Ignacio de la Torre. Professor. IE Business School
30 November 2016
Donald Trump’s recent victory in the U.S. presidential elections has left nobody indifferent. But what can America expect from the new tenant in the White House?
Donald Trump’s recent victory in the US presidential elections has left nobody indifferent. Just what kind of America has Trump been handed?
First: The pre-crisis level of production in the US was recouped a while back (in fact it is now 4% higher in per capita terms). Nevertheless, as is normal following a crisis, inequality has increased, and this played an important role in the election results. This trend appears to have peaked in 2015, and family incomes started to rise fast (by 5%, the biggest rise since 1967). The US economy, after experiencing weak growth in the first quarter, picked up fast in the second quarter, and is expected to see a growth rate of 2% in 2017.
Second: Little by little the US has reduced its public deficit (but not its debt, which is still at high levels). Trump and Clinton agree on something - the need to spend more public money on infrastructures. Clinton intended to provide a stimulus of 1% of GDP, and Trump replied that he would quadruple that offer. One way or the other we are going to see more fiscal stimuli, given that a majority of Congress will approve said measures (possibly at a level closer to that offered by Clinton), which will mean a greater offer of bonds, which in turn will mean their price will fall, making interest rates rise in the long term. The net result could be increased financial instability.
Third: The US is seeing a rise in inflation. Underlying inflation already stands at between 1.7 and 2.3%, depending on what indicators you look at. Given that two thirds of companies’ costs are labor costs, which are going up as unemployment goes down (the latest figures point to a rise of 2.7% in hourly wages), inflation will continue to grow, which means that the FED will have to act, regardless of who is in the White House. I believe that interest rates will go up in December, and the FED will start acting in an increasingly less moderate manner, raising interest rates faster than the 2017 market expects, which will also increase the risk of financial instability.
Fourth: Trump’s protectionist rhetoric has centered around the tariff union with Mexico and Canada, as well as certain Chinese products. The president cannot review unilaterally treaties approved by Congress, and republican legislators have traditionally favored free trade. In any case, the protectionist rhetoric could weaken the currencies of emerging economies with high levels of exposure to the US.
Fifth: Trump favors a weak dollar that stimulates exports, which tallies with his desire to auction off more bonds to invest in infrastructures. The negative consequences associated with this are twofold: a) a weak dollar could bring more inflation at a dangerous time given that domestic inflation is rising, as we have seen, and b) US creditors, particularly countries that hold enormous quantities of treasury bonds, like China, Japan or Gulf countries, could vary the composition of the strategic reserves, favoring the yen or euro.
Globalization has driven the biggest eradication of poverty in the history of humanity. Approximately 80 million people have been lifted out of poverty in the last 20 years. The flip side is that the negotiating power of companies has improved in key sectors in western countries. This factor explains the importance attached to profits in the US, and the dwindling importance of salaries, a trend which has triggered the investment phase currently under way, and which also explains the election results. When all is said and done, it is also true that the people who have been adversely affected by this level of competition have also benefitted from the increase in purchasing power that comes with being able to buy things more cheaply as a consequence of globalization.
The problems facing many a voter are complex rather than simple, but the human race is nostalgic for simplicity. Many voters have expressed their frustration by voting for Trump. The essence of populism is expounding very simple solutions for highly complex problems, which voters find attractive. We have already seen this. After the crash of 1929 a “simple solution” was implemented which consisted of raising tariffs and adopting a protectionist stance in the US. The result? Unemployment reached a record level of 36%. The most vulnerable were the ones who suffered most. Thus, history shows us that when a populist government gets in (and, as I have always stated, nearly all political parties exhibit a certain amount of populism) it has to face the real complexity of said problems. Magic bullets no longer work, and cause mass disappointment among voters, as we know only too well in Europe.
In a few months’ time we will find ourselves facing the consequences of this very personal contradiction in the US.