Two developments coincided in the US this week. The Dow Jones hit 20,000 for the first time. And it became clear that President Donald Trump was going to do a lot of what he promised to do during the election campaign. Both of these things cannot both continue indefinitely. If the new president carries through the bulk of his election promises, the markets will, sooner or later, get a serious case of the jitters. Because his "America First" agenda – or more precisely how he intends to pursue it – is going to lead to tensions, rows, conflict and serious economic risk.
Who knows what, exactly, will upset the markets. Or when it might happen. But what Trump has promised to do on trade is already starting to ramp up international tensions, as he threatens to fund the wall with Mexico with a tax on imports from that country. And his promised budget policy of cutting taxes and increasing spending will, unless they quickly boost growth, raise fears about a hole appearing in the budget.
The financial markets have chosen to ignore these risks – almost completely – and focus on the positives. They are betting that Trump can deliver in terms of cutting taxes and boosting growth, including cutting taxes on corporate profits. The Wall Street perspective is that policymaking in the US has been "stuck" over the past eight years, for much of which Obama and Congress have been in a kind of a stand-off.
Regulation reduced
Trump has also promised to slash regulation. Already he has signed an order putting a stop to any new regulatory moves. And industries as diverse as pharmaceuticals and drone manufacturers are hoping for a boost from lighter-touch regulation. Also, businesses in many sectors are also queueing up for a share of higher infrastructural spending on roads, bridges, airports and so on. For all these reasons, the Dow and the dollar have been on the up.
I don’t know what Trump will do to spook the markets. But he will surely do something. Remember, after all, that this is the president who took office on the basis of tackling vested interests. And few interests are as “vested” as Wall Street and big business.
The essence of Trump’s presidency is populism. And big business, these days, is not popular. On the contrary, the string of revelations about the small amounts of tax paid by massive corporations on their overseas earnings has stoked public anger.Trump may give to business via lower corporation tax, but has also threatened to hit companies investing abroad to service US markets. There will be lots more of this to come and Wall Street won’t like a lot of it.
There is another, even more fundamental, factor. The whole direction of Trump’s economic policies are that for America to win, other countries must lose. It is an approach harking back to the old economic world of the 16th to the 19th centuries – so-called mercantilism – when European countries in particular tried to built their exports and control imports via tariffs. “Winning” in this kind of economics means exporting more than you import, and using all the state’s resources to protect domestic economic interests.
It is the antithesis of the modern economic system of free trade and globalisation which is not based on some kind of zero-sum theory of one country “winning” and another “ losing”, but rather on the mutual gains from freeing up trade. The trouble is that while globalisation delivered significant wealth over many years to many parts of the world, something has broken in recent years. The gains have increasingly gone to the better-off -– the so-called elites – and the middle and lower classes have appeared stuck.
Cure vs illness
How much of this is due to globalisation is debatable. Much is also due to the onward march of technology eliminating many jobs. But free trade has also had its price, too, for sure – even if most economists believe the net effect is positive.
Whatever the cause, the resulting dissatisfaction is what the populists like Trump have been tapping in to. The trouble is that the Trumpian cure may make things worse. Trade wars, or trade tensions, will not help. Aggressively targeting Mexico and China, as he has promised, is not going to increase US living standards. The respected Peterson Institute in the US has estimated that if he went ahead with his election promise to impose tariffs on Mexico and China, it would cost 4.8 million jobs.
Trump has already pulled out of the proposed Trans Pacific Partnership – a trade deal involving 12 countries around the Pacific. He has said he will renegotiate Nafta – the free trade deal involving the US, Mexico and Canada. He has picked a fight with Mexico – a big trade partner for the US – and threatened to impose import taxes. And he has also sparked diplomatic rows with Germany and China.
Trump’s comment when he was talking about the wall – that a nation without borders is not a nation at all – was telling. If the world’s biggest economy starts to erect economic borders as well as physical ones, then this will come at a cost.
There is a counter argument. It is that President Trump will shake a big stick, but not move ahead with many of the crazier policies. But a week on, the Trump presidency is doing largely “what it said on the tin”. Either he changes course, or the market surge will end, probably dramatically. The erection of economic borders simply does not sit alongside a soaring stockmarket. Something has to give.