One of the most stunning political developments in the US has been the rise of Donald Trump. In an article originally published by Caixin, Marc Chandler, BBH’s Global Head of Currency Strategy, describes how Trump’s candidacy for president is both an expression of political dynamics in the US as well as an American expression of a political current evident in nearly every high income European country.
One of the most stunning political developments has been the rise of Donald Trump and his apparent success in securing the nomination of the Republican Party for President of the United States. Trump’s candidacy is both an expression of political dynamics in the US as well as an American expression of a political current evident in nearly every high income European country. The nationalism and xenophobia appears to be an expression of frustration of unmet expectations and the failure of the elites to ensure prosperity and security. It is at once a cause and effect of the crisis of neoliberalism, of which the Great Financial Crisis was a major blow.
The US national interests and challenges to those interests do not change much from year-to-year, and this may help explain the continuity in US foreign policy (including foreign economic policy). Trump’s campaign style emphasized a break from the conventional approach. There is already a faction that concludes that the US is shouldering a greater burden for globalization than it ought to as a question of will and resources. This faction mocks the United Nations and dragged their feet about accepting the new quotas at the IMF, which were a precondition of reforms.
Also given Trump’s style (temporally inconsistent) it is difficult to anticipate a coherent set of policies. The foreign economic policy thrust seems to be one of unilateralism that could scare foreign investors. The US is a net debtor in that foreign investors own more US assets (portfolio and direct investment) than US investors own foreign assets.
Since the Great Financial Crisis, global trade, and capital flows have not recovered fully. Part of the populist appeal that is evident in many countries, including the US, is the view of that the globalization is undermining living standards. In Europe, integration may be understood as a subset of globalization. In any event, the multilateral institutions and the post-WWII order seem fragile at this moment in time. The thrust of Trump’s foreign economic policy would seem to weaken that fragile order.
Perhaps Trump is embracing the idea of the G-Zero world that has been suggested by some political scientists. The US no longer has the power to provide hegemonic leadership to make and enforce the rules of engagement that some scholars argue is necessary. What follows is that the US does not have to sacrifice occasionally its short-term interests for strategic goals. Therefore, the US is free to pursue its narrow national interests.
The specific form of globalization post-WWII was shaped by the US more than any other country. As opposed to the classic approach to international relations, where the struggle was over securing a fixed sphere of interest, the US has insisted on variable shares of the global economy. The variability was determined by economic prowess not political favors. Trump, in effect want to abandon the US approach. If Trump, and others seemingly like him, manage to peacefully dismantle and unravel globalization, the role of the dollar would likely change significantly.
When considering the dollar impact of a new administration, it has often been helpful to think about the likely policy mix. The best policy mix for a currency is the loose fiscal policy and a tight monetary policy. This was the policy mix of the Reagan dollar rally. It was also the policy mix in Germany after the Berlin Wall fell which led to the German mark overshoot and ERM crisis (that led to the Maastricht Treaty and EMU).
If, despite Trumps allusions (illusions?) of firing Yellen, the Fed does continue to gradually normalize monetary policy, the key moving piece will be fiscal policy. One of the reasons why some conservatives don’t support Trump is that amid the conflicting signals, it sounds as if fiscal policy may be relaxed in a Trump government.
Global investors, like US investors, are talking about Trump, but so far investors have not reacted. The focus will shift to Trump’s vice presidential candidate and the Republican Party platform. On the Democrat side, Sanders’ win in Indiana keeps the race alive, on paper at least, and California is the last big prize. How Clinton reaches out to Sanders’ supporters is an important part of the process in the coming weeks. The controversial nature of Trump’s candidacy has spurred talk that the Democrats could take both houses of Congress, on ideas that many Republicans will not turn out to vote.
Lastly, what foreign investors need to appreciate is that despite the claims of democracy, the US still does not directly elect its President. They chose electors who are committed to voting for a party’s candidate. One important implication of this is that the national polls are misleading. The electors are based on the population of a state. This means that a vote in New York or California, both large states, have greater influence than a vote in less populated states like Idaho or Rhode Island.
Among the 50 states, certain patterns develop over a number of elections. The current alignment suggests that there are a handful of states like Ohio, Pennsylvania, and Florida, in which the election is thought to be determined. Pay close attention to the polls especially starting toward the end of the summer.
The event markets offer interesting insight as well. Some that have been around for many electoral cycles, like the University of Iowa’s electronic market, often anticipated the results better than polls. At the end of May, it showed that Trump was drawing 35% of the wagers. However, PredictIt, another event market showed Trump at 43%.
The views expressed are as of June 1, 2016 and are a general guide to the views of BBH. The opinions expressed are a reflection of BBH’s best judgment at the time this broadcast was recorded or article was written, and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed. Neither BBH nor its affiliates provide legal or tax advice. Nothing contained herein is intended as a recommendation to buy or sell any security, or to invest in any particular country, sector or asset class. BBH is not affiliated with Caixin. 06/2016. IS-2016-06-02-1882