TRUMP TOO- the road ahead?
With a republican President and the Republican Party in control of the Congress and Senate, it is highly probable that the big fallout for other democracies is going to be economic as changes to fiscal and monetary settings exert their effects both inside and outside of America. It is extraordinary that much of the “commentariat” in Australia has chosen not to do the analysis here. Apart from some indirect recognition, that is suggested in public comments by the Deputy Prime Minister, Barnaby Joyce, the “experts” speak of “steady as she goes”; “mutual understandings” and “standing side by side”, as if the comfort zone is without boundaries.
The Trump Presidency, its executive, its policies and its operations may well usher is a very different set of understandings and arrangements for many other nations. It could go in the following way:
- The US company tax rate will be lowered towards fifteen percent. This will be inflationary and investment money will begin to flow back into the US economy. This will accelerate the impacts of the Brexit decision upon cities like London.
- This inflationary effect can be offset by releasing (for a time) a lot more US domestic oil so that the nation gets the advantage of cheap energy. In a speech in Texas Mr Trump used the term “pump more oil” and the shale oil businesses rushed for some sedatives.
- No one has to be told; no approvals need be sought; nothing has to be purchased – simply allow US oil companies to “turn on the southern oil fields”.
- Cheaper energy in the US will mean that the rest of the world then has a big problem as the inflation monkey returns. In the US losers will be shale oil industry. Later it should return to profitability. Outside of the US, OPEC will have to reconsider its long-term position.
- Where possible the US would begin to weaken existing and anticipated trade agreements and reset import quotas so as to favour US farmers in particular. This will present more problems for other advanced economies, and lower beef and sugar quotas for Australia. This outlook was the basis of comments by Mr Joyce.
- In the US, the Federal Reserve will pick up the signal that the nation is going into further and substantial debt. The current Debt/ GNP ratio is close to 1.4 and under republican President Eisenhower it reached 1.8. Increasing national debt will mean more offset inflation.
- The Trump administration plans to invest in massive infrastructure programs across the US largely focusing upon the repair of assets – roads, dams, levy banks, flood mitigation canals all across the south, bridges, airports ports etc. Just one report by the US Army Corp of Engineers has indicated that every bridge in the US needs major repair work.
- As Americans are “put back to work” other developed economies will have to deal with the inflationary effects. A large amount of the money that washes through the wealthy economies will find a home in the US. We need to understand the potential scale here. If, over a few years there is a mobilisation of the money that is held in Australia’s Industry Superannuation Funds and the US Pension Funds, this is an amount of more than US $40 trillion!
- Big infrastructure programs across the US will mean longer-term investment opportunities and the modernisation of materials and supply industries. There are steel plants in the “rust belt’ that can be rebuilt to use the latest technology. These would then be in front of the game for fifty years or so.
- The cost of money in these other economies will become very expensive and remember they will be copping it when they already have very low growth or no growth.
- As US heavy industry begins to gear up, and after a time, wage-rates should begin to rise and in a longer time-frame, revenue will begin to come into the treasury and debt can be reduced. Under Republican administrations, the US has ridden this tiger before.
- With foreign policy, the links across the Atlantic will be weakened as the US scales up its presence in the Pacific. This is the direct opposite of what Paul Keating saw as being possible with a democrat President.
- At the same time the US can begin to counter China’s influence through the use of economic levers - exchange rates, tariffs, non-tariff trade barriers etc. China will begin to experience the impacts of a serious inflation problem, along with its requirement to service massive domestic debt. China’s Debt/GNP ratio is 2.5!
- As the new administration articulates and establishes this new position for the US, it will want to negotiate a set of special military agreements with Japan, the Philippines and possibly South Korea, aiming to ring-fence China in and give North Korea a special signal. The Abe government is up for it. Mr Abe has already met with Mr Trump
- Now Beijing will be faced with steadily worsening and potentially massive domestic problem driven by lowered exports, closure of industries, civil unrest. In the first year after the GFC began to play out across China, there were nearly 90,000 instances of civil unrest requiring army and/or multiple police interventions to restore order.
- Just as a middle class is emerging within China, it could begin to be scooped out because of external economic pressures. Sounds like the USA experience?
- The Chinese leadership could be expected to retaliate by fanning renewed and nationalist posturing first directed at Taiwan and then Japan. If 150 million or so Chinese workers are laid off and begin to “gather at the gates” does anyone seriously think that the Chinese leadership is going to be requesting briefings about a few sand dunes in the South China Sea? That is fantasy!
- A question that we should be asking is, “Might there be another revolution across China a few years on?” This one would be driven by sections of an aspirant middle class, not by peasants.
I include below a letter published in the Age recently.
The Donald's choice
For Donald Trump, the road in front is divided. He can take one path and go beyond a roadside picture of Silvio Berlusconi, or take the other path and perhaps pass beyond a picture of Franklin D. Roosevelt. The choice is his and the American people will await his decision. For the rest of us, we should not forget that for two decades following the death of FDR, many Republican Party members considered that during his very challenging presidency, the Oval Office was occupied by a communist.
This article gives the views of the author, and not the position of The Policy Space.