In the lead-up to 20 January 2017, when Donald Trump
assumes the American Presidency, Asians are all guessing on what the outlook
for their savings will be.
Trump is particularly difficult to read because he
has made so many wild statements on the campaign trail. Everyone accepts that
campaigners promise heaven and deliver mostly hell, but when they win the
election they should become much more sober.
So far, it looks like policy will follow his campaign threats.
The Trump Presidency will be bi-polar – either
highly successful if he re-boots American dynamism, or one that may bankrupt
the country trying, including getting involved in another war.
These wild swings in investor mood can be read from
the way the markets have yoyoed from hesitation to rally, with the Dow showing
another peak. So far, Trump family
members appear to have more clout than outsiders than was the case with any
previous President, with perhaps the exception of the Clintons.
Disappointingly, if the Treasury Secretary turns out
to be another ex-Goldman Sachs man, Wall Street will appear to have another
insider running the status quo. It
remains to be seen if the new Treasury Secretary can manage simultaneously the
promised spending on infrastructure, cutting taxes for the rich and containing
the effects of a stronger dollar.
All signs are that the dollar will become stronger,
repeating the famous phrase – my dollar, your problem. The latest (June 2016) IMF health check on
the US economy remarked that “the current level of the US dollar is assessed to
be overvalued by 10-20 per cent and the current account deficit is around 1.5-2
per cent larger than the level implied by medium term fundamentals and
desirable policies.” The IMF thinks that the risk of a dollar surge in value is
high, with a 10 per cent appreciation reducing GDP by 0.5 per cent in the first
year and 0.5-0.8 per cent in the second year.
Trump is likely to be highly expansionary in his
first year because the Republicans, having control of the Congress, Senate and
Presidency, must demonstrate that they will revive growth and jobs to ensure a
second term. Note carefully that Trump’s election promises of stopping
immigration, cutting Trans-Pacific Partnership (TPP), imposing sanctions on
China and cancelling the North American Free Trade Agreement (NAFTA) are all
inflationary in nature.
This is why if the Fed does not raise interest rates
in December this year, it may be under pressure next year not to take any
action to slow a Trump economic recovery.
Independence of the Fed will be called into question, since Trump’s
expansionary policy will put pressure on his budget deficit and national debt,
already running at 3 per cent and 76 per cent of GDP respectively. A 1 percent increase in nominal interest
rates would add roughly 0.7 per cent to the fiscal deficit, making it in the
Those who think that recovery in US growth would be
good for trade are likely to be disappointed.
So far, the US recovery (which is stronger than either Europe or Japan)
has not led to much increase in imports, due to three effects – lower oil
prices, the increase in domestic shale oil production and more on-shoring of
manufacturing. The US current account
deficit may worsen somewhat to around 4 per cent of GDP, but this will not
improve unless sanctions are imposed on both China and Mexico, which will in
turn hurt global trade.
Why is a strong dollar risky for the global economy
The answer is that the global growth model would be
too dependent on the US, whilst the other economies are still struggling. Europe used to be broadly balanced in terms
of current account, but has moved to become a major surplus zone of around 3.4
per cent of GDP as a whole. Germany alone is running a current account surplus
of 8.6 per cent of GDP in 2016, benefiting hugely from the weak Euro.
Japan has moved back again to a current surplus of
3.7 per cent of GDP, but the Yen remains weak at current levels of 107 to the
dollar. I interpret the Bank of Japan’s
QQE (qualitative and quantitative easing) as both a financial stability tool
and also one aimed at ensuring that the capital outflows by Japanese funds
would outweigh the inflows from foreigners punting a yen appreciation. The Bank of Japan’s unlimited buying of
Japanese government bonds at fixed rates would put a cap on losses for pension
and insurance funds holding long-term bonds if the yield curve were to steepen
(bond prices fall when interest rates rise).
Japanese pension and insurance funds have been large investors in US
Treasuries and securities for the higher yield and possible currency
In short, the capital outflow from Japan to the
dollar is helpful to US-Japan relations. Prime Minister Abe, being the first
foreign leader to call on Trump, is dangling a carrot that Japan can fund
Trump’s expansionary policies, so long as Japan is allowed to re-arm.
Between June 2007 to June 2015, US Treasury data
showed that the total amount of US securities held by foreigners increased by
$7.3 trillion to $17.1 trillion, bringing its gross amount to 94 per cent of
GDP. Japan already holds just under $2
trillion of US securities and as a surplus saver, has lots of room to buy more.
The bottom line for Asia is not to expect great
trade recovery from any US expansion. On the other hand, Asian investors will
continue to buy US dollars on prospects of higher interest rates and better
recovery. This puts pressure on Asian
Of course, it is possible that the US fund managers
will start investing back in Asia, but with trade sanctions and frosty
relations between US-China in the short-term, US investors will stay home. If interest rates do go up in Asia in
response to Fed rate increases, don’t expect the bond markets to improve. The equity outlook would depend on individual
country responses to these global uncertainty threats. In short, expect more
Trump tantrums in financial markets.
–By Andrew Sheng
The writer, a former Central banker, comments on
global issues from an Asian perspective.