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Should we hail the new God King Trump, or rush for the nuclear bunker?

20/01/2017

Should we be celebrating the start of the era of President Trump and his bold selections for cabinet, or are the predictions by his critics about to be realised?

Free thinkers. Say one thing for President Trump’s planned cabinet and team of advisors, there are an awful lot of free thinkers among them. Many of them, the generals for example, including Mad Dog James Matis, are known as tough guys, if they disagree with Trump, and many of this team do on key issues, they won’t be shy about coming forward.

The perception is that Trump and his team, are anti-immigration, anti-Muslim, anti-free trade/globalisation, Putin loving, anti NATO, climate change deniers.

Oh, and they believe in a low dollar, and the Fed is run by a bunch of elites who have no concept of reality.

Well, some of them do indeed believe some of these things. Although, even Rex Tillerson, the Secretary of State to be, who won the friendship of Russia prize, has recently been highly critical of Russia for the invasion of Ukraine, and said: “We are the only global superpower with the means and moral compass capable of shaping the world for good.”

Indeed, Mr Tillerson and mad Dog himself, are conservatives, who believe in NATO, the strong dollar, and the kind of foreign policies that has typified the US these past 70 years.

Mr Tillerson may have been the CEO at Exxon Mobil, a company many claim was behind anti-climate change propaganda, but he has recently become a covert to the cause of climate change.

The new Treasury Secretary in waiting, Steven Mnuchin, former partner at Goldman Sachs, is an advocate of the strong dollar, his views seem to be aligned with those of Janet Yellen, chair of the Fed, a woman who has been vilified by the Trump campaign. Mr Mnuchin, is pro-free trade.

But other members of the Trump team, for example Wilbur Ross, who became a billionaire by rescuing distressed assets in the US steel and textile industry and turning companies in these sectors around, is the man who will lead much of the US efforts regarding trade, and he is a big fan of protectionism.

The Trump team is packed with climate change deniers.

What Trump and his team do want to do is to impose big tariffs on imports from Mexico and China (35 per cent and 45 per cent, respectively). President Trump wants to cut corporate tax to 15 per cent, and slash regulations.

He also wants to instigate a one trillion-dollar infrastructure investment programme.

Congress may clip his wings, like they did with President Obama, but there are reasons to think that the new President will have more luck getting his own way. For one thing, both houses in Congress, Senate and the House of Representatives, have Republican majorities. For another thing, many congressmen and congresswomen owe their jobs to Trump. For a third thing, with Twitter his tool, and backed by a team of hard men, and with the tide of populism in his favour, he may have more luck bullying Congress into seeing things his way.

Many US companies have already been so cajoled, announcing plans to bring jobs back home, although in many of these cases they were simply re-announcing past policy decisions.

The result of all these plans, assuming he really can get Congress to ratify them, will be more jobs, and USA GDP will pick-up and by quite a bit.

But history tells us that in the long run, protectionism leads to disaster.

If you believe in climate change you won’t a have problem accepting the view that a climate change sceptic US is a threat to long term global stability, but in the short run, such a policy may create jobs.

If the US attempts to create a cheap dollar, then that is a race to the bottom policy, other country’s will follow suit, but it is not possible for all countries to have a cheaper currency.

Mr Trump seems to see business and geo-politics as a zero-sum game. In fact, the reality is not like that, all players can benefit from trade. Cooperation is the new mantra. The Trump tactic feels, in many ways, very non-digital. But when it comes to currencies there really is A zero sum game. It is no more possible for every currency to fall in value as it is possible for every team in the Premiership to win all their matches.

But in the long run, climate change denial is a negative sum game, it will make us all worse off. In the long run, protectionism will simply create a new elite, a handful of people who will benefit from the arbitrage of distorted markets created by tariffs, while the global economy gets poorer.

And a massive fiscal stimulus, and job creation programmes at a time when US unemployment is less than five per cent, seems all but guaranteed to create excess inflation.

A Trump boom may well be on its way, but expect interest rates to shoot-up over the next few years. For people with big mortgages on low interest, this may be a disaster.

The good times may be set to ensue, this will enforce the idea that Trumponomics is working, and may secure Trump re-election in four years-time, but expect things to turn pear shaped, eventually.


 

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