Markets definitely took Trumps win with stride. The Dow Jones industrial average soared to more than 1000 points above the level it was at the day before the election. The NASDAQ and S&P also advanced after retreating initially. It seems investors like a CEO – however controversial he might be – in the White House. There is a sense that President Elect Trump will run the country more from a business perspective, unlike any president before him.
Nevertheless it is too early to celebrate. The Dow did reach a new record high yesterday, but the markets remain volatile and President Trump remains a riddle in many aspects. His proposed fiscal expansion could generate drag elsewhere, especially if it comes with a tax cut. It could well increase the already precarious debt situation that the US is facing.
Commerce might also suffer from President Elect Trump’s anti-globalization policies – if he goes forward and scraps trade deals. Doing that will not necessarily favor balance of trade in the US, but it may affect the livelihood of those American citizens who depend on revenue from exports.
Can Trump Solve the Triffin Dilemma?
Trump might not be able to solve trade imbalances unless he figures out how to wean the world from its dependence on the USD as its reserve currency. This is due to the fact that the world’s demand for reserve currencies is greater than the exports coming from the nation that mints that reserve currency. This means that the supply of USD in the world will always be greater to US exports, leading to a permanent trade deficit.
As a result, the US also benefits from a healthy foreign direct investment. These trade imbalances result in cash inflows to the US, since USD holders look to put their capital to good use. The US is probably the most solid market to invest in, which is also part of the reason why its stock exchange leads the world in a wide range of parameters including new listings.
Trump will learn that the world economy is a carrousel
As long as President Elect Trump doesn’t upend the balance of the world economy, US markets will have every reason to continue breaking records. The real problem is the fine tuning, or how much protectionism and how much fiscal expansion can the economy really take before it faces a backlash. The world economy is like a carrousel: what goes around comes around and hopefully Trump learns that fast, if he doesn’t know it yet.