Donald Trump, sorry – President Donald Trump – made his name in real estate and other businesses, and now he has the keys to the White House and, with it, the title of most powerful man in the world. For a man who made the economy a significant part of his election campaign, it’ll be no surprise that some of the biggest changes he enacts during his tenure in the White House will have to do with financial markets, trade, and businesses. But what exactly can we expect from the economy over the next four years, and how will businesses be affected? We take a look at some of the biggest shifts that might occur, as well as some of the winners and losers of Trumps policies.
Wall Street hasn’t always been the most consistent street on earth, but even by the financial district’s up and down past, Trump’s presidency is something new entirely. If there’s one thing that the stock market needs to be healthy, it’s stability. And Donald Trump doesn’t offer stability. In fact, his rise to the highest position in the land was such a shock that Wall Street was shook the moment it was announced he had won the election. Of course, Wall Street will eventually bounce back – and might even benefit from some of Trump’s policies, but the ever present threat of destabilization will make the stock market increasingly volatile, especially in light of the president’s mantra of ‘America First’. How does that attitude affect a global market? We’ll have to wait to find out.
After the economy, Donald Trump’s main focus was on immigration. He was mostly talking about illegal immigration, but the wider implications of his rhetoric were hard to avoid, even if they were just collateral damage: immigrants will not be front of the queue to benefit from Trump’s policies. The moral debate about this is irrelevant to business; what actually matters is how businesses that rely on foreign labour will be able to cope with any changes that limit a foreigner’s ability to work in the United States. Resort areas are dependent on overseas labour to fill busy seasonal periods, and they won’t be easily replaced; indeed, the reason they are hired is often because the company can’t find Americans who want to work on a short term basis.
For companies that hire the very best employees regardless of where they hail from, such as start ups and IT companies, Trump’s policies might make it more difficult for them to get the necessary work visas.
If you’re a high earner and/or have a vested interest in the profits of a corporation, then Donald Trump might just be the hero you need in order for you to take home more of your money. For starters, President Trump is going to simplify the tax process, more than halving the number of tax brackets. If you’re among the highest wage earners, you’ll see your tax rate drop from nearly 40% down to 33%. Corporate taxes are also being lowered to 15%, and companies who have been concealing their earnings in overseas territories will be able to move their money back home for a one off 10% tax.
Donald Trump is a businessman and, like many other businessmen, has a loathing of nitpicking regulations that stop companies doing business with another and the public at large. Now that there is a businessman in the White House, we might soon have a situation whereby many of the regulations that have stagnated the economy are lifted, and businesses allowed to flourish. This could mean changes in lending laws, financial and banking practices, emission laws, and much more becoming the norm as an era of an open economy comes to pass.
While this might be good for business owners, workers are more likely to feel the strain of any rollbacks of regulations, as in many cases they were initially enacted into law their benefit. For instance, getting rid of the Affordable Care Act, or at least the parts that say businesses that employ 50 or more workers have to offer health coverage, would have a hugely detrimental effect on workers. See also the minimum wage, which Trump has been wavering on. At the moment, he supports a rise to $10 an hour – but will the change, or is it enough anyway?
Many businesses are connected with other parts of the world in some way or another, and this is only made possible due to trade agreements that have been agreed in the past. Donald Trump has vowed to rip up the trade deals that he believes do more harm than good for the United States, and negotiate new deals with countries around the world. This might sound good to some Americans, but the policies come with a long set of problems. For instance, Trump would like to negotiate trade deals that bring American factory jobs back to the states, but this simply can’t happen – any companies that move back to the states will use automated machines to make their products, not workers. Additionally, punishing companies who outsource their work overseas might make them employee domestically, but there would no way that prices could stay the same if workers commanded an American salary. And what a public that cannot afford to buy do for the economy?
Trump has only been Commander-in-Chief for a matter of days, so it’s too early to tell exactly how his presidency will shape social and economic life in the United States and beyond. Needless to say, the economy is heading some big changes once Trump gets properly underway with his plans. If the potential changes listed above frighten you, then A. You’re not alone and B. Perhaps it’s worth remembering that Trump has a habit of flip flopping on ideas, even those that appear to be key to his policies, depending on his whim. So it might not all be as bad as it seems. Or it might be worse. We’ll have to wait and see.
What Can The US Govt Do To Help The Stock Market?
Unless you live under a rock, you will know the stock market has plunged this past week. ‘Plunged’ may be an understatement as the Dow fell by 1,500 points, a new intraday record. But, there is no room for congratulations on laying this new ground, not even for the Trump administration. Remember, this is a government that waxed lyrical about the state of the Dow Jones hours before the slide.
Although the White House is now nothing if not unpredictable, top members of the cabinet will be looking to strike back. The economy is Trump’s ace in the hole, and it seems to be tanking hard. But, the stock market isn’t a leaky faucet which you can tighten in a couple of seconds. So, what can the WH do to ease the drop?
Here is a selection of tools at their disposal, and a wrench isn’t one.
Absolutely nothing if the past behavior of the Trump government is any indication. But, this isn’t out of sheer laziness or lack of understanding this time. It’s because the slide is, in part, due to a lack of confidence in the market. Investors expect interest rates and inflation to play a massive role in the not-too-distant future and are pulling out. So, doing nothing may be the key to the door for the White House. At least, it’s what Joe LaVorgna, chief economist for the Americas as Natixis, believes. Speaking to CNBC, he thinks it’s a move against the Fed because it isn’t aggressive enough, which has led to a sell-off. And, one pertinent thing to remember is that there wasn’t a single piece of info that led to the exodus. Even though it resembles the 2010 Crash, the details aren’t the same.
Speak To The Fed
Trump is by no means an advocate of government intervention unless it involves scandal. However, he may change his mind in this instance when a simple solution is at hand. As LaVorgna said, there are lots of investors that think this slump is down to the Fed and that it isn’t doing its job. Why? It’s because they are doing nothing to allay people’s’ fears. Interest rates, as well as inflation, are the big issues as the money-makers dread the increasing regulation. After all, reports suggest hourly earnings rose by 2.9% last Friday before the incident. Simply asking the bank to calm the situation could be the easiest and cleanest route for everyone. But, don’t cross your fingers because the Trump WH doesn’t do straightforward.
Point To The Facts
No one likes to side with this government unless they are sycophants, but the stats are there for everyone to see. The market spiraled out of control as investor confidence hit an all-time low, yet there wasn’t much evidence to suggest why. After all, bond yields on the day were lower than before, which should have eased fears. Plus, there is the position of the S&P. Although it isn’t as reputable as before 2010, it’s still a decent indicator and it is trading as normal. In January, the moves were almost identical to the ones made in December. In layman’s terms, it means the market isn’t going to have to analyze a year of returns. The govt doesn’t have the credibility to point to the facts after its assault on the truth, but they can gesture to the likes of Michael Yoshikami.
The White House will undoubtedly act as if nothing is wrong, and they may be right. However, even if this is just a recalibration, there is a mental element. Trading and investing require strong-minded people to spot patterns and take calculated risks. No one is going to do that while the Dow swings up and down like a yo-yo. His only option is to instill confidence back into the system that he dearly treasures. Again, speaking to the Reserve would be a start as it may prevent it from tightening the belt. But, there are other options too. One which experts agree on is the element of AI-led investment software. Currently, the rise of technology means there’s a gap in trading which is being exploited by these programs. As a result, the anomalies are leading to drops such as the storm that is currently hitting the market. Only 10% of stocks are traded by individuals, and that is a problem because computers are aggressive.
You may have noticed that there is a Mexican standoff between investors and the government. Stood there with their guns in hand, no one wants to shoot first. The reason is simple: a lack of communication. All of the above has happened because of a perceived hike in interest rates and inflation, but there are no guarantees. As in 2008, the barriers surrounding the stock market are preventing people from making informed decisions. ‘Make America Great Again’ is the slogan, but Trump may want to look to Europe for help. MiFID II Trading Solutions is an EU regulation that tries to make markets open, transparent and resilient. Regulation isn’t the government’s strong point, especially as the rise in the Dow as a result of market freedom. However, a lucid program could make the situation clearer for all parties.
Close Down The Shutdown
If you aren’t aware, again, where have you been living? The US government shutdown for the second time this year on Friday morning, and is a huge problem. The men and women that have to work out how to deal with a national problem work in the Capitol building. Without them doing their jobs, there isn’t going to be a quick fix. And, it isn’t as if Trump himself burns the midnight oil according to reports detailing his daily schedule. The US needs all areas of government up and running and working together if it is going to get out of this mess with any credibility. While the shutdown is still in process, the odds get longer and longer.
What are your views? Is this a big deal or is it just a flash in the pan?
Are commercial banks behind forced march towards electronic payments?
A campaign to ban hundred-dollar bills is going on in the US. It involves prominent economists, including former Head of the Federal Reserve, Lawrence Summers.
In April, Deutsche Bank held International Cash Conference entitled “War on cash: Is there a future for cash?”.
Visa payment system quite expectedly carried out an advertising campaign under the slogan “Cashfree and Proud”.
Dozens heads of states and private banks have already said that cash is ineffective, is used to finance criminal activity and tax evasion, and, finally, do not allow governments to manipulate macroeconomic indicators.
In December 2016, the Australian Minister of Finance proposed to prohibit the circulation of banknotes of 100 Australian dollars.
It is now forbidden to accept the largest denomination – 100 Bolivars – for payment in Venezuela.
Yet, this is only the beginning of the war, led by financial regulators, bankers and electronic payment system operators around the world. Their real goal is elimination of cash.
“The electronic payment industry in all of its forms is trying to find ways to displace cash, and that will continue,” said George Peabody, Senior Director at Glenbrook Partners, a payments research firm in Menlo Park, USA.
For financial organizations and governments, the idea of giving up cash is practically devoid of shortcomings. Cash as such has certain advantages and disadvantages that stem directly from its nature. Being a completely anonymous payment method, cash remains physical objects, movement of which requires energy and money. Denominations and coins are easy to destroy, mutilate or simply lose. For this reason, the regulation of real money is expensive and complicated. No regulator in the world will tell you the exact amount of money in circulation – only, perhaps, how many banknotes have been issued.
Also, physical money can act as a means of storing valuables or as a treasure, when it comes to investment coins made of precious metals. Physical money can be faked. Finally, do not forget about direct expenses for printing, introduction and removal from circulation, denomination and other unavoidable operations. It is also impossible to make remote payments with physical money.
Unfortunately, all good ideas of economists encounter resistance of people who have no idea how the economy works. For example, Denmark has supported the negative rate, advocated by Harvard University professor Kenneth Rogoff. Four years of the experiment caused private sector investment to fall by 2 percentage points (from 18.1% to 16.1% of GDP), and the savings rate increased by almost five p.p. (from 21.3% to 25%) compared with the time when the rate was above zero. Citizens understood that they were losing money on deposits. At the same time, they were afraid to spend, because they began to lose confidence in the long-term stability of the financial system and safety of their savings. If the state commences strange experiments with other people’s money, it is better to tighten the belt and wait.
Apparently, people have three options in the current circumstances: to leave money in the bank and lose little by little on negative rates; to spend or to invest their savings; to close the account and put cash in the pocket. Not surprisingly, many prefer the third option, and this is a fact confirmed statistically. Thomas Savare, CEO of French security printer Oberthur Fiduciaire, says: “there are a lot of preconceived ideas about that. I can’t predict whether or not banknotes will have disappeared in two hundred years. But while I can’t see future, the volume of printed banknotes is growing faster than GDPs. That might come as a shock considering the rise in electronic payments, but the reality is that cash is still king and growing in developed economies… and even faster in emerging economies.”
Actually, one of the reasons why people are hiding money is a general distrust in the financial system. The prohibition of paper bills obviously does not solve the core problem: people will not become confident in financial institutions just because they will be forced to take all their money to a bank. In addition, in the state of mass surveillance, paper money has a completely property – it is anonymous.
Yet, citizens of the world are losing their freedom, argues investor Jim Rogers, who in the 1970s together with George Soros founded Quantum Fund. He says: “If you want to go and buy a cup of coffee they know how many you drink, where you buy them etc. If they can all put it into electronic formats and they will the world is all going electronic”.
Privacy activists also believe that actions of governments, not citizens, must be more transparent. Professor of the University of Freiburg and member of a group of economic advisers under the government of Germany Lars Feld does not agree with the need to cancel cash either. In an interview with the Frankfurter Allgemeine Zeitung, he called cash “coined freedom” and noted that physical money allows citizens to avoid excessive state control. And off-the-radar labor activity can be contrary to the law, but this is often “the last opportunity to make a living” for certain groups of people, Feld noted.
Oberthur Fiduciaire’s CEO argues: “People should be able to choose how they want to pay and we see across the world that the usage of cash isn’t decreasing even in countries with more and more electronic payment solutions, because they aren’t completely trusted”. “The use of cash remains an essential liberty that everyone should be able to have”, they say at Oberthur Fiduciaire.
Also, few know that if a citizen makes a deposit to a commercial bank account, he loses ownership of his money and in return acquires the obligation to claim the same amount back. Unfortunately, only lawyers understand the fundamental difference between the right of property and the right of obligation.
Precisely this transformation of the first type of right into the second exposes people to a certain risk. The reason is simple: the bank can go bankrupt or get sanctioned.
Here, for example, an ugly story from America – Operation Choke Point. There, the Ministry of Justice (for the noble purposes of protecting the population from predatory lending) asked banks to voluntarily block “suspicious” financial transactions. Apart from the Ponzi schemes, the operation covered sale of weapons, pornography and escort services, as well as law-abiding and harmless telemarketing, lotteries and the sale of fireworks. As The Atlantic explains in its material, banks and card systems like Visa and MasterCard turned out to be the “choke points”, pushing on which the state easily blocked not only criminals, but also completely legitimate business.
The problems, which financial and government institutions hope to solve by eliminating cash, require an integrated approach to democracy, political institutions and civil society. We cannot deny the existence of shortcomings in the system, but we also need to understand that the ban on cash should not restrict freedoms and rights of law-abiding citizens.
Creating Perceptions: What is Really Happening with the Indian Economy?
In just a little over a year, Indians will take to the polling booths again to decide whether the Narendra Modi led BJP (Bharatiya Janata Party) government’s much anticipated second term as the ruling party will become a reality or not. Even though the present government has always been the favourite to retain its position, a heightened focus on the health of the Indian economy may or may not be in their best interest, and it all depends on which picture Indians choose to accept.
One picture, two different outlooks
IMF (International Monetary Fund) chief Christine Lagarde said earlier in October that “for the medium term, we see a very solid track ahead for the Indian economy”, assuaging some of the disconcertedness that has surrounded the Indian economy post two of the boldest moves ever attempted by any government since independence in the country: demonetisation and a massive rollout of the GST (goods and services tax) earlier in the year. The lingering effects of the disruption caused by these steps resulted in India’s GDP growth slowing down again in the latest quarter to 5.7%, with the country playing second fiddle to China, again. However, Lagarde has lauded the steps taken by the Indian government to digitise the economy and simplify the tax regime, dismissing any surprises in the drop in figures as “a little bit of short-term slowdown” which was to be expected following the government’s “monumental effort”.
Moreover, during his visit to the US to meet with investors and corporate leaders, Minister of finance Arun Jaitley reflected that there is a “positive mood” about India in the US, adding that Americans have a good understanding of the actions taken by the government and what they will lead to. That may very well be the case, but the picture of the economy within the borders is far less pronounced, and the division of its state among the citizens far more.
Soon after the figures for growth were in for the latest quarter, India’s former minister of finance Yashwant Sinha, who is also a member of BJP, singlehandedly contributed hugely to the already dwindling confidence of the public in the government’s approach when he wrote in a letter in his column on The Indian Express about “the mess the finance minister has made of the economy.” Citing issues ranging from the decline in private investment and distress in the agricultural sector to the loss of jobs across different sectors, he has blamed demonetisation and a poorly implemented GST for the poor state in which the economy finds itself. Consequently, the past month has seen a flurry of editorials and opinion pieces on what the true picture is of India’s economy, where it is headed, and whether the fears of the people are warranted or if these tiny setbacks will finally be followed by the promised prosperity.
The problems are real, but what are they?
Agriculture was one crucial sector of the economy hit badly. The agrarian crisis has worsened due to an unsatisfactory monsoon season after farm loan waivers were granted following massive protests across states. On the other hand, the GST rollout has hit hard the small and medium businesses which were vastly unprepared to cope with the government’s move. While the GST council meet earlier in October may have eased the tax burden on the SMEs, it is still some way to go before they can be pulled out of what Mr Sinha accurately describes an “existential crisis”. An improvement in growth would also require a timely recovery from the supply shock caused by the implementation of the GST, in the absence of which it would be more realistic to expect more quarters of slow growth. Another major problem is the dearth in the investment by the private sector with an increase in stalled projects for the fifth consecutive quarter. This, along with other engines of economic growth including private consumption has shown slowing signs as well. The government may argue that when they inherited the economy it wasn’t in its best shape either, but demonetisation and now GST, no matter how ambitious have created a scare among the people leading to alarms of low confidence ringing across all major sectors, which needs to be addressed.
The biggest concern perhaps for the government is the lack of jobs created. One of the promises made by the Modi government during the elections was the creation of millions of jobs. However, according to the Centre for Monitoring Indian Economy the workforce declined from 406.5 million at the end of last year to 405 million till April this year. Almost every indicator points out to a net loss of jobs for the year 2017. The telecom, construction, and textile industries among others have also laid off a large number of their workforce. A broken promise on this end is unlikely to be forgiven and forgotten that easy.
Where the government is right
As is always the case, the analysis here as well is a two-way street. To the credit of the government, some positive signs have shown with the first tax collection under GST exceeding government’s expectations of Rs. 91,000 crore. Other sources also show a bit of a revival in consumer spending. Moreover, irrespective of the expected duration of the slowdown, PM Modi has recognised the need to tackle some of the most prominent issues that plague the economy in order to get it back on track. It is for that purpose that the Economic Advisory Council to Prime Minister has been set up consisting of experts chosen by Mr Modi himself. “There is a consensus amongst us that there are various reasons that have contributed to a slowdown of growth rate. Our entire thrust would be on implementable decisions”, said the Council’s chairman Bibek Debroy. The EAC or EAC-PM has identified 10 issues to tackle in order to launch the economy towards a higher trajectory of growth. These are inclusive of but not limited to the areas of agriculture, the informal sector in the country, job creation, public expenditure, and monetary policy among others. The need for instituting an Economy Track Monitor has also been realised by the Council to suggest correct courses of actions based on heavy and informed assessments.
Making it right: which path to follow
What can the government do? What should be done? Division exists on the suggested courses of actions as well. One of the solutions to the problem would be an increase in the government spending, a suggestion that has found the support of many policymakers throughout the country. That, however, is not without its problems. The central bank has warned that such a fiscal stimulus may come at the cost of macroeconomic stability and even the EAC seems not to be in favour of it. The government also wants to stick to its fiscal deficit target of 3.2% of the GDP and is unlikely to trade off some of this stability for growth. In the event that it should achieve neither, it would be further behind the starting line, not making for a flattering image before the next general elections.
If not a fiscal stimulus, then what is the alternative? The answer is policy reforms in those sectors of the economy that have been plagued with poor performance in terms of both employment and growth – textiles, real estate and construction, and leather among others. A report from JP Morgan suggests that the government should focus on fixing the supply chains that were disrupted first due to demonetisation and then the GST by improving the regulatory framework for SMEs. Resolving the problem of non performing assets in banks is another area that the government needs to set its sights on. The EAC, in its next meeting may look at the sale of government stakes for the recapitalisation of banks as the right step to take.
Time prevails over all
“It is a mistake to think that there is some magical, perfect way to run a large-scale complex system like an economy”, says Jitendra Singh, emeritus professor of management at Wharton, on the subject of the growth of the Indian economy. Yashwant Sinha expressed the same sentiment while concluding his letter when he mentioned: “nobody has a magic wand to revive the economy overnight.” The problems that the Indian economy is facing did not start with demonetisation and GST, they were already headed this way. These steps may have accentuated some of the many problems that have slowed growth but it is also true that an excessive and undue amount of attention is being placed on them. The real problems of the economy are the ones that the EAC to PM Modi hope to tackle and only time will tell what the government is able to do. Unfortunately, time is what is most scarce for the government.
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