Did you see the news? Earlier this week, Theresa May announced she can see the future!
Not in so many words. But she may as well have. In an announcement fit to make all free-market, small government enthusiasts shudder (including many in her own party, I would imagine), the prime minister laid out the government’s new industrial policy.
The strategy, according to the government, “will be underpinned by a new approach to government, not just stepping back but stepping up to a new, active role that backs business and ensures more people in all corners of the country share in the benefits of its success.”
The added emphasis there was mine
I found that particular part of the announcement instructive. It’s clear that May’s government sees its role as an active part of the market, picking industries it believes are “worthy” of investment and funnelling taxpayer cash towards them.
It’s just another form of authoritarian big government arrogance: “We alone know what’s best. We will decide what will and won’t succeed. We will direct cash to these places. Our will be done!”
I’d call that favouritism at best and downright cronyism at worst. It’s certainly not capitalism. And it makes it clear the government doesn’t really believe in the free market’s ability to create wealth and prosperity.
Because that’s the other way of government achieving those goals: get out of the way and let the market decide what is and isn’t worthy of success. Don’t pick favourites. Don’t tilt the playing field in favour of industries you like (or you want donations from).
Get out of the way, cut taxes and let things run their course
In a market like that, there’s no need for the state to intervene. Businesses would succeed or fail on their own merits, by providing high quality goods and services at competitive prices to a market that demanded them. I think most people would rather live in that economy, where effort and reward are related, rather than rewards coming as a result of the government of the day liking what you do.
For what it’s worth, the government has selected several key industries in which to support as part of this strategy. Those include a variety of tech industries – the kind we recommend in Frontier Tech Investor. That may well help those industries. Fine. You take what you can as an investor and if the government helps support firms you invest in you accept that (and bank what profit you can).
But I think most people would rather see tech firms succeeding on the strength of their own ideas and expertise, rather than the number of tax breaks or government handouts they receive.
Rethinking Trump
Speaking of the insanity of government, let’s talk Donald Trump.
Quiet down. I was only joking. I’m not here to tell you what’s right and wrong politically. And Trump has only been in office for five days. We can’t judge him yet.
But what if the assumptions the markets have made about him are wrong? The “Trumpflation” trade – stocks up, commodities up, inflation expectations up and bond yields up – is based on a fairly simple idea. The markets have assumed Trump will increase fiscal spending significantly.
That might be to “build the wall”. Or that might just be a metaphor for “build stuff”. He could decide to build a wall on Mars for all the markets really care. But the idea he’s going to increase government spending on something is pretty firmly established.
(By the way, if he really wanted to sell the idea to the American people, going to Mars wouldn’t be a bad idea. That’s how JFK dressed his stimulus up: by sending a man to the Moon. It was a moon-doggle: effective branding for huge government spending in the economy.)
Indexes are up
Back to Trump and the markets, which have been baking in the idea of fiscal spending since the election in early November. Since Trump was elected, the Dow Jones is up 9%. The FTSE 100 is up close to 5%. The US copper index, a barometer for inflation expectations, is up 13%.
But what if the markets have Trump wrong? What if when he actually tries to pass a budget, he’s unable to? The US national debt is already enormous. And there’s another debt ceiling debate on the horizon later this year. If the politics of the situation get in the way – for instance if the Tea Party argues against increased debt-funded spending – then the markets could correct severely.
Given markets tend to overshoot in both directions, we could see a sharp 10%-15% drop. I’m not predicting that. But the potential is certainly there. We’ll watch the political situation in the US carefully to see if the Trumpflation trade is showing signs of reversing. Watch this space!
Don’t say protectionism
Just hours after Tim Price sent his latest Price Report copy to Dan Denning and me, in which he warns of the perils of protectionism, he was proved right. With Tim’s warning ringing in my ears, news of Trump’s promise to impose a “very major” tax on businesses moving operations outside the US broke.
Here’s what Tim had warned of just before that. Keep in mind he was writing without knowledge of Trump’s specific plans, only his general policy.
I don’t know anyone who doesn’t harbour at least some misgivings about the implications of a Trump presidency.
It’s clearly too early to say much substantively. But so far, since the presidential campaign first started, the man has been the very definition of the phrase “loose cannon”. And taking his words at face value makes it clear that the US is about to experience, in political terms, the end of business as usual. Note, for example, the following segment of his inauguration speech:
“From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first.
“Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs.
“Protection will lead to great prosperity and strength.”
He didn’t quite say protectionism, but he might as well have done.
Longstanding subscribers will appreciate that I generally have little time for economists. Ask a dozen economists a question and you’ll get at least 13 responses. But one thing that most economists are absolutely agreed on is that protectionism made the Great Depression worse.
On 17 June 1930, the Smoot-Hawley Tariff Bill was signed into law, which raised US tariffs on over 800 types of goods. Irving Fisher – the economist who is now notorious for having stated just before the 1929 crash that “Stock prices have reached what looks like a permanently high plateau” – sponsored a petition against Smoot-Hawley that would be signed by over a thousand US economists. In June 1930, Thomas Lamont, a partner at JP Morgan, was imploring the US administration not to enact it:
“I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff. That Act intensified nationalism all over the world.”
Unsurprisingly, America’s trade competitors retaliated. North American exports and imports would fall by more than half during the course of the Great Depression. After 1929, US GDP fell by 10% per annum, for three years in a row.
We know protectionism doesn’t work, just as all attempts to interfere in the free market ultimately fail. We may as well try to turn back the rising tide. But that doesn’t seem to have stopped Trump having a good crack.
More on that as we learn more. Until tomorrow!
Nick O’Connor
Associate Publisher, Capital & Conflict
Category: Geopolitics