Prepare for a reversal of monetary rule under President Trump

Historians may come to see 2016 as an economic policy inflection point

by: Gillian Tett


Three and a half decades ago, a Yale student called Adam Glick tried to persuade his fellow students to embrace the freshly elected president Ronald Reagan.

It was hard. Back in 1980 most of the establishment — and gilded students — sneered at the idea of a former B-list Hollywood actor in the Oval Office. Almost nobody guessed that Reagan might end up a Republican icon.

Mr Glick is now a successful asset manager running a multibillion-dollar private fund. He feels a sense of déjà vu. The election of Donald Trump has left elites shocked and outraged — and Mr Glick is once again trying to tell friends (and fellow financiers) this is a mistake.
Instead, he insists that what investors need to recognise is that the “wisdom of crowds” has given the next president a powerful mandate for change. As a result, in 30 years’ time, historians might see 2016, like 1980, as a big economic policy inflection point.

Can this optimistic interpretation of events be correct? In some ways, it seems hard to believe. On the campaign trail Mr Trump seemed very different from Reagan. He has no experience of public office.

He projects anger rather than optimism about an American “morning”. He does not seem inclined to collaborate with enemies. The Republican elite (mostly) shunned him. His personality is at best undisciplined and at worst abusive.

But one striking detail about this week’s events is that his victory speech was calm and conciliatory. That might — just possibly — suggest Mr Trump the president will not be quite the same as Mr Trump the angry candidate. A second important detail is that the president-elect, like Reagan before him, appears to recognise that he needs to rely on advisers to compensate for his lack of policy knowledge. And if you look at the advisory team around him, it is possible to see a policy platform emerging that might indeed turn out to be bold.

Nobody should describe this platform as Reaganism 2.0 or a free-market revolution. Mr Trump is deeply protectionist, reluctant to reform benefits such as Social Security and favours an extensive infrastructure programme. If implemented in full, which seems unlikely, these bold pledges would add $10tn to the public debt in the next decade. This (rightly) appals conservatives.

But Mr Trump’s advisers are also batting around ideas Reagan’s heirs can applaud. They want to cut personal taxes and slash corporate taxes rates from 35 per cent to 15 per cent, a move that Anthony Scaramucci, one adviser to Mr Trump, thinks could boost corporate earnings by 30 per cent. Advisers such as Tom Barrack, of Colony Capital, want to fund infrastructure with public-private partnerships.

They want to use tax incentives to repatriate companies’ overseas cash piles. They also plan widespread deregulation, ranging from a “bonfire of energy rules” to a reversal of new fiduciary rules for asset managers and a repeal of Obamacare, the US’s healthcare act.

This may look like a bewildering mix, knitted together only with populism. But what links them is a deep conviction that governments cannot reignite growth by relying on monetary policy alone.

Rather, fiscal and supply-side reforms are needed. Indeed, Mr Trump’s advisers are so scornful of ultra-loose monetary policy that some are keen to push for the early exit of Janet Yellen as US Federal Reserve chair.
As a result, when historians look back at this week, they may well conclude that the most important inflection point is not about deregulation or tax cuts. Instead, the pendulum swing that matters is about the role of central banks. After all, the howl of voter anger shows with cruel clarity that it was a mistake to expect central bank policy experiments alone to deliver sustainable economic growth. That might now pave the way for a long-awaited recognition that central banks cannot — and should not — be the “only game in town”, to quote Mohamed El-Erian, chief economic adviser at Allianz. Fiscal and supply-side policy is now centre stage.

If so, this is an inflection point that is long overdue. There is no guarantee that Mr Trump can corral his team to deliver; his personality may in the end prove too erratic, and his advisers’ economic policy dreams may ultimately collapse into foreign or domestic strife.

But the fact that the stock market has rallied shows that Mr Glick is not the only asset manager who thinks he can smell a domestic economic policy turning point. Yes, he may turn out to be misguided.

But investors discount this possibility at their peril, particularly after a year in which the elites have been wrongfooted so many times.

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