Italy’s referendum holds the key to the future of the euro

On December 5, Europe could wake up to an immediate threat of disintegration

by: Wolfgang Münchau



After Brexit and Donald Trump, prepare for the return of the eurozone crisis. If Matteo Renzi, Italian prime minister, loses his constitutional referendum on December 4, I would expect a sequence of events that would raise questions of Italy’s participation in the eurozone.

The underlying causes of this extremely disturbing possibility have nothing to do with the referendum itself. The most important was Italy’s economic performance since it adopted the euro in 1999. Total factor productivity, the portion of economic output not explained by labour and capital, has fallen in Italy by about 5 per cent since then whereas in Germany and France it went up by about 10 per cent.

The second source was the failure by the EU to construct a proper economic and banking union after the eurozone crisis of 2010-2012 and to impose austerity instead. If you want to know why Angela Merkel cannot be the leader of the free world, look no further. The German chancellor could not even lead Europe when it mattered.
The combination of those two factors are the biggest causes for the incremental rise in populism in Europe. Italy has three opposition parties, all of which favour exiting the euro. The largest and most important is the Five Star Movement, a party that defies the usual left-right classification. The second is Forza Italia, Silvio Berlusconi’s party, which has turned rabidly anti-euro after the former prime minister was forced out of office in 2011. And the third is the separatist Lega Nord. In democratic countries, it is common that opposition parties eventually come to power. Expect that to happen in Italy too.

The referendum matters as it could accelerate the path towards euro exit. If Mr Renzi loses, he has said he would resign, leading to political chaos. Investors might conclude the game is up. On December 5, Europe could wake up to an immediate threat of disintegration.

In France, the probability of a presidential election victory by Marine Le Pen is no longer a remote risk. Of all the candidates that have declared, she is the best prepared. There are some who could beat her, like Emmanuel Macron, the former reformist economics minister, who declared his candidacy on Wednesday. But he may not make it to the final round of the elections as he lacks a party apparatus.

If Ms Le Pen became president, she has promised to hold a referendum on France’s future in the EU.

If that referendum were to lead to Frexit, the EU would be finished the next morning. So would the euro.

A French or Italian exit from the euro would bring about the biggest default in history. Foreign holders of Italian or French euro-denominated debt would be paid in the equivalents of lira or French francs. Both would devalue. Since banks do not have to hold capital against their holdings of government bonds, the losses would force many continental banks into immediate bankruptcy. Germany would then realise a massive current account surplus also has its downsides. There is a lot of German wealth waiting to be defaulted on.

Can this be prevented? In theory it can, but it would require a series of decisions taken in time and in the right sequence. For starters, Ms Merkel would have to accept what she refused in 2012 — a road map towards a full fiscal and political union. The EU would also need to strengthen the European Stability Mechanism, the rescue umbrella, which is not designed to handle countries the size of Italy or France.
Is this even remotely likely? Think about it this way: if you ask the German chancellor whether she wants commonly-backed eurozone bonds, she will tell you no. But if she has to choose between eurobonds and an Italian exit from the euro, her response may well be different. The answer will also depend on whether you ask before or after the German elections next autumn.

My central expectation, however, remains not a collapse of the EU and the euro, but a departure of one or more countries, possibly Italy, but not France. In the light of recent events, my baseline scenario is now firmly on the optimistic scale of reasonable expectations.


The Year the World Felt the Might of China’s Commodity Traders

Bloomberg News 

  • Surging metal prices linked to jump in hedge-fund transactions
  • Cash pours into materials as alternative to stocks, property
The Chinese speculators shaking up global commodity markets are switched-on, flush with cash and probably not getting enough sleep.

For the second time this year, trading has exploded on the nation’s exchanges, pushing prices of everything from zinc to coal to multi-year highs and sending authorities scrambling to deflate the bubble before it bursts. Metals brokers described panic earlier this month as the frenzy spread to markets in London and New York, prompting wild swings in prices that show no signs of abating.

While billions of yuan have poured in from herd-like Chinese retail investors who show little regard for market fundamentals, brokers and traders say even more is coming from an expanding army of deep-pocketed hedge funds. They’re chasing better returns in commodities as stocks and real estate fade, often using algorithms and trading late into the night, when markets in London and New York are most active.
 
“There is no doubt that the price moves and the bigger volumes worldwide are being driven by the Chinese, and by professional speculators and financial players,” said Tiger Shi, managing partner at brokerage BANDS Financial Ltd., which counts several of those funds as clients.

“The western hedge funds and institutional investors don’t really know what’s going on. Often they were used to trading macro factors or Fed policy, but now they find they have fewer advantages.”



Shi, previously head of metals in Asia at Jefferies Group LLC and Newedge Financial Inc., estimates that China may have more than 5,000 hedge funds active in commodities. At least 10 manage assets of more than 10 billion yuan ($1.4 billion).

The use of algorithmic trading, in which computers execute multiple orders in milliseconds, is turbo-charging volume and volatility, according to Fu Peng, a portfolio manager at Lianzhan Global Macro Fund Management Co. About a third of activity on Chinese exchanges is executed by automated commands, which generates more volume and greater momentum in the global markets, Shi estimates.

A recent example was on Nov. 11. Copper in Shanghai jumped by the most since trading began in 2004 amid a surge in volume. On the London Metal Exchange, it gained as much as 7.6 percent, before sinking 1.7 percent in the Asian evening. The gap between the day’s high and low was more than $500, the widest in five years, and the intensity of the swing was just as big in New York futures.



“I can recall only two other occasions in my career where there was such panic and devastating price action in copper but this market today is far less transparent,” Matthew France, head of institutional sales for metals in Asia at Marex Spectron Group, said in an e-mailed report on Nov. 14. “The machine component in the market is now so much bigger as is the onshore retail and fund involvement on the Shanghai Futures Exchange and OTC options.”


The country’s biggest hedge funds include DH Fund Management Co., Shanghai Discovering Investment Co. and Shanghai Chaos Investment Group. Officials for all three declined to comment for this story.

Over less than two weeks this month, the value of daily transactions on China’s three commodity exchanges more than doubled to peak at $226 billion on Nov. 14. Sparked by speculation that government reforms are helping reduce oversupply of raw materials amid signs of improving demand, Chinese money is pouring into commodities as investors look for better returns than other assets including stocks or real estate, according to Fu at Lianzhan Global Macro Fund Management.

“The nation’s supply-side reforms had a big impact on the market balance, and that’s the fundamentals behind the trading,” Fu said by mobile phone from Hong Kong. “But at the same time, we’ve got too much money there. There have been no returns from investment in industries. The stock market is neither dead nor alive. Investment in real estate also got curbed.

So all the money is rushing into commodities.”

The Bloomberg Commodity Index has returned 8.8 percent this year compared with a 7.2 percent drop in the Shanghai Composite Index of equities, and the government has imposed measures to cool the country’s real estate market.

“Commodities market volatility is liquidity driven, as money from commercial bank wealth management products and private banking accounts flow into the market seeking higher return,” said Li Yulong, chief investment officer at Jyah Asset Management, a mutual fund which overseas more than 9 billion yuan.

Chinese traders are often most active during the night session, when trading also typically peaks on the LME and on Comex in New York. On almost two-thirds of the past 30 trading days, copper trading was heaviest between 9 p.m. and 11 p.m. in Shanghai, bourse data show.

Analysis of volume and open interest suggests they typically hold contracts for only a few hours.


 
 

Similar to the last frenzy in April, the government-owned exchanges have stepped in to cool trading by raising fees and margins, or cutting the number of new positions allowed daily.

Volume and turnover have since come off their highs but prices are still swinging. Copper is poised for its biggest monthly advance in a decade in London and Shanghai. Zinc rose to its highest in more than nine years, while lead jumped to the most in five years on the Shanghai Futures Exchange amid record volume.
 
“The massive and unprecedented surge in Chinese trading volume in base metals over the past month -- but especially since the election -- has put LME metals traders on red alert,” Tai Wong, director of commodity products trading at BMO Capital Markets in New York, said in an e-mail. The price moves caused by Chinese traders make “a strong argument that the Middle Kingdom is once again the center of the world, at least for metals,” he said.


— With assistance by Martin Ritchie, and Winnie Zhu


Gray Champion Assumes Command: Part II

By: The Burning Platform


In Part One of this article I discussed the arrival of Grey Champions in previous Fourth Turnings; their attributes, deficiencies, and leadership skills; and why Donald Trump is the Grey Champion of this Fourth Turning - whether you like it or not. Now I will try to make sense of what could happen next.

"Our movement is about replacing a failed and corrupt political establishment with a new government controlled by you, the American people. The establishment has trillions of dollars at stake in this election. For those who control the levers of power in Washington and for the global special interests, they partner with these people that don't have your good in mind. The political establishment that is trying to stop us is the same group responsible for our disastrous trade deals, massive illegal immigration and economic and foreign policies that have bled our country dry.  
It's a global power structure that is responsible for the economic decisions that have robbed our working class, stripped our country of its wealth and put that money into the pockets of a handful of large corporations and political entities. The only thing that can stop this corrupt machine is you. The only force strong enough to save our country is us. The only people brave enough to vote out this corrupt establishment is you, the American people." - Donald Trump
Make America Great Again


Seventy year old Donald Trump has assumed the Grey Champion flagstaff. In an increasingly chaotic world, normal working class Americans in flyover country were seeking a leader who could bring order, defeat the corrupt establishment, make tough decisions, and capture the zeitgeist of this moment in history. The ruling elite oligarchs and their fawning minions, occupying their strongholds in New York, California, Illinois, and D.C., are infuriated the peasants have dared to resist. In their secretive secure spaces, the elites are plotting with one purpose in mind - this uprising must be quelled.

They are now fanning the flames of discontent, funding professional protestors, and convincing the useful idiot college student millennials, Trump is dangerous to their future. It seems these mathematically challenged snowflakes have already forgotten about the $10 trillion of national debt and $1 trillion of student loan debt loaded on their backs by the Obama administration in the last 8 years. This is not to mention the $200 trillion of unfunded welfare liabilities awaiting them as they graduate with degrees in LGBT Studies and great jobs at TGI Fridays in their future.

As the legacy corporate mainstream media outlets hyperventilate over Trump going to dinner without informing them, while scorning and ridiculing his cabinet selections (even when he hasn't made them yet), this Fourth Turning chaotically churns towards its inevitable bloody climax. The current violence in the streets may be Soros funded domestic terrorism, but it still creates more anger, bitterness, and further unwillingness to compromise or meet in the middle.

This country is manifestly divided between red and blue, with the red geographically occupying 85% of the country and blue centered in the liberal urban bastions of corruption. There are multiple civil wars brewing below the surface, between the establishment and the people; left versus right; rural versus urban; Wall Street and Main Street; and the haves versus the have nots. It hasn't turned particularly bloody - YET.

It appears Trump's cabinet will be filled with establishment insiders. Many of his supporters will be disappointed. The daily minutia flogged by the 24 hour cable news propaganda machines is meaningless in the broad expanse of a twenty year Fourth Turning Crisis. Every president ends up with Washington insiders in their cabinet. At the end of the day, it's the president who sets the policy, decides what to prioritize, and sets the agenda for the nation. In the case of a Grey Champion assuming command in the midst of a Fourth Turning, events and his response to such events will dictate the course of the country and most likely the world for the next four or eight years.

The market reaction to Trump's ascendancy has a stench about it. On election night futures dropped 800 points, but markets turned positive the next morning and haven't looked back since. The stock market hovers at all-time highs. It's almost as if the big swinging dicks on Wall Street decided to send a message - they are still in charge. It doesn't matter who's in the oval office, Wall Street calls the shots. If you cooperate and do as you're told, the markets will ascend. If you attempt to implement any policy they don't like, a crash will be manufactured (ex. TARP rejection by Congress). The currency and bond markets are in turmoil across the globe. Something is clearly getting ready to blow.

You can ignore the day to day gyrations, as the three core elements of this Crisis - debt, civic decay, global disorder - will produce a chain reaction implosion during Trump's reign of power. The national debt is on automatic pilot to breach $1 trillion per year for as far as the eye can see. A $1 trillion infrastructure plan, rebuilding the military, building walls, massive tax cuts, trade wars and no spending cuts are a recipe for fiscal disaster. Trump's advisors seem to be following Dick Cheney's advice that deficits don't matter. Steve Bannon's documentary - Generation Zero - was based on the Fourth Turning, so you would think he would understand what's coming next.

Interest on the national debt was $433 billion in FY16. That colossal amount was with a near record low weighted interest rate of 2.2%. In case you haven't noticed the 10 Year Treasury rate has skyrocketed from 1.32% in July to 2.36% today. A 1% increase in rates across the yield curve will result in a 50% increase in interest on the national debt to $650 billion. Soc Gen's Albert Edwards believes the current bond route could drive the 10 Year Treasury rate to 3.25%. That would blow a hole in our annual deficits. Isn't leverage great?

US 10-Year Yield


The housing market was already rolling over due to high prices and stagnant household incomes.

With mortgage rates jumping by 1% and possibly more, housing bubble 2.0 meets pin 2.0. Auto loan defaults were already surging, as every Tom, Shaniqua, and Julio in America got a new vehicle with a low payment lease or 7 year 0% loan. Over 25% of all student loans are not being repaid. The stock market bubble has been sustained by corporate CEOs borrowing to buy back their stock at all-time highs. Their corporate earnings have been falling for several quarters in a row and now the interest rates on their record levels of debt are going higher.

In addition, the USD is now at a 13 year high, up 10% since May and 30% since mid-2014. This will further weaken the profits of our global conglomerates. Making America great again by bringing back manufacturing jobs will be DOA if the USD keeps rising. It just so happens earnings are falling with interest rates and currency rising, when stock market valuations are at record highs. The euphoria of the Trump victory will be short lived as the country officially enters recession and the stock market drops by 30% or more within the next year.

The civic decay already proliferating during and after the election will be exacerbated as bad debt wipes out financial institutions, corporations, and willfully ignorant consumer borrowers.

The lesson of 2008 has already been forgotten. Rather than rolling out his grand vision, Trump will be dealing with a financial crisis which will make 2008 look like a walk in Central Park. 

Will he follow the same failed policies used after 2008 - NIRP, QE, and saving Wall Street at the expense of Main Street?

Or will he level with the American people, allow Wall Street banks to go bankrupt, let the free market purge the system of trillions in bad debt, tackle the unfunded entitlement liabilities, and have Americans endure a Depression in order to reset our economic system? It will take a Grey Champion with a high level of moral fortitude and courage to demand such sacrifice from the citizens of this country.

With the left already trying to provoke a race war, once the Depression takes grip and the social safety net of entitlements begins to fray, the civic decay in the urban ghettos will reach a tipping point. Cities will burn, looters will run roughshod as police refuse to enter lawless neighborhoods, and commerce will grind to a halt.

If social justice warriors, black lives matter terrorists, or any other group of useful idiots decide to take their protests and violence into the red zones, outright civil war could break out. The Grey Champion is likely to clamp down on this civil disorder with the use of troops. Civil liberties will be trampled as the Federal Government attempts to maintain control. Fourth Amendment fans will not be pleased.

With rigged markets at record highs and the establishment still holding this Ponzi scheme of a country together, so they can extract a few trillion more before the collapse, the illusion of normalcy has lulled tens of millions into a false sense of security. Global disorder expands exponentially by the day.

The Middle East is a powder-keg; Russia and the U.S. are one mistaken shoot down from war; Europe is being overrun by Muslim hordes even as their insolvent socialist paradise goes bankrupt; NATO provokes Russia on a daily basis; Japan's decades long depression worsens; China's debt bubble approaches the breaking point; and currency wars are waged across the globe. Delusional Americans willfully ignore the facts because acknowledging them would require painful choices and accepting the consequences of decades of bad decisions.

As Trump focuses on filling his cabinet posts and preparing for his inauguration eight weeks from now, the forces of evil are gathering strength and preparing for battle. We are in the midst of the lull before the storm. Nothing has changed since the election from a debt crisis perspective. It seems the mainstream media pundits are purposely asleep at the wheel as The Obama administration has dialed the government spending up to 11.

Obama has made it his mission to reach $20 trillion in debt before he departs. At the current rate of debt accumulation, he will reach his goal by mid-December. The Obama administration has increased the national debt by $324 billion in the first 48 days of the fiscal year. That's a rate of $6.75 billion per day. The rate of accumulation last year was $3.3 billion per day. This is out of control, and not a peep from the propaganda media, or incoming administration.

US National Debt 1980-2019


The ongoing Soros funded protests in liberal urban enclaves across the country are setting the stage for a major confrontation in Washington D.C. on January 20, 2017. Obama continues to fan the flames of faux outrage from the left. Soros and his domestic terrorist co-conspirators are planning violent demonstrations in the midst of the inaugural celebration. Obama will order the police to stand down and allow the situation to get out of control.

Vandals jumpinmg on police car


Picture the 1968 Chicago Democratic convention. There is one major difference. There will be hundreds of thousands of Trump supporters who will not stand idly by and be abused by millennial snowflakes, BLM thugs, and feminazis. This event is likely to trigger clashes across the country. The gloves will be off and the situation could spiral out of control.

Those hoping for the Trump presidency to somehow derail this Fourth Turning are delusional.

Fourth Turnings never de-intensify. They build to a bloody crescendo, with the existing social order left in tatters and clear winners and losers. I think it is useful to describe this Fourth Turning in terms everyone should understand. J.R.R. Tolkien wrote his Lord of the Rings trilogy in the midst of the last Fourth Turning. It's not a coincidence the heroic figure of Gandalf the Grey saves the day during the Battle of Helm's Deep. He was the Grey Champion.

In today's parlance, Helm's Deep is occupied by normal working class Americans (aka the deplorables). George Soros is the evil Sauron, creating an army of Orcs with his immense wealth to destroy the good people of Helm's Deep and abolish their way of life. Through relentless propaganda, violent protests, and the creation of useful idiots through our government indoctrination camps (aka public schools & universities), Soros is attempting to conquer our society and turn it into a global socialist playground for himself and his oligarch cronies. They had us surrounded and were breaching the walls. Two weeks ago the battle seemed lost. Soros had his Orc General Clinton positioned for certain victory.

Helm's Deep


When the situation looked darkest, the Grey Champion materialized on the horizon with reinforcements indispensable in turning the tide. The feeling in flyover country when Trump ascended the podium to assume the mantle of the presidency was on par with the feelings of the Helm's Deep citizen combatants when they realized Gandalf the Grey had arrived to save the day. As we know, the victory at Helm's Deep did not win the war. Sauron regrouped and resumed his attack on humanity in short order. Soros is regrouping as we speak and girding his forces of evil for a final showdown. This war is still being waged. And the victor will not be crowned until the mid - 2020s.

Battle of Helms's Deep


The deplorables were in search of a prophet generation (Boomer) Grey Champion to lead them through this era of darkness, adversity and peril as this Fourth Turning careens towards its climax.

The Grey Champion doesn't have to be a good person, but they must lead and display tremendous confidence in their cause and path. Humbleness, thoughtfulness, graciousness and building consensus are not the traits of a Grey Champion.

Lincoln and FDR have many detractors, but during their Fourth Turnings, they most certainly led, casting aside impediments (often illegally), initiating conflict and enduring many dark days, with bleak prospects for a successful resolution. But they forged on despite the setbacks, failures, and tragedies. Both died on the doorstep of victory. Those of a libertarian bent, thinking Trump will restore Constitutional rights, will be disappointed, as he is likely to strengthen and expand government control of our economy, healthcare system, speech and communications.

As this Fourth Turning traverses obstacles towards its ultimate climax, the intensity will escalate to an earth shattering dimension. Bold decisions will need to be made, requiring a leader who displays incredible confidence, unflinching determination and inspirational leadership. Political correctness and cultural warfare gibberish will have no place in the coming trials. Trivialities will be disregarded; techno-narcissists will be forced to abandon their iGadgets and pick up a weapon; financial oligarchs will see their fortunes evaporate in the blink of an eye; revenge and retribution will be meted out in equal portions; and the possibility for worldwide annihilation will be ever present.

Winter has arrived, bitter winds are blowing and Spring is many years away. Grim times have befallen the planet. The prospect for a tragic outcome grows by the day. The storm clouds loom on the horizon. There will be no avoiding the coming tempest. Trump cannot defuse the banquet of consequences, decades in the making, headed in our direction. The best he can do is maneuver the country through this minefield of history without blowing the world up. There will certainly be financial chaos, widespread death, colossal destruction, and an all-out war to the finish. Let's pray the Grey Champion can lead us through this valley of death to a new High. There are no guarantees and our choices will matter.

Lightening Strike

"The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort - in other words, a total war.  
Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind's willingness to use it." - Strauss & Howe - The Fourth Turning


The Darker Side of the Dollar’s Rise

Expectations of better growth are also tightening financial conditions

By Richard Barley

President-elect Donald Trump speaks during a campaign rally in Hershey, Pa. Photo: Associated Press


Expectations of stronger U.S. growth as President-elect Donald Trump opens the fiscal taps have lit a fire under the dollar—with the greenback reaching a 13-year high measured by the ICE Dollar Index. But a stronger dollar, especially given its rapid rise, has already exposed weaknesses that have been ignored by investors. There could be more.

The shift has jolted investors into action. Last week they put $27.5 billion into global equities, while pulling $18.1 billion out of bonds, the biggest moves in two and three and a half years respectively, Bank of America Merrill Lynch notes. The result is higher yields and tighter financial conditions. The pain trade has been in emerging markets, where there has been a rapid negative reaction to higher U.S. yields and a stronger dollar.

A stronger dollar means weaker currencies for some struggling regions, notably Europe and Japan.

But tightening elsewhere could offset any gains these regions would get from rising exports driven by their weaker currencies.
From a growth perspective, there is a timing mismatch. If there is to be a fiscal boost in the U.S., it will take time to arrive, meaning the economic effect won’t be felt until later in 2017 and beyond.

The impact of tighter financial conditions could be felt more quickly: higher U.S. yields could affect mortgage demand and the housing market, and a stronger dollar threatens to crimp U.S. corporate profits.

That said, the move in the dollar and bond yields is doing some of the Federal Reserve’s work for it, meaning expectations that are being ramped up for tighter monetary policy may yet be a little overdone. While an interest-rate increase in December looks almost certain to avoid questions arising about the Fed’s credibility, the tone the central bank strikes into 2017 will be crucial.

The 2013 taper tantrum was caused in part by concerns that the Fed would tighten financial conditions rapidly. This can be a self-fulfilling prophecy, and tough words from central banks, coupled with the recent market moves, could create a similar dynamic. Already in some emerging markets, currencies have fallen and yields have risen more rapidly than they did during the tantrum.

Meanwhile, for the eurozone, times have changed, and 2017 looks like a tricky year. There are a elections in key member states such as France, Germany and the Netherlands. A constitutional referendum in Italy that could deal a blow to Prime Minister Matteo Renzi is coming up in two weeks. Some of the decline in the euro may reflect a higher political-risk premium, particularly after the surprise results of both the U.S. elections and the Brexit vote in the U.K. Investors won’t want to get burned again.

This risk had largely been ignored until recently. This has led to an unpleasant mix in Europe: German yields have risen, but Italian yields have risen further and faster. The last thing the eurozone needs is renewed fragmentation in bond markets. The European Central Bank is looking at changing how its bond-purchase program operates, but may face a tricky task in communicating any shift while keeping expectations of loose monetary policy intact. Markets aren’t good at reading nuanced messages, and the risk of a bad reaction is higher.

The story of 2016 is that investors aren’t great at reading the political runes. The lesson learned might be that caution is the best defense.


A Look Behind the Curtain of Trumponomics

The stock market senses a coming sugar high from tax cuts, but watch out for a destructive trade war.

By Alan S. Blinder

President-elect Trump in Grand Rapids, Mich., Nov. 7. Photo: The Washington Post/Getty Images


Since Donald Trump will be America’s next president, it behooves us to contemplate what Trumponomics might actually do to—not for—the U.S. economy. His campaign proposals were an odd mélange of slogans, like “build a wall” and “it will be great,” and reliable old saws of Republican economics, like massive tax cuts. Since we don’t know who will be whispering in his ear in the Oval Office (other than chief of staff, Reince Priebus, and alt-right chief strategist, Steve Bannon) the best we can do now is guess. ​

I’ll start with three easy ones.

Tax cuts. Congressional Republicans always want to cut taxes on the non-needy, and they are all too willing to bust the budget to do so. With Republican majorities in both Houses, pushing something resembling the Trump tax proposals through Congress should be a piece of cake.

The tax cuts will balloon the deficit, of course. But that’s something Republicans worry about only when a Democrat occupies the White House. Both President Reagan and President George W. Bush pushed through lavish tax cuts with no ways to pay for them. The good news here is that the Trump tax cuts will put the economy on a sugar high—which is probably why the stock market cheered and inflationary expectations rose.

Climate change. A second excellent bet is that the U.S. will cease being a positive force in the battle against global climate change and become an implacable foe instead. After all, the president-elect thinks the whole thing is a hoax. And it’s really easy to wield the wrecking ball here. All he needs to do is ignore the commitments made by President Obama, and the Paris climate agreement will be in shambles. Canada will become warmer, too.

• Infrastructure. Everyone expects the president-elect to propose a surge in infrastructure spending.

He’s a developer, right? Yes, but this is one place where Republicans in Congress may not be so willing to follow the leader. Remember, we have a big budget deficit which is about to be made much bigger by tax cuts. And doesn’t building infrastructure raise government spending? Try selling that package to the Freedom Caucus.

Now let’s turn to three major planks in the Trump platform that will be harder than he thinks, but where he can cause a lot of harm trying.

Health care. They say you can’t beat something with nothing. Are we about to try? Mr. Trump campaigned on repealing ObamaCare “on day one” and replacing it with . . . well, something great.

He mentioned health savings accounts, which may be great for the rich but are useless to the poor, and getting insurance companies to compete across state lines, which won’t accomplish much.

But not even Congress can scrap ObamaCare immediately. Yes, it can repeal the Affordable Care Act. But a mass of regulations implementing the law are on the books, and the U.S. has slow-moving administrative procedures for changing regulations. Unless Mr. Trump also repeals the rule of law.


That said, the new president and Congress can throw a huge monkey wrench into our health-insurance system by, for example, ending all the subsidies under ObamaCare. But do they really want millions of patients with serious pre-existing conditions to face bankruptcy, illness, or death? His Nov. 11 interview with this newspaper suggests not. But it will take money from somewhere to maintain the Affordable Care Act’s requirement that insurers accept customers with pre-existing conditions.

Immigration. When it comes to illegal immigration, the new president will have ample enforcement powers. After all, illegals have broken the law; they can be deported. But even if humanitarian and civil-liberty concerns don’t detain him, think about the gigantic budgetary costs and economic disruptions of efforts to find and deport 11 million people. For starters, who will fill the jobs now being done by millions of undocumented workers? And did I mention the ridiculous wall?

International trade. Mr. Trump wants to renegotiate Nafta. If he doesn’t get a “better deal,” whatever that means, he threatens to abrogate the treaty. Legal experts disagree over whether the president has the unilateral power to do so, but that won’t detain a man who’s so used to being sued.

However, some of his foreign-policy advisers might warn him about the perils of abrogating treaties.

The U.S. is party to lots of them—and will no doubt want to negotiate more.

Even without abrogating Nafta, U.S. trade laws offer the president ample tools with which to wreck trade with Mexico. Doing so would throw Mexico into a depression, thereby provoking more illegal border crossings. It would raise prices here and likely destroy more American jobs than it creates.

Throw in some slaps in the face toward China (branding it a currency manipulator, 45% tariffs, etc.), and you have the beginnings of a trade war that no one wants—except Vladimir Putin.


Mr. Blinder is a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve.


Donald Trump’s Choices in the Middle East

Shlomo Ben-Ami
. US Airtstrikes in Kobani

TEL AVIV – US President-elect Donald Trump has said a lot about foreign affairs, without really saying anything at all. His muddled statements offer little insight into what kind of foreign policy he will actually pursue, and there is not much reason to believe that, when his approach does become clear, it will be what the United States – or the world – needs.
 
Trump is a businessman, not a statesman. He thinks in terms of immediate profits and losses – a worldview that is exemplified in his declarations that US allies need to contribute more to security alliances. At a time of evolving challenges and growing threats, adhering to this narrow-minded, isolationist approach is unlikely to do anyone much good.
 
One region that Trump will not be able to ignore is the Middle East. The crisis in Syria, in particular, will draw the US in, though Trump’s choices there are limited. After all, America’s “moderate” jihadist allies are no more palatable than President Bashar al-Assad, and the so-called Islamic State is far from defeated.
 
Former New York City Mayor Rudy Giuliani, a close Trump adviser and possible member of Trump’s cabinet, has identified defeating ISIS as the administration’s first foreign-policy priority.
 
Trump has claimed that he knows “more about ISIS than the generals do.” But that is unlikely.
 
After all, the only way fully to defeat a movement that thrives amid chaos is to build strong and competent states, a task for which Trump lacks both the inclination and the patience.
 
If Trump opts for a purely military approach, he will find that every “victory” merely creates space for more violence and terror. While the conquest of Raqqa and Mosul by a US-led military campaign would improve America’s standing among its Sunni allies, it would also relieve pressure on the Russia-Iran-Hezbollah axis. Iran-backed Shia militias would unleash a killing spree against Sunni communities in Mosul after ISIS withdrew. The ensuing turmoil and pressure on Sunni populations would fuel more terrorism, whether associated with ISIS or with entirely new groups.
 
Whatever tack Trump takes in Syria, it will surely be influenced by Russian President Vladimir Putin.
 
Trump must cut America’s dependence on Russia in the Syria war, in order to resist Putin’s efforts to use his influence in Syria to gain leverage with regard to Ukraine.
 
Of course, Trump’s willingness to challenge Putin, for whom the president-elect has voiced admiration, is uncertain. But America’s security and military establishment, together with Republican senators like John McCain, are unlikely to allow Trump to “Make Russia Great Again” by surrendering both Syria and Ukraine. The surrender of Ukraine alone would embolden Russia to reassert itself in its supposed “sphere of influence,” potentially causing NATO to come apart.
 
Judging by his campaign statements, Trump might not be worried about the unraveling of NATO – or of any US security alliance, at least not yet. But the results could be disastrous, not least because a lack of US security guarantees and structures could spur nuclear proliferation.
 
Trump’s promise to suspend the Iran nuclear deal is particularly worrying. Iran has prepared Hezbollah to be a powerful proxy for precisely those occasions when it needs to strike back at Iran’s enemies. Moreover, suspending the nuclear deal would cause Iran to become a nuclear power in no time. In a region with no collective security architecture, terrorist groups could easily acquire their own primitive nuclear devices.
 
Given this, America’s estranged allies in the Middle East – Saudi Arabia, Egypt, and Israel – would be well advised to drop their opposition to the Iran deal, and instead encourage Trump to keep it in place. Likewise, Trump’s promise to reduce funding to foreign allies, as part of a broader “America first” strategy, should be tempering their joy at his victory.
 
Another estranged ally that could shape Trump’s choices in the Middle East is Turkey, which has pursued something of a détente with Russia in recent months. To salvage the bilateral relationship, Trump would have to sacrifice America’s partnership with the Kurds, whose militias in Syria and Iraq have been America’s most reliable allies in the battles for Mosul and Raqqa.
 
Turkish President Recep Tayyip Erdoğan may want ISIS defeated, but he wants to quell the Kurds’ ambitions of self-rule even more. Rewarding the Kurds for their help by backing their bid for statehood would be so unacceptable that, to prevent it, Erdoğan might even try to thwart the defeat of ISIS. Add to that opposition from Iraq, Syria, and Iran, and it is clear that Kurdish independence is not in the cards.
 
Palestinian statehood, however, should be. In his own erratic way, Trump has said as much, fueling hopes among some Palestinians that his election could end up working in their favor. But Israel’s fanatic settler movement has the opposite impression, viewing Trump’s victory as a license for the unrestrained expansion of settlements in Palestinian lands.
 
In the end, how Trump uses US leverage in the Israel-Palestine conflict – the only issue in the Middle East where the US enjoys such indisputable influence – might depend on events on the ground.
 
Specifically, a settlement-building spree might end up triggering a particularly fierce third Palestinian intifada.
 
But Trump should not wait for a crisis to impose an agenda on him. Instead, he should recognize that now, more than at any time since 1948, America’s estranged Sunni allies have a strong incentive to make peace with Israel and collaborate with it on regional security, and that such an arrangement could be legitimate only with the creation of a Palestinian state. Given that this would also support US reconciliation with the Arab peoples, thereby serving America’s national security interests, Trump should not hesitate to seize the initiative.