, his casual suggestion that the United States could threaten default on its debt in order to renegotiate with our creditors as if Treasuries were a junk bond – each of these proposals could jeopardize the foundations of American prosperity and the global economy.

Team Trump is almost certainly unfazed by this opposition from the titans of the economics establishment.  Trump himself would  probably align with Michael Gove’s quip when challenged to name a single independent economic authority supporting Brexit, “I’m glad these organisations aren’t on my side.  I think people in this country have had enough of experts”.

For the economics profession, any suggestion by a potential president of the USA of failing to honour the Federal government’s supposedly ‘risk-free’ debt is about as anathema as any financial policy suggestion could be.  Trump supporters would say that Trump is no ‘politician’ and that in practice he always surrounds himself with advisers and that he delegates detail having set the broad direction.  If it is counterproductive for the US to default, it would not do so. The problem is that it is counterproductive for US presidents to have ever thought such thoughts in public.

Donald Trump as president would pursue immigration controls, presumably build his “beautiful” wall along the border with Mexico (foreign labourers without a green card need not apply), would not sign into law the Trans Pacific Partnership trade liberalisation, would undermine the North America Free Trade Agreement, would reverse environmental controls which hold back coal mining, would reduce as promised corporate income tax rate, probably to 15% and might make some progress on his promise of diverting resources to much needed infrastructure spending (as well as that 2000 mile wall).

Responsibility for detailed implementation of his policies may be delegated to a powerful Mike Pence as vice-president.  Pence, a social conservative republican, formerly associated with the Tea Party, can be expected to take seriously the congressional ceiling on Federal government debt, and the need to fund the promised tax cuts with reduced federal expenditure as well as hoped-for faster growth.

In the next four years the impact on the economy and markets of a Trump presidency would depend on how these trade-offs play out.  At this stage, no-one knows.  How well US inflation is anchored around current low levels would come into sharp focus, and the balance of probabilities is that US inflation would be less well-anchored that at present.  This matters for interest rates.

Peter Stanyer, independent economic consultant to The Financial Planning Corporation LLP
4 November 2016

Peter is the author of The Economist Guide to Investment Strategy, 3rd edition, Profile Books, 2014.  The views expressed are his own personal views, and do not constitute advice to buy, sell or hold any investment.

This update has made use of the Grumpy Economist blog of John Cochrane, of the Hoover Institution at Stanford University.

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