As the US presidential election count continues, it becomes increasingly likely that Donald Trump will win. It appears that the majority of Americans believe that Trump is more trustworthy than Kamala Harris on economic issues, and they say that the economy is their principal concern.
The irony in this belief is that it is the opposite of the real situation, at least if we assume that Trump will carry out the promises that he has made.
First, on tariffs Trump has repeatedly promised that he will increase tariffs across the board. While there are various versions of that policy, it is most likely that a Trump administration will impose a 20% tariff on most goods from most nations but a 60% tariff on goods from China.
Americans don’t appear to understand that reintroduction of tariffs would be a bad thing for both the world and US economy. The reason for this flows from the concept of comparative advantage. The world and each individual country will be most prosperous if each concentrates on producing goods and services that they can make more cheaply and/or efficiently than most other nations.
The extraordinary growth in world prosperity from the 1970s until now was in considerable measure a result of most countries eliminating or radically cutting tariffs. Before that time most countries had tariff barriers on most goods, and 20% or so was a fairly typical rate. The belief at the time was that protecting a nation’s economy by imposing tariffs to penalise goods from competitor nations was the best policy. Until the Arab oil crisis of the early 1970s that more or less worked okay, but the explosive economic growth that followed widespread cuts in tariffs indicates that even a relatively modest 20% tariff is a burden on growth.
Trump’s reintroduction of a 20% tariff would not be a complete disaster, although growth would be distinctly suboptimal. The real problem with Trump’s announced policies is with the 60% tariff he has promised to impose on Chinese goods. That would be a complete disaster for the entire world, because China would undoubtedly retaliate and impose similar tariffs on American goods. That would be catastrophic for the world economy. The US and China are the world’s two largest economies and a trade war between them would certainly result in a major recession if not a repeat of the Great Depression of the 1930s. As a nation heavily dependent on trade, Australia would suffer more than most in such a trade war.
This situation would be made even worse by Trump’s announced policies on migration. He has promised to deport millions of undocumented/illegal migrants. That would also be a disaster for the American economy. Americans seem to believe that illegal migrants are taking their jobs. The reality is that they are doing dirty, unpleasant jobs that Americans refuse to do themselves. If significant numbers of migrants are deported, business will be forced to pay Americans much higher wages to attract people to do those jobs. That would result in a resurgence of inflation in the US, which in turn would result in the Federal Reserve increasing interest rates again to curb inflation.
Fortunately, it is probable that Trump will find out that he is unable to deport significant numbers of migrants. Most countries will refuse to accept unwilling migrants arriving by sea or air from the United States.
The bottom line is that a Trump presidency would be a bad thing for both the world and American economy, just as it would be a bad thing for climate change. We should all start praying to whatever deity we might believe in for a late swing to Kamala Harris.
Trumps very clear majority does put the cat among the climate pigeons
So Trump seems to have won and the DJI rose steadily during the afternoon. If the ASX rises tomorrow, should I short the hell out of it? I wish I knew how to do this.
You can use the BEAR and BBOZ funds which can be traded like normal shares — the second will move much more than the first one in case you feeling greedy. I would set a sell price in case it drops so you don’t lose all your money, since, as the famous saying goes “the markets can remain irrational longer than you can remain solvent”.
I personally can’t see how a world-wide tariff is going to do much good either and it is hard to see how it won’t lead to much higher inflation, but if Trump tries to force interest rates down by getting rid of the Fed and everyone else decides to follow, shares might still go up in value despite being actually worth less due to inflation, in which case your short position will still lose you money.
The tariffs would be a disaster.
Imports are of three types.
consumer, capital and intermediate which are both.
so you have both direct and indirect effects on inflation. The Fed would have to raise rates immediately Trump announcing his decision.
moreover you have missed the effects of a trade way. europe would react as would other countries. This would reduce international trade and world growth.
Mass Deportations would both be contractionary as it would take millions out of the labour force but it would also tighten the labour market.
to take two examples Los Vegas would be desolate and California wines would be devastated.
I cannot see how he could not do either
It is bad
I am not an economist. But I think we always need to look at secondary effects. If China and the US stop trading, there would be at least some compensating extra trade for Australia. The Chinese goods we buy would be cheaper. Obviously they will buy less of our minerals.
I actually favour reducing or stopping trade with China for non-economic reasons. The relationship is not reciprocal. They use trade as a weapon of foreign policy. We simply do not. It is about time we transferred the world manufacturing base to Vietnam and India. This would have been much cheaper if we had done it 20 years ago when yours truly was telling everyone he knew that China would never be a partner.
Regarding deporting migrants, I do not think you can say they do jobs Americans will not. They do those jobs at a pay rate Americans will not. So pay rates for lawn mowing and fruit picking will go up. Inflationary. And tariffs are obviously inflationary.
It will be fascinating to see how Trump explains away the inflation surge. On past performance, he will be completely successful in avoiding any blame – at least amongst his base.
Chris most of the world, US ,china Europe ( and also us) is up to the proverbial in debt ( ot already truly under water,)
surely regardless of who is in charge, this must in the end , have consequences ?!
How will that play out ?
I have no idea. I do not understand monetary theory at all.
Neither do I 👍