If Donald Trump means what he says, the West is dead as a meaningful concept.
The international system and liberal trading order upheld by the US since the Second World War will disintegrate in short order.
The Asian balance of power will unravel. Weak countries on the Pacific rim will be left with no choice: cut off by an isolationist America, they will succumb to the orbit of an expansionist China. Japan will have to rearm at break-neck speed to defend itself.
Russia’s Vladimir Putin will have a free hand in Eastern Europe, able to lever his (temporary) military advantage to maximum political effect. Whether Mr Trump pulls out of NATO or merely lets it wither on the vine, the outcome will be the same. Nobody will believe in the solidarity and deterrence of Article V.
A series of walls – metaphorical and real – will obstruct the flow of global goods and capital that we take for granted. Emerging markets will be left in the lurch. Interlocking supply chains of global commerce will become unworkable. The World Trade Organisation will go the way of the League of Nations.
The Paris climate accord – agreed last year in a rare moment of world concord – will degenerate into a free-for-all since Mr Trump dismisses the CO2 threat a ‘Chinese hoax’. Those who champion open democracy in difficult places will no longer be able to draw on American moral leadership and diplomatic pressure. They will find themselves apologising, or in prison.
It is impossible for equity, bond, and currency markets to price such a strategic earthquake, which explains the wild gyrations we have seen since the election shock. All models break down.
The judgment call we have to make is whether he actually means the outlandish things he said – mostly flippantly, and in vague terms – and whether White House duties will compel him to retreat even if he did.
Washington’s permanent government and the ‘K’ street lobbyists of corporate America have a way of co-opting US leaders. It is my tentative working premise that Mr Trump is not a new Mussolini and that he will ultimately trim his excesses. Call it a ‘soft Trump’ if you like, though this too entails its own political risks.
If so, an entirely different economic picture takes shape. His manifesto amounts to a massive fiscal stimulus, with tax cuts across the board, a $1 trillion blitz on infrastructure, and an imperial navy of 350 combat ships.
It is a replay of Reaganomics in the early 1980s, a form of turbo-charged Keynesian reflation, and damn the deficit. It promises a pro-cyclical economic boom, so long as Mr Trump quietly drops his threat of 35pc tariffs against Mexico and 45pc against China.
Mr Trump enjoys the huge advantage of Republican control over the House and Senate. This averts the paralysing gridlock and obstructionism that surely awaited Hillary Clinton had she won. He can overcome the ideology of austerity in a way that she could never hope to do.
There will be friction but House Republicans will hardly resist his plan to cut corporation tax from 35pc to 15pc, or to cut income tax from 39.6pc to 33pc for the rich, to 25pc for middle earners, to 12pc for those below $54,000, and to zero for those under $29,000.
Nor are they likely to block his call for national reconstruction on bridges, tunnels, telecommunications, cyber security, water systems, pipelines and the electric grid, all built with “American steel” and supposedly modeled on Eisenhower’s highway expansion in the 1950s.
You might equally say it looks more like Roosevelt’s New Deal, even if funded partially by private money and run on a fee-earning basis. Infrastructure spending of this kind is what Left-leaning economists such Larry Summers and Paul Krugman have been calling for all along.
It starts to plug the $3.6 trillion backlog of projects identified by the American Society of Civil Engineers. It address one cause of sliding US productivity growth. It soaks up the corporate cash hoard, helping to bring investment back into alignment with savings.
The budget deficit would probably balloon by at least $450bn – or 2.4pc of GDP – even after offsetting a hiring freeze for public employees. That is potent money.
Mr Trump’s tax cuts for the rich are not to everybody’s taste. Yet in broad macro-economic terms, this fiscal rebalancing is what Keynesian and monetarist doctors ordered. It becomes easier for the US to escape the ‘Wicksellian’ trap of a negative natural rate of interest, and therefore to escape clammy embrace of quantitative easing.
Fiscal expansion allows the Federal Reserve to raise interest rates faster, ceteris paribus. Vice-chairman Stanley Fischer has even put a figure on it, suggesting that every one percentage point of GDP in fiscal loosening implies rate rises of 50 basis points.
Trumpanomics shifts the structure of US and global credit, and exchange rates. It was the same regime of “loose fiscal/tight money” that catapulted the dollar sky high in the early 1980s, with dramatic global consequences.
You would not know this from the instant reaction this morning after the vote. Traders slashed expectations of a rate rise in December. They sold the dollar. Headlines warned of a dollar crash. This is nonsense on stilts.
The greater risk is that a double shock of rising rates and a rising dollar will set off turmoil in global shadow finance, the $10 trillion nexus of debt trading outside the US that is denominated in dollars. The global financial system is more intricately tied to US policy and dollar liquidity today than at any time since the pre-War Gold Standard.
Dangers abound for everybody if mistakes are made but the fall-out from a ‘hard Trump’ is not confined to the US, whatever some in Europe and Asia fail seem to think. The lesson of the 1930s is that those countries running a structural current account surplus suffer most once protectionism takes hold.
The deficit countries get off lightly. In certain circumstances they may even benefit, as none other than Adam Smith conceded. The inexorable fact is that America that runs a $500bn deficit and serves as consumer of last resort for the world, and the world cannot afford to lose it.
Yes, the US would be damaged by trade wars but the damage would be worse for those mercantilist states that feed off the open US market without fully reciprocating. Mr Trump’s team specifically names Germany, alleging that it uses the euro mechanism to hold down its exchange rate and lock in a surplus of 8.5pc of GDP.
Yes, the US would be damaged by trade wars but the damage would be worse for those mercantilist states that feed off the open US market without fully reciprocating Mr Trump has threatened to name China a “currency manipulator” from day one, automatically triggering sanctions. This comes even though the Communist Party is now in the opposite position, struggling to stop the yuan falling because of accelerating capital flight.
Punitive tariffs would be traumatic, given the symbiotic nature of corporate ‘Chimerica’. Yet a tit-for-tat trade war between the US and China would not be symmetric. The disguised weakness of the Chinese position would become painfully obvious, and might bring forward the day of reckoning for China’s banks and corporate debtors.
However unfair, a ‘hard Trump’ might well cause more havoc in Asia, Europe, Latin America, and the Middle East than in the US itself.
This is not to say that Mr Trump will act on his threats. He is a demagogue but not ultimately a fool. The cold calculated trade at this stage is to bet on optimism.
Buy the dip, with tight political stops.