Bob Homan: Trump's paradox, when chaos leads to growth
This column was originally written in Dutch. This is an English translation.
By Bob Homan, Head of ING Investment Office
The US president is trampling like a bull through the china shop of the international economic order. But investors don't seem to mind.
Donald Trump is known for his unpredictable policies. The trade war, the dismantling of institutions, and now the shutdown of the American government: it sometimes seems as if he defies all economic logic. After the initial turmoil surrounding import tariffs, financial markets seem to be largely unaffected. They have been rising sharply recently. Does this make the chaos less severe? Or are there even unexpected positive effects to the chaos? I will highlight a few things that can also be interpreted as positive for the economy or financial markets.
Take the current shutdown. Politically, it is a nightmare, but economically – especially if parts of the closures become permanent – it mainly means a brake on government spending. Less spending leads to smaller budget deficits. And financial markets are precisely concerned about those large deficits. With rising unemployment as a result of the shutdown, the US central bank is more inclined to further lower interest rates, which is favourable for equities and bonds.
The introduction of import tariffs, although bad for overall prosperity, also has a dual effect in the short term. Yes, prices are rising, leading to higher inflation. But higher inflation also means higher nominal growth. And that in turn is good for the ratio between public debt and GDP. Markets are particularly concerned about rising public debt relative to national income. That is not so bad.
Moreover, it encourages companies to produce locally, which stimulates growth in the long term. Trump's attack on the independence of the Fed is another example. Although economic dogma dictates that central banks must operate independently, his rhetoric has significantly weakened the pound sterling.
A weaker dollar makes American export products more attractive and attracts foreign investors. These investors are also actively encouraged: foreign companies are offered lower tariffs in exchange for investments in the US. It is a form of economic negotiation reminiscent of extortion, but still. The undertone is pragmatic.
And then there is the broader institutional context. In Europe, there are often complaints that regulation hinders economic growth. Trump, on the other hand, is calling all kinds of institutions into question, from environmental regulations to international treaties. This leads to uncertainty, but also to space. Space for companies to do business without the stifling frameworks that we in Europe always complain about.
Of course, this is not a plea for chaos. And I think that unpredictable policy has a net negative impact on the economy and society. But this clearly does not apply to financial markets. Sometimes unorthodox policies yield short-term economic benefits that traditional models cannot predict. Perhaps it is time to focus less on the style of policy, if it can even be called “policy”, and more on its effects.