j.P. Marín Arrese | The coming year will start on January 20th when Donald Trump becomes president. We already have a taste of what might happen. In a way, Trudeau became the first to prove it as he travelled to Mar-a-Lago in a desperate effort to cajole his guest into dropping plans for crippling trade tariffs. Far from reaching his goal, Trump advised him to switch Canada into the 51st State of the Union. To defuse such an insulting joke, someone pointed out it would probably turn out to vote liberal. The incoming White House tenant amusedly retorted his neighbouring country might be cut into two states, one liberal and another conservative. That’s the man.
He takes ludicrous pleasure in threatening partners abroad with skyrocketing tariffs and opponents at home with jail. Enough to send shivers down the spine worldwide. While he probably will spend more time playing golf than putting his menaces into practice, his hunch for pulling the trigger can unsettle the global economy. China has already drawn up emergency plans to cope with the worst. Others seem helpless. Ukraine will probably have to accept an uneven ceasefire handing out to Russia a sizeable chunk of its territory. The BRICs will come under constant fire. As to poor Mexico, so far from God and so close to the US, it will suffer both trade squeezes and a massive tide of migrants expelled through the Northern frontier. Europe has already received a couple of hammer blows. It will need to increase defence spending beyond its means as the price to preserve the NATO umbrella. It also faces severe punishment for enjoying such a substantial trade surplus with the US unless it trims it by buying American oil and gas. As Trump will quickly dump all environmental protection commitments, the Union will bear the brunt of waging the climate war alone.
Even if he nominally holds boundless power, fortunately, he doesn’t so tightly control all Republican lawmakers. His flawed attempt at raising the stakes in the recent row over the government shutdown shows he fails to own full command of both Houses. Let’s cross our fingers that moderate members of his Party will curtail his ambitions to turn the world upside-down. Yet, the collateral damage his preposterous announcements inflict will dent the economy. The US would not emerge unscathed, as investment and business confidence takes a heavy toll. Our only hope lies in the stock market, as Trump blindly considers their trend the best benchmark of his economic policy success. In his former mandate, he swapped his campaign against China for mutual understanding as soon as risk-averse investors sent the shares plummeting.
The Fed’s last-week U-turn reflects its fears Trump’s policies might fuel inflation and turn the public balance sheet into shatters. Powell has delivered a stern warning of what might wait in stock. Yet, engaging in a tug-of-war with the president might prove highly dangerous for economic stability. The ensuing cost may remain acceptable if the stock exchange remains the only casualty. Yet, severe turmoil could hit the financial system if the contagion extends to the debt market. The whole scheme rests on a bet that interest rates will never overshoot a ceiling widely considered an unbridgeable barrier. Should the bet prove wrong, the whole system would collapse as it did in the last banking crisis. The Fed should calibrate the danger looming ahead—the more so as its policies can neither curb inflation, unless putting a brake to growth, nor rein in the public deficit.
