“While we will always put America’s interests first, we will get on with all other nations that want to get on with us. We’ll have great relationships, we will seek common ground not hostility, partnership not conflict”.
So Donald Trump during the small hours of Wednesday morning, as part of his acceptance speech. These emollient words, and the praise he heaped on Hillary Clinton after months of campaign-trail bile, changed the mood on global markets.
Despite the shock of Trump’s victory, and the initial 800-point plunge of the Dow Jones Industrial Average, the US equity benchmark ended the day 1.4pc up. Yes, there is deep and on-going uncertainty relating to Trump taking office as America’s 45th President in January. His economic program, after all, amounts only to a series of slogans.
Financial markets seem collectively to be hoping, though, after all the unhinged insult-trading which marred the most unpleasant campaign in modern US history, that America’s body politic may now regain some poise. Traders are focused, specifically, on the incoming President’s relatively low-key statements on tax cuts and infrastructure spending, rather than his oft-repeated stump-speech pledges to deport 11m illegal immigrants and build a wall along America’s south-most frontier.
Some may dismiss such a stance as a classic example of hope over experience. That would be wrong. We have no experience. Never before has a former reality TV star, with no record of political office, secured the most powerful position on earth. And not only does Trump hold the keys to the Oval Office. The Republicans – nominally, his party – control both the Senate and the House of Representatives.
Trump’s conciliatory acceptance speech reminded some of President Reagan. His fiscal spiel is certainly Reaganite – given that Trump, like his 1980s predecessor, wants to “ride the Laffer curve”. That involves lowering taxes sharply in the hope that, via faster resulting growth and better compliance, the overall tax take rises.
Corporation tax, we’re told, will fall from 35pc to 15pc under President Trump. Personal tax rates will drop “for all income groups”. America’s national debt has doubled to around $16,000bn (£12,800) under President Obama, which Trump has repeatedly criticized. Yet, if the Laffer curve exists – and the Reagan-era evidence is mixed – it certainly doesn’t kick in at once. Sharp tax cuts, in the short run, cost-money. America’s deficit will get a lot bigger before it gets smaller.
Another reason more red ink looks imminent is Trump’s pledge to “more than double” Clinton’s proposed $275bn (£221bn) infrastructure spend on roads and bridges, while extending $137bn in tax credits for private construction spending. Then there’s the “billions of extra dollars” for defence.
When Obama tried to borrow more, a Republican-controlled Congress stopped him – sparking the 2011 debt-ceiling crisis, which resulted in the US looking down the barrel of a sovereign default. Ironically, the same may happen to Trump. House Speaker Paul Ryan, currently the most senior elected Republican, says he’ll work “hand in hand” with his new Presidents. But Congress is packed with fiscally conservative GOP members who think Trump has high-jacked their party.
Having promised to create 25m new jobs over a decade, and “double economic growth” when the US is already expanding at 2.4pc, Trump-voter expectation are sky-high. But if his tax cuts don’t work quickly, and borrowing spirals, his fiscal hands will be bound. That seems the prevailing market sentiment – that Trump will spend big early on, generating a short-term boom, before being reined-in by Republican lawmakers before doing collateral damage to America’s already weak public finances.
A more immediate question is whether US interest rate will rise anytime soon – and if Trump’s victory makes that more or less likely. Federal Reserve Chairman Janet Yellen has indicated a December increase for some time – a possibility played down in recent days, given Trump’s shock win.
I don’t buy that. Yellen, whose first term expires in just over a year, has been criticized by Trump, who called her “very political”. He has also described the US stock market, pumped up by ultra-low rates, as a “big, fat, ugly bubble.” If the Fed doesn’t raise rates next month, that could be interpreted as Yellen viewing Trump as a liability. His stated policies – more borrowing, more infrastructure spending – will be inflationary. A weaker dollar will also push up prices, another reason to hike rates. I’ve long said the Fed won’t dare raise rates in December due to market jitters. Now we must consider that Yellen may not dare not to, for fear of her term not being renewed.
While Congress can defy the White House on fiscal policy, the President’s foreign policy prerogative means there are no such checks and balances on trade. This is the area of economic policy where Trump should cause most alarm. The President-elect campaigned on a pledge to introduce a huge 35pc tariff on imports from Mexico and an even bigger 45pc import levy on products from China. Given the extent to which blue-collar Trump voters have been encouraged to blame “foreign workers stealing jobs”, he’s under pressure to deliver.
Could Trump take such a retrograde step? If he did, the Chinese would almost certainly retaliate. Commerce between the world’s two largest economies would crater. Diplomatic relations, already fragile given tensions in the South Pacific, would shatter. Anyone who doubts how quickly trade wars can develop, and economic rationality can give way to political chest-beating, jingoism and mutual recrimination, should study the disastrous impact of the Smoot-Hawley tariffs in the 1930s. International relations collapsed and American was plunged into the Great Depression, which shook capitalism to its core.
If Trump messes up US fiscal policy the consequences could include bond market squalls and related equity market turmoil, resulting in significant damage to growth and jobs. If he re-writes US trade policy, positioning American as a protectionist aggressor, rather than a model (however imperfect) of free trade, Trump is in danger of sparking international tension and economic stagnation the likes of which we haven’t seen in over half a century. Tear up the Western world’s default free trade position, Mr. President elect, and you are creating a new, way more unstable and far less prosperous, world order.
One can only hope Trump surrounds himself with some sensible people – the involvement of Harvard Professor Martin Feldstein would do a lot to reassure me – and that he behaves like a businessman rather than an iconoclastic politician. Pragmatic business leaders believe in positive-sum games – if I do a deal with my rival, we can both benefit. Politicians often think in zero-sum terms – my rival’s loss benefits me unequivocally.
The world has, for several years now, been marred by rising protectionism – and now a deeply inexperienced President is entering the White House on a protectionist ticket. This is a cause of major concern.
One positive aspect of Trump’s Presidential victory is that he financed his own campaign. So, unlike Clinton, he isn’t immediately beholden to any corporate interests. Given that, could Trump impose meaningful structural reforms on Wall Street? Obama talked about imposing a strict divide between investment and commercial banking, re-introducing a proper Glass-Steagall split, but ultimately failed – spending his entire Presidency placating the moneymen.
Trump has many drawbacks. But he isn’t in the banking industry’s pocket. Perhaps, then, “The Donald” – for all the dangers he represents – has a unique chance finally to defuse the “too big to fail” powderkeg.