Trumponomics
Few should I say or comment about the recent
Presidential Election in the US won by Donald Trump[1],
being that I am not an American citizen and as such do not have the right to
vote. However, Presidential election in the US is the most important for the
Western World being that it is the most powerful Nation. So it is always
advisable to follow US news not only on economics but also on International
Policy. Commerce, but also War, Defense, Diplomacy, many factors are defined at
the White House. Consider though that US has a bigger impact in the Western
Hemisphere (including Euro Zone AND Latin-America), whereas other Nations have
more impact on other regions. China is clearly taking the lead in South-East
Asia, whereas Oil Nations are the most powerful in the Middle East.
But back to Global Economics, one of the main
focuses of this blog. When we hear news it is very important to read between
the lines, and to assimilate or integrate them to understand the total impact.
- Economics: Trump promises to cut taxes for individuals
and businesses and increase infrastructure spending. Now let me be clear on
this. Right-wing governments (in this case Republicans), are usually more
business friendly, but at the expense of the government. Now, Obama did a great
job at lifting the US out of the worst depression since the 1930s. However, his
government did print trillions of dollars and increased government spending,
which is not sustainable in the long term. I am always in favor of 4 or 8 year
periods when it comes to Government, shifting between left and right. Too
little tax burden hurts government dependents. These are not just
administrative employers, but teachers, policemen, hospitals, firefighters...
Too much tax burden eventually hurts business... Quite clearly Trump will favor
business, but will cut government spending. In the short term, jobs might be
lost. The most important is that his administration manages to reactivate the
private sector in a fast and efficient manner, to compensate for the loss of
jobs in the public sector.
- Energy Policy: restrictions for production of
shale, oil, natural gas and clean coal will be lifted. This will add to the
creation of thousands of jobs, but will also put pressure on the Supply side. Consider
the following article: "US energy independence look tantalizingly close"[2]. The
US has embarked on a journey towards energy independence, which it might
achieve by 2020. This means that they will stop importing oil to become and oil
exporter. Consider how oil imports in the US have shrunken from 65% in 2005 to
28% in 2015, to a projected 11% in 2020, while domestic oil production has
reached a 43-year high. Whereas the article states that energy independence
will be easier if prices rise sharply to USD 100 a barrel, consider my view[3]
that the Shale Revolution itself and a superpower like the US leaving it's
position of Importer to become Exporter will hold the prices at bay (in a
channel of 30 USD to 60 USD) for many years to come. In the Oil industry,
cycles are long. On the other hand, lower Oil prices are pushing innovation in
the technology field to become dramatically more efficient.
But it's not all about economics, politics play
a major role as well. Whereas in the past the OPEC controlled the market, today
there are many other players such as Russia and Canada. By becoming a major
player in the industry, the US ensures that the Arab Oil Nations lose power,
and their positions weaken in the game
of world politics. Squeezing the Arab Nations might be much more important for the
US than the economic effects of the Shale, reason for which I believe America
will do whatever it takes to lead the Shale Revolution.
- Trade: this is one of his most controversial
points. Trump has identified that the biggest rival to the US when it comes to
Global Trade is actually China. This is correct. By the year 2030, China will
surpass the US as the world's largest economic player (measured in Nominal GDP)[4]. Donald
seems keen on "punishing" companies that send jobs overseas and wants
to get those manufactory jobs back to the US. He obviously missed John Travolta's
speech in Primary Colors:
According to Economic Science Nobel Prize
winner Paul Krugman "No matter what Trump does, manufacturing jobs are not
coming back to the US"[5]. I
could not agree more. According to Krugman: "the manufacturing sector
hasn't added jobs to the labor market in years past. Instead, improved
equipment and automation has allowed US manufacturers to increase output. Thus
even if manufacturing came back to the US, most of the plants would be
automated anyway, producing a lower number of jobs than one might hope for"
(...) "The service sector is the future of work, but nobody wants to hear
it". YES!!! Finally some sense to it. It is through automation and
technology that value is added to the private sector. Low end jobs will disappear
anyway, and do not add so much value to the economy. In my 4 books and this
blog, I start with Economics from a historical perspective, to conclude that
the focus should be on developing technologically as we gaze at the beginning
of the Fourth Industrial Revolution. Nothing will be gained by fighting against
that, and it is important to understand that it is best to stay in the lead,
even if that means sacrificing some low end positions in order to develop those
high end value adding positions that the economy needs.
Trump's external trade policy will lead to
restrictions to import to the US, which will impact all their trading partners.
Quite clearly the US has all the power, so there will not be so much
negotiation there. In Argentina, some concerns from the Agribusiness are
already arising, since the US is the main market for their products. It is
advisable to strengthen ties with other countries as well, to diversify risk
and mitigate the impact of change at the White House. In the case of Argentina,
whose main markets are Brazil and the US, more efforts should be done to align
positions in World Commerce with China. This has worked very well for
Australia, that takes advantage of it's geographical location to do Trade with
BOTH the US and China. Hopefully there should not be a need to "choose"
when it refers to simple Commerce Agreements. Europe might want to strengthen
ties with the US though, in the "pie of World Commerce", it seems to
be the European Union the one that will be "eating" less and less...
- Interest Rate: Trump has critized the Fed (an
independent economical entity responsible for setting the US Treasury Interest
Rate), by saying it is creating a bubble with low interest rates. Now, the Fed
has done a great job under the Obama Administration. Lower interest rates make
it cheaper and easier for the private sector to finance itself, at the
detriment of investment (currency weakens, but exports are more competitive).
Lower interest are advisable in contexts of recession or weak economies, to
encourage taking debt. However, with the recession already behind and thousands
of jobs being created in the Obama Administrations, the US economy might be
strong enough to raise the interest rate. A stronger interest will attract
investment, strengthening the US dollar. Job creation will continue, but must
not be driven by cheaper cost but by higher value added positions. But how will
a raise in the Fed's interest rate impact Europe? Consider that Europe's
interest rates follow policy making in Berlin. However, all the stock markets
are at some point linked to the Dow Jones. A raise in the Interest Rate in the
US will obviously impact Europe as well (since it has impact on the US dollar,
which would strengthen), but European Central banks might have some sort of
margin of maneuver.
- The Wall with Mexico: I have not much comment
here, except that Mexico is actually part of the North-American continent and
should be treated as such. As children learn at school in the US, the American
continent is divided in two: North America and South America (divided by the
channel of Panama). I agree with migration laws, but the best solution is to
integrate with Mexico and look for a way to increase productivity for Mexico as
a country, or for Mexican communities that are living in the US (mainly in the
Western Coast, that was actually part of Mexico until the year 1847). In the
same manner that Argentina has to target increasing the productivity of
Bolivians, Paraguayans and Peruvians (their latinos), the US has to work to
increase the productivity of the Mexican people in efforts for Regional
Integration. Remember, if your neighbors are poor, you will eventually be impoverished
yourself.
The election of Donald Trump means great news
for the US. Compared to other Republicans like Richard Nixon, Ronald Reagan or
the Bush family, Donald seems a much more "center-right" choice. He is
really a Business man who turned to politics and not a typical politician. He
will surely be more concentrated on Business and job creation, and less on
warfare. Consider that when Republicans take office usually bad things happen:
War in Afghanistan, occupation of Kuwait... Investment in Defense will surely
rise, but I do not believe this Administration will engage in meaningless
warfare. How the rest of the Nations manage to adjust to his "rules of the
game" remains to be seen. He is a strong leader and an even stronger
negotiator. Americans surely have 4 fantastic years ahead of them.
Cristian Bøhnsdalen
CMO/CFO & Co-Founder @ITRevolusjonen
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