Why Trump 47 will be perversely positive for USD assets
International spillovers could leave the US looking good on a relative basis
If you had said on January 7, 2021 that Donald Trump would be the Republican front-runner in 2024, many people, myself included, would have been incredulous. And yet here we are. The failure to deal with Trump properly then was a first-order institutional failure, from which the republic may not recover. Various legal processes now in train may yet derail his second run at the Presidency, but it is probably too late to rely on a legal fix to what is now fundamentally a political problem. The institutions that failed to deal with Trump in 2021 are unlikely to succeed in doing so now. The legal proceedings are doing more to help than hinder him politically.
If Trump wins the election outright, that is fair enough from a democratic perspective, although no less of a threat to US institutions. In the event of a close race or a Biden victory, Trump will attempt another coup or putsch. As one astute observer noted back in 2020, a necessary condition for preventing a Trump coup is to recognise he is staging one. The continued normalisation of Trump makes such recognition harder, if not impossible.
The 2020-21 coup attempt had two fronts, one legal-administrative and one a violent attack on the Capitol and the electoral certification process. Both fronts failed, but far too narrowly for any degree of comfort going into this year’s election. The US electoral process is jurisdictionally-fragmented and has many moving parts. The closer the election result, the more problematic this becomes for maintaining the integrity of that process against another coup attempt.
Recent US Presidential elections have been close contests and this one is shaping up as no different. Ray Fair’s model based on macro factors puts the Democratic Presidential vote share at just 51%. Australian betting shops have Trump at $2.10 compared to Biden at $2.80. Nikki Hayley is a distant third at $13. Biden’s approval rating is tracking poorly relative to the corresponding period in Trump’s Presidency, when Trump was facing defeat.
Trump’s first term performance: the best case we can make
On some dimensions, Trump is already governing the United States. This is particularly evident in trade policy. There is complete continuity between the Trump and Biden administration’s policies on trade. The Biden Administration did stand-up a new economic engagement framework in the Indo-Pacific (IPEF), a substitute for the former CPTPP, which it is now walking back because of fears Trump will use it against them in the election. Trump says he will tear up IPEF. Trump is defining from opposition what policies are politically possible. In that sense, Trump is already effectively into his second term.
What would a second Trump term look like? If we look to his first term, we might question whether it will be disastrous in a narrow policy sense, putting aside the more fundamental threat to US institutions. On the big issues, like the response to COVID, it is hard to know the counter-factual performance of a Democratic administration. The Trump Administration stood up Operation Warp Speed and so gets credit for that, but again, the counter-factual is not obvious. Ironically, because the GOP base is so ridden with anti-vax sentiment, Trump now can’t even mention this policy success (he did once and was booed by the audience).
Trump implemented a tax reform, including a permanent cut to the corporate income tax from one of the world’s highest statutory rates. That was unambiguously good for business investment, all else equal. Biden wanted to raise the corporate tax rate, but was unable to get it through Congress. Trump has proposed further lowering the US corporate tax rate to 15% in a second term, which will be a positive for US stocks, again, all else equal. But the macroeconomic benefits of his first term corporate tax cut were fully offset by the costs and uncertainty of the trade war. The tariffs were one of the biggest tax increases in US history. A second term corporate tax cut would likely be similarly undermined by economic policy uncertainty, trade frictions and geopolitical turmoil. Trump’s capacity for economic self-harm is considerable.
On foreign policy, as Janan Ganesh notes, Trump is more unilateralist than isolationist. The Trump administration rolled up ISIS with support from other countries, a little heralded but important victory. Trump’s disregard for the world outside the US can cut both ways, making him less inclined to work cooperatively with allies, undercutting the US position abroad, but still willing to aggressively assert US interests. Trump has never understood the value of the US alliance network, the US’s most valuable strategic asset, seeing it as all cost and no benefit. Australia, a close strategic partner of the US, navigated the first Trump Presidency fairly effectively, but I do not envy Australian policymakers having to pull this off again in a second term. AUKUS in particular would be at risk.
Trump’s second term agenda: what to expect
If that is the best case we can make for Trump’s first term, what does the second have in store? A renewed trade war is almost a given, with Trump already committed to an across the board 10% tariff increase on top of existing tariffs. Withdrawal from the WTO would also seem likely, although whether this can be done through executive order is debatable. Trump might well have sufficient support in Congress to do it. The economic policy uncertainty unleashed by Trump’s first trade war was positive for the dollar, undermining US competitiveness and threatening a spiral of protectionist responses.
On foreign policy, Ukraine has already been thrown under a bus by Trump’s acolytes in Congress and things will only get worse with Trump in office. Europe will pick-up some of that slack, but it is unlikely to be enough. Trump might make good on his threat to withdraw from NATO. In any event, US credibility in Europe will be shot. The consequences of Ukraine losing the war would be dire. Trump’s response to any Taiwan contingency is hard to predict, but if Ukraine is allowed to go down in whole or in part, it is hard to see why his view of Taiwan should be any different. This would up-end the geopolitical order in Europe and Asia.
The first Trump administration shutdown the US government’s efforts on climate change and a second Trump administration will likely do the same. Much of the IRA will remain in place, but more as industrial than climate policy. The global effort will fragment and will likely spill over into conflict over trade. The US has already become the world’s biggest oil producer with no encouragement from public policy. Trump will have no qualms about presiding over the US as a petro-state, with political institutions to match. We have previously discussed the implications for the US dollar.
US fiscal policy will likely be expansionary under Trump, which is another US dollar positive. With the exception of Judy Shelton’s failed nomination, Trump mostly made sensible appointments to the Federal Reserve in his first term. Indeed, his decision not to reappoint Janet Yellen must be counted as another first term positive given the way in which Powell steered the US and global economy through the pandemic downturn. By contrast, Yellen delivered sub-par economic outcomes through an unintentionally hawkish policy stance during her time as Fed Chair. The main reason Trump did not want Yellen was a justifiable fear Yellen would seek to offset the corporate tax cut as a demand-side stimulus rather than recognising its supply-side benefits. However, if Trump tries to subordinate the Fed in his second term, it would be a major blow to a key institution from which the US may not recover.
US stocks will love the prospect of a 15% corporate tax rate, but will likely see increased volatility due to policy uncertainty, geoeconomic fragmentation and elevated geopolitical risk. As noted here previously, there are few good options for hedging Trump, either in a policy sense or from a commercial or markets perspective. Perversely, USD asset markets will likely do well for the reasons already discussed, although this may also partly reflect growing risk premia. The US might look like a capital-‘S’ shit show, but the international spillovers from a second Trump term could still leave the US looking very good on a relative basis. I would not want to be short volatility going into 2025. Low volatility generally outperforms anyway.
Future historians will likely look at 2024 in much the same way we look at 1914, a year marking a clear demarcation between two very different eras. For those of us who came of age in the 1980s and 1990s, it will be a very different world to the one we grew up in. Brace for impact.
ICYMI
In my former role, I arranged for the US economic historian Doug Irwin to do a number of events in Australia, including with USSC and federal Treasury. I had planned for Doug to visit Australia again in 2020 and had him lined-up to do both the H W Arndt and Richard Snape lectures. We had to pull the plug on those plans as the borders closed in early 2020. But I am pleased to say that Doug will now be doing both events in 2024. Although three years later than originally planned, there is probably no better time to hear from Doug on the topic of the past and future of globalisation. See the links for further details.
The UK’s political class needs to learn to love the economy it actually has. Not just the UK’s! See also Dan Davies on the Old Rectory Mittelstand.
Hi Stephen, the Snape link doesn’t seem to provide details. Do you have any other information?