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Phuket Expat Finance: Trump – the economic pros and cons

From the time Donald Trump announced his candidacy, no one in the media or the general public really took him seriously. After all, that speech on the escalator at Trump Tower insulted immigrants in general, and Mexican immigrants specifically. Surely, such a person could never get elected to the most powerful job in the world?

economics,


Phuket Expat Finance

Sunday 27 November 2016, 02:00PM


What the fallout will be from US President-elect Donald Trump’s economic policies is anyone’s guess. Photo: AFP
What the fallout will be from US President-elect Donald Trump’s economic policies is anyone’s guess. Photo: AFP

We all know the answer to that question, and the man known as “The Donald” now goes by the moniker “President-Elect Trump”.

Regardless of your political affiliation (or nationality), this regime change at the White House will affect you. Like it or not, major events in America tend to affect the global markets, as well as the world economy. So what are the possible economic ramifications of a Trump presidency?

TAXATION

Donald Trump (and most Republicans, for that matter) are proponents of Supply Side Economics – the theory that states when taxes on the wealthy are too high it curtails hiring, but if those taxes are cut the money magically trickles down to the rest of the economy.

In 1980, then candidate George H. W. Bush coined the phrase “Voodoo Economics” for this now fully discredited school of thought. When taxes are cut on the wealthy, the money simply never trickles down. This is not a political opinion, but an economic fact.

If the CEO of Wal-Mart or Apple were forced to pay a top personal tax rate of 50 per cent, or even 60%, would it impact the hiring decisions at those companies? No. In fact, during the period when America’s middle class was “born” (1930s-1960s) the top tax rate ranged between 74% and 91%… and the economy thrived.

The enduring legacy of those tax cuts is the $20-trillion US National Debt (which was less than US$1 trillion when Reagan took office in 1981). Donald Trump’s platform contains more tax cuts, so expect the debt to rise, but don’t expect any of that money to trickle down

SPENDING

Donald Trump has proposed massive infrastructure spending to repair America’s roads and bridges, the maintenance of which have largely been ignored for years.

If Trump is successful at passing some kind of infrastructure program, it would likely be a “big league” success. After all, the federal government has already claimed a number of similar success stories in its history.

Roosevelt’s New Deal included massive infrastructure spending in the 1930s; government spending on WWII in the 1940s was another shot in the arm to the economy; and Eisenhower’s federal highway system carried the policy of federal government-funded public works projects into the 1950s.

Back then, however, there was the aforementioned 91% top tax rates to help fund these endeavours. Infrastructure spending, combined with significant tax cuts, would further balloon the debt.

GLOBAL TRADE

It is common practice for presidential candidates to “talk tough on trade”, and Trump was no exception.

He vowed to build a wall on the border with Mexico (and make Mexico pay for it); bring China before the WTO for currency manipulation; renegotiate NAFTA; tear up the TPP; and improve relations with Vladimir Putin and Russia.

Zurich Bread

Trade Wars have never ended well for either side, the most famous example being the Smoot-Hawley Tariffs, signed into law by Herbert Hoover in June, 1930. In the words of former Federal Reserve Chairman Ben Bernanke: “Economists still agree that Smoot-Hawley and the ensuing tariff wars were highly counterproductive and contributed to the depth and length of the global Depression.”

Tough talk by past candidates have come to naught once they took office; let us hope the same is true with Trump.

EQUITY MARKETS

Anyone who only looks at daily closing prices might think that equity markets responded well to his election, but as returns began pointing to a Trump victory, the S&P 500 Index futures were trading down as much as -5%, and Asian markets (open for business at the time) were in a tailspin.

Conciliatory words in his acceptance speech stabilized stock markets, but it was the uncertainty of what “President Trump” might bring which sent shares reeling.

There are many more speeches to come, but there will also be policies and actions. As he is not a conventional politician, what exactly a Trump Presidency might bring is still uncertain.

If there are no real surprises, then there is no reason to believe that the initial reaction of the futures markets will repeat itself. Any actions that “spook” the markets, however, will see investors punished.

COMMODITIES AND CURRENCIES

As much as equities dislike uncertainty, precious metals love chaos. As equity and futures markets around the world were plunging on November 8th, gold and silver were soaring.

Again, the moderate voice at the podium that night saw everything move in the other direction, but any trade war, international incident, economic crisis, stock market crash, etc. would be good news for metals.

Likewise, because uncertainty usually results in a “flight to safety” into US Treasuries, any of the above would normally be accompanied by a strengthening US dollar.

However things play out, the new President’s policies will have a profound impact on the economies of every country in the world.

 

For more information and expert advice about investing in stock markets, email Phuket Expat Finance at chatwithus@phuketexpatfinance.com

 

 

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