Against the tide: Trumping globalization
The rise of populism in general, and Trumpism in particular, brings severe geopolitical and economic risks and could have a disastrous impact on growth and productivity.
Populism substitutes gut feel ignorance for rational policy. In the guise of the new US president-elect Trump, it heralds an age of insularity rather than globalization. This will transform the global currency landscape into competitive devaluations elsewhere. It will destroy the economic underpinnings of increasing and shared global prosperity. It adds new risks, geopolitical and economic. It will reduce profit growth and raise inflation.
Trump’s victory, backed by a clean Republican sweep of the Senate and House of Representatives, is a massive empowerment of the global anger vote. As Trump begins to put a wall (or is it fence?) around the US, the damage he can do is almost immeasurable.
There is no silver lining. Domestically, the clean sweep of the election empowers Trump to enact his populist policies, which, given the nature of the man, he will do. And globally, this increases the chances of populists gaining power and influence everywhere from Marine Le Pen in France to the Five Star movement in Italy and in numerous other countries, including emerging markets.
Trumpism in particular, and populism in general, attacks the core of globalization on which the last 25 years of financial market prosperity depends. Have no doubt, globalization drove productivity, much (probably too much) of which rewarded capital. And that trend was already sick. But now it is dying. The impact on global growth and productivity will be disastrous – not just big.
Domestic spending will not compensate for the damage done by Trump globally. Disrupting international supply chains built up over decades transforms the trade economics of nation states into the economics of insularity. It is far more nefarious for the domestic economy than the stimulus of building a wall and repairing a road. An anecdote may help here; virtually all Mexico’s trade surplus with the US is cars. But US companies own 50% of car production in Mexico. And 50% of every car exported from Mexico is imported first from the US.
Trump, apart from tearing up trade deals – both enacted (the North American Free Trade Agreement) and potential (the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership) – could weaken Nato (which would empower Russia), could weaken the EU further and may start a trade war with China. In other words, nationalism replaces internationalism. The world will become much more geopolitically insecure as a result. This is particularly true of emerging markets; if the economic rewards for good behaviour are diminished, the benefits of militarism are augmented. And the US will not be there as an effective global policeman to hold the errant in check.
In practical economic terms this sets in motion some mega trends. Equities globally will be the casualty of growth. Globalized corporations and big exporters will be the fall guys. The Federal Reserve will go on hold as domestic economic confidence wanes and financial markets paralyse monetary policy. Other central banks – the ECB and Bank of Japan – are more likely to ease, given the contagion effects from the US and strengthening yen and euro.
Inflation will rise in a secular trend as the result of lower levels of international trade, economic efficiency and increased fiscal spending (particularly in full-employment economies like the US).
There is nothing in Trumpism to boost productivity and growth. Nor is there in monetary injections like helicopter or fiscal spending, Trump-style.
Down and down
More money printing hefts state resources. But the state generally delivers poor quality products at an outrageously high price in terms of taxation (public health care and education are two examples). In other words, the productivity of state spending is very low. If it were a supermarket where people went by choice, the store would be empty and the shelves full of inferior goods.
It is hard to see how helicopter money, by increasing the economic role of the state, would do anything but lower an economy’s total productivity – upon which its growth rate ultimately depends.
Apart from an initial short-term consumption binge, unmatched by a corporate investment follow-through, the consequences are likely to be diminished living standards (eroded by inflation and low productivity-dictated wages).
The money will be made by the savvy who can move money and escape the debasement system. Inequality will rise further. Nationalism will be the focus of extremist economic policy and populist politics. No one is going to print and spend public money to make foreigners rich. So globalization is the first casualty.