We were warned that were Donald Trump to become the President-elect, the financial markets would crash. Shares would slide; the dollar would plunge. Markets like stability and the one thing that his friends and foes would agree on is that The Donald would not bring stability. He promised many things, but continuity of policy was not one.
As we now know, these market predictions have been completely wrong. The Dow Jones reached a new peak last week and the dollar is at a 13-year high. Sure, bond yields rose, but under any other circumstances this would have been welcomed as a sign of a return to more normal financial conditions. In any case, they are still lower than they were a year ago.
So does this mean that finance has fallen in love with Trumponomics?
Well, perhaps not yet. No one knows much about it. We don’t yet have a Treasury secretary or any other financial appointments. We don’t know what bits of candidate Trump’s policy calls might be hardened into specific policy proposals. We don’t know what he could get through Congress. But – and this is a big but – there is a shift of mood taking place. Maybe, just maybe, his plans for the economy might turn out to be rather successful.
There are three big policy shifts: a big fiscal boost from tax cuts and higher public spending, rolling back of regulations on energy and financial services, and trade controls.
The first could be huge. He has proposed cuts in personal taxes, with the headline top rate of income tax falling to 30 per cent. But maybe more important are the changes to corporation tax, with a cut to 15 per cent, and an amnesty on companies’ foreign balances that would allow, or perhaps require, them to be repatriated with a low tax charge – say 10 per cent.
These changes, with the support of the Republican majority in both houses of Congress, could come in very fast. Think of the effect. There would be a massive one-off flood of money into the US and out of the tax havens. The amnesty would be good news for the US taxpayer and dreadful news not only for the offshore financial centres but also for the accountants and lawyers who have devised these schemes. Suddenly Donald Trump and the European Commission would be singing the same tune, united in their efforts to make companies pay more tax.
The cut in corporation tax, coupled presumably with the closing of other loopholes, would further reduce the incentive to shuffle money offshore. Countries that compete by having low corporation tax rates, in particular Ireland with its 12.5 per cent rate, would suddenly find that advantage swept away. The playing field would be levelled towards the US. Indeed, Trumponomics would be setting a new global standard for corporate taxation.
There would, however, be some cost to the Exchequer. As we learnt from Reaganomics in the 1980s, if you cut taxes you may get faster growth but you do get less revenue. Add in the additional spending that has been promised for infrastructure and other projects, the budget deficit will widen. That is one of the reasons why bond yields have risen. If Uncle Sam is going to borrow more money, he will pay a higher interest rate to do so. That, in turn, has been one of the forces pushing up the dollar. If dollar interest rates rise (and the markets are now convinced that the Federal Reserve will increase short-term rates again next month) the case for holding dollars rather than any other currency becomes even more compelling.
So that is why the dollar has gone up. What about shares? Faster growth would certainly help, but the bull case is further increased by the promise of relaxing regulation. High-tech shares have fallen but shares in basic commodities and banks have more than offset this decline. You can make a moral judgement about this, and many people are appalled by the prospect of looser curbs on pollution and looser controls on banks. But it is easy to see why large chunks of the business community are rather encouraged. I suppose the defence would be that regulation could become lighter but remain effective, if it were to become better engineered. We’ll see.
And the big negative, trade controls? I think here that US business, maybe wrongly, hopes that in practice the new President will be more cautious than he was in his campaigning. The harsh truth is that controls on trade with China and Mexico would make Americans poorer, not richer. And maybe, fingers crossed, it would be possible to create voluntary restrictions on Chinese and Mexican exports to the US, rather in the way that Japan restricted its exports in the 1980s in response to US warnings.
The big message here is that for the moment, at least, the world of finance is happy to see the US loosen fiscal policy. Now let’s see how it reacts to the loosening of UK financial policy in the Autumn Statement, which will be announced on Wednesday.
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