The era of Trumponomics

To say that 2016 was not the best year for global politics and international cooperation would be a bit of an understatement. It was bad enough that Britain tore itself apart from the European Union. Now, the United States has elected Trump. Despite losing the popular vote, the Republican presidential candidate secured those 270 electoral votes needed to win the white house and complete perhaps the biggest political upset in modern history. So much for polls, media and expert's prediction of a democratic win: the United States and, by extension, the world is now in unchartered territory. What now?
Undoubtedly, Trump's presidency throws vulnerable religious and racial minorities into a whirlpool of uncertainty. Considering his countless controversial statements during the campaign -- not least of which was building a wall on the southern border -- it is no surprise that hundreds of thousands of panicked souls made a mad dash for Canada's immigration website after results were out. That the U.S. may no longer remain a safe haven for immigrants is well understood. But more broadly, what will be the economic consequences of a Trump administration, both at home and abroad? Trump's economic policies, or "Trumponomics", if you will, could amplify income inequality, substantially raise US debt, reduce central bank independence, weaken domestic financial regulations, destabilise the global financial system and pour cold water on trade-led global growth.  
Trump could usher in a new era of macroeconomic policy where finally fiscal policy takes the driving seat. Since the global financial crisis, monetary policy has been the only game in town in the world's largest economy. With fiscal policy constrained by huge amounts of public debt, the U.S. Federal Reserve (Fed) shouldered much of the burden of reviving demand and preventing deflation. Trump could change all that. His economic plans rotate around massive spending on infrastructure to rebuild roads, ports and bridges with the added stimulus of generous tax cuts. In theory, this sort of expansionary fiscal-carrot is expected to catalyse demand through higher output, jobs and income. In fact, it is this line of thought that has brought about a rally in US stock markets in recent days.
But there is a catch. For one thing, how inclusive is his tax cut? Not much, according to the Urban-Brookings Tax Policy Centre, an independent economic research institution in Washington. Its recent report titled "An Analysis of Donald Trump's revised Tax Plan" states that the largest benefit of Trump's proposed tax plans would go to high-income households, both in dollar and in percentage terms. As Martin Wolf, chief economics commentator of the Financial Times points out, it would benefit people like Trump himself.
Then comes the issue of financing infrastructure spending. According to the report by Tax Policy Centre, Trump's tax proposal would reduce government revenue by a whopping USD 9.5 trillion over its first decade and an additional USD 15.0 trillion over the subsequent 10 years! Much of the revenue loss would come from individual income tax cuts, while about a third would be from reduction in corporate income tax rate and introduction of special rates on pass-through businesses such as partnerships. Considering increased spending on roads and ports, public debt could rise by as much as 25 per cent of GDP by 2026. If anyone is keeping count, total stock of public debt (in per cent of GDP) is already above 100 in the US. Increased interest liabilities -- especially of the magnitudes implied by Trump's plans -- could get in the way of future productive spending. Although in the case of the U.S. this idea may not hold. Its "exorbitant privilege" of playing host to a global reserve currency means the economy will continue to receive massive amounts of capital inflow, which can pay for new investments or repay existing debt. Still, there should be an upper limit to how much an economy may borrow from a long-term debt sustainability perspective.
It is important to recognise that higher fiscal deficit in an economy close to full employment implies higher inflation, or "Trumpflation" as it is now being termed in global financial circles. Bond markets across the world are already reflecting this expectation (coupled with higher inflation expectation from a more protectionist trade policy). After election results came out, US 10-year treasury yield climbed above 2-percent for the first time since January, 2016. Small wonder that emerging market (EM) currencies are falling as interest-rate differentials between US and EM assets are shrinking, with the expectation that it will continue to shrink. Needless to say, cheaper currencies will raise external debt servicing cost in these EMs. Some countries like Brazil and Indonesia are also experiencing collapse in carry trades -- a strategy where an investor borrows money at a low interest rate to invest in a higher yielding asset -- as their bonds lose the yield-advantage. Assuming interest-rate differentials continue to fall fuelled by higher inflation expectation in the US, the upshot is faster capital outflow from EMs with increased risk of "sudden stops" in private financing, or a "Trump Tantrum" if you don't mind a bit of financial market jargon.   
Speaking of inflation and interest rates, how will monetary policy be affected? Higher inflation expectations, coupled with improving labour market conditions and lack of violent financial market reactions following Trump's victory (barring the Mexican peso's collapse) is likely to tempt the Fed to push ahead with a policy rate hike this December, 2016. Just last week, Fed vice-chairman Stanley Fischer corroborated this view. One would think Trumponomics gels well with the Fed's near-term goals.
Not so fast. Trump, who has been highly critical of the Fed's super-loose money policy, calls into question the central bank's medium-term independence. In fact, Judy Shelton, a member of Trump's advisory team stated in financial media that the new president would want someone "whose thinking was more in line with his" running the central bank! That, put together with the fact that Trump blasted Fed Chairwoman Janet Yellen for keeping rates "artificially low" to help President Barack Obama, all but guarantees a new central bank chief from 2018 (that is, after J. Yellen's present term expires) who is much more submissive to the new president's whims.   
Herein lie the implications for global financial stability. It is no secret that the Fed in recent years took global financial conditions into increasing consideration when making policy decisions. This at least partially explains why the Fed has not yet tightened monetary policy this year following multiple bouts of global financial volatility stemming from China's exchange rate concerns, tumbling oil prices (both in January, 2016) and Brexit. Had the Fed pulled the trigger then, as it implied in its December 2015 monetary policy projections, it would have only added fuel to the fire of financial volatility. Trump might toss all that consideration into a trash can.
It is this "every man for himself" line of thought that characterises Trump's protectionist trade rhetoric. His victory could put the final nail in the coffin for big trade agreements at a time when trade openness and globalisation is increasingly being called into question. The Trans Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) are all but dead. Even the 23-year old North American Free Trade Agreement (NAFTA), which Trump termed a "disaster", could see a major change in design or collapse all together.
Then there is the China factor. Throughout his campaign, Trump lashed out at the world's second largest economy, labelling the latter a 'currency manipulator' and stealing US jobs through cheap exports. Slapping tariffs on Chinese products could start a trade war that could leave both countries worse off. By extension, most of the world will be affected, stemming from lower growth in the largest two. That said, China could capitalise on a more closed US economy by striking up free-trade deals with developing and other developed economies and bring about a permanent shift in global trade that is centered in Asia.
To cap it off, Trump pledged to dismantle the Dodd-Frank Act. This is the legislative framework passed in 2010 to strengthen Wall Street following the 2008 crisis. In other words, it is a check against financial firms from indulging excessively in risky investments. Analysts of US financial regulation predict that Trump may not remove all aspects of this policy. Be that as it may, three days after Trump's ascension, the Huffington Post reported that the new administration will all but certainly throw out the "Volcker Rule" which prevents banks from making speculative investments - the very type of financial activity which led to the 2008 crisis. Unless it is replaced by a more robust alternative, diluting financial reforms will make the entire economy more vulnerable to the kind of recessionary-shock that was seen only nine years ago.  
So where does all this leave developing countries like Bangladesh? We all know Bangladesh is just beginning to enjoy the benefits of an export-led growth model which has provided jobs and lifted millions out of poverty. A brave new world where countries close their doors on each other will certainly not help sustain high rates of economic expansion or poverty reduction. Given a Trump presidency, the labour-flow channel is obviously at risk if immigration becomes tighter. Facing uncertainty on future immigration policies, more people may consider other advanced economies for education and work unless Bangladesh develops its domestic industries to absorb high-skilled labour. The second channel is financial. Development finance could take a hit if political relationship with the US gets frayed. The third channel, and perhaps the most important, is through the direct impact of a Trump shock on the global economy through trade and investment. If global growth is affected due to protectionist policies, rising risk premiums leading to higher borrowing costs and slower investment emanating from policy uncertainty, Bangladesh is likely to feel the pinch of reduced external demand.
All the more reason for Bangladesh to raise domestic demand through higher quality public spending, improved infrastructure, stronger financial sector and a better business climate. Equally important is the need to maintain strong diplomatic and trade relations with the U.S. while also actively seeking to strike trade deals with the likes of China, India and South-East Asian economies. Indeed, a strong regional agreement could divert some trade away from the west and into Asian economies dependent on an export-led growth model.
Make no mistake; this discussion is still based on information we all already know. What actually happens will depend on which Trump shows up in office in January. Will it be the aggressive property developer millions view unfit to be the commander-in-chief? Or a more rationale figure who said more positive and conciliatory statements in his victory speech than throughout his entire presidential campaign? The latter would suggest he would have to backtrack on several outlandish promises. Trumponomics is already between a rock and a hard place.
The author is a macroeconomic research analyst for an organisation in Washington D.C. and Research Fellow for the Asian Centre for Development in Dhaka. Views expressed are his own. Email: [email protected]