Trumponomics and Trump’s “America First” rhetoric originates from the Beggar thy neighbor policies of the classic 18th century Scottish economist and philosopher Adam Smith, the father of modern economics.
So Trumponomics is the 21st-century version of the Adam Smith’s beggar thy neighbor policies which came about as a policy solution to domestic depression and high levels of unemployment.
What then is the crux of Trumponomics, the modern version of Adam Smith’s beggar thy neighbor policies?
Trumponomics could be about converting “America First” rhetoric into action. Put simply, Trumponomics implements a trade policy that benefits America, while harming its neighbors or trade partners, hence beggar thy neighbor.
So Trumponomics views international trade as a zero-sum game. But Europe is natural resource poor and human resource rich (particularly Germany) who views international trade as not only a route to prosperity but also its very survival, bearing in mind the old continent is energy/ food dependent. Put another way, Europe must trade to survive and prosper. Unrestricted trade between the European Union and other trading blocs, nations is viewed (maybe even sold) as a mutually beneficial transaction between nations.
The EU views trade through a prism of comparative advantages (that all parties gain from trade).
But that is at odds with America’s Trumponomics view of trade being a zero-sum game. America is in an enviable position of being both natural resource and human capital rich. America can survive without international trade but Europe cannot. So America’s Trumponomics has locked swords with the Europeans and the latest G7 summit underscores the fermenting discord.
The goal of Trumponomics is to increase American prosperity (to the detriment of everyone else) by increasing demand for US’s exports while reducing reliance on imports. This means ramping up domestic consumption, in other words reducing leakages through a $1.5 trillion dollar tax cut which increase liquidity (and in theory domestic demand).
Trumponomics will reduce the consumption of imports through trade barriers, such as tariffs or quotas. Competitive devaluation may not be considered desirable, bearing in mind that the US’s largest exports are treasuries which will remain attractive to investors in a stable dollar environment. Moreover, the bulk of Trump’s trillion dollar infrastructure is most likely going to be financed by a treasuries auction (not taxation) which will (deliberately) suck dollar liquidity from the global markets.
Trumponomics could extend to financial markets leading to a diversion in the regional performance of assets.
A dollar liquidity shortage could already be in its early stages, bearing in mind that the credit cycle is maturing and a credit squeeze could be dead-ahead. The Fed, the world’s central bank by default has signaled to the market that it wants to move towards monetary policy normalization, which would entail further rate hikes and an unwinding the Fed’s massive $4.3 trillion balance sheet.
Note that no external auditors have been invited to audit the Fed’s balance sheet. So this is just more mystic surrounding the Fed, the world’s most powerful private company with secret shareholders. Not only does the Fed own the copyrights to the world’s reserve currency which it creates with keyboard strokes the Fed is also not required to conduct external audits. Only a chosen few insiders have seen the books.
But let me keep this relevant to how the Fed’s unwinding in conjunction with Trumponomics is likely to lead to a diversion in the regional performance of assets.
The emerging market crisis (internal link) which I forecast would occur back in December is being caused by Fed tapering, the Fed withdrawing dollar liquidity from the markets through Fed rate hikes and winding down its treasuries buying.
Indeed, The Reserve Bank of India Governor, Urjit Patel is pleading the Fed to go slow with the unwinding of the balance sheet.
The “turmoil” in the dollar funding of emerging markets is not because of the U.S. Fed moving interest rates, that have been rising since December 2016. “The upheaval stems from the coincidence of two significant events: the Fed’s long-awaited moves to trim its balance sheet and a substantial increase in issuing U.S. Treasuries to pay for tax cuts,” wrote Patel.
Indeed, it is the latter part of the Treasuries intention of auctioning treasuries to finance Trump tax cuts and trillion dollar infrastructure program which will suck Ems dry of dollar funding.
So Trumponomics, reading between the lines, will widen the divergence between emerging markets FX.
Indeed, this trend could be in its early stage, bearing in mind that the Fed’s finger is on the trigger. But the world’s central bank, the Fed (notice how the Bank of India Governor begs the Fed not to unwind and not ECB, BoJ of BoE) has yet to pull the trigger and take the kill shot.
All the talk about the Fed unwinding has just been that, talk. Take a look at the Fed Balance Sheet and you will notice a reduction in assets from 4.5M to 4.32M which can hardly be described as “normalization”.
So this ongoing divergence between US dollar-denominated assets, the USD could be in its early phase if the Fed is onboard with Trumponomics.
Here is the sixty-four million dollar question, is the Fed a fan of Trumponomics?
Trumponomics, “America First” (read between the lines) is also about dollar hegemony fight back even if it means rattling old friends and allies.
The real power-broker meeting last weekend, Bilderberg 2018 took place in the shadows of the G7. Western financial elites, spymasters, and NATO experts met in secret in Turin to discuss, no doubt, how to save the petrodollar wealth power hegemony.
Who will be the sacrificial lamb, Ems, Euro? Will an invasion (regime change) of Venezuela, Iran (oil-rich) under another false pretense so as to put it all on the dollar because in the words of retired US Fed Alan Greenspan “we invaded Iran because we needed to”
Will Trumponomics be in the shadow government’s gunsight too-maybe the Fed will trigger the great unwind just before Trump’s midterm elections? Unlikely, surely Trump is their man in the fight? We are going to find out soon.