Chaos Americana

Trump, 60. Haley, 40. The outcome in South Carolina last night was so predictable the MSM networks projected the winner less than five seconds after the polls closed.

Nikki will soldier on for a while, but 45 will be the Republican nominee. That was evident a while ago. No news here.

But wait. Indeed things have changed lately. The risks to your RRSP, your kid’s college fund and your equity portfolio may soon take a sharp turn north.

As stated here already, there’s no good outcome to the 2024 US presidential election. And since America dominates the global economy (and ours), we must pay attention. If Biden wins, he’ll be 82 on inauguration day. Already his critics have done a fine job at making him appear weak and diminished. If Trump wins, his isolationist and protectionist policies pose dangers to the domestic market and the world order. Already the MAGA Republicans in Congress are strangling aid to Ukraine, to the delight of Putin. And Trump will be 78 when sworn in. If he loses he will likely claim the vote was rigged, and what happened on January 6th might look mild. Meanwhile both Trump and Biden expanded government spending and added to the national debt in historic fashion.

America now owes almost $35.5 trillion. In contrast, Canadian federal debt is $1.2 trillion.

Biden & Trump equally irresponsible with spending

The US can spend in this fashion and accumulate more debt than God because it controls the world’s reserve currency. It’s called the ‘exorbitant privilege’ which reduces borrowing costs for American firms. As nations like Canada and China buy US Treasuries (the safest assets in the world), bond yields are compressed and the price of borrowing falls. It’s a win for corporations and for the US. And, in effect, citizens of the world have been a big part of allowing politicians in Washington to spend without recourse. Also by controlling the world’s reserve currency the US can weaponize its dollar, as it has done in imposing sanctions on its enemies, restricting their commerce and access to capital. It also is able to dominate and control international trade by providing the stable and universal medium of exchange. The buck.

All this is part of the Pax Americana which has kept us out of another world war since 1945.

Equal in importance is the role America has played in foreign affairs, with a network of global bases, the world’s dominant military and interventionist actions to provide a global security guarantee. So American supports Ukraine as Russia breaks that Pax. It supports Taiwan in the face of Chinese threats to seize it. And America is the backbone of NATO, ensuring Europe’s peace and sovereignty, keeping aggressors in check.

But wait. Trump has vowed to change all of this.

‘He will keep us out of foreign wars,’ a MAGA supporter in South Carolina told a TV reporter last night. And, yes, Trump has cast Biden as an international war-monger, and himself as the America-firster. “Pax Americana, or the post-World War II American security guarantee, will be threatened under a Trump Presidency,” says a report from Pennock Idea Hub in assessing his potential impact on financial markets.

Lately Trump has trashed NATO while his Republican colleagues have thwarted legislation to keep funding the anti-Russian defence in Ukraine. Days ago he said any country (like Canada) not paying enough into the defence pact is on its own. Putin can attack any one, he stated (“Russia can do whatever the hell they want”) and the US will not defend it, despite its NATO promise. Biden says the US will stand with Taiwan against China. Trump does not.

Says the Pennock report: “Not only will the unraveling of Pax Americana threaten the geopolitical security structure of the post-World War II era, but it will also call into question the post-Bretton Woods architecture of using the USD as the de facto global reserve currency.”

The US has tried isolationism before. As Canadian troops mobilized in 1914 rushing to Britain’s side to fight Germans, Americans stayed home until millions had perished, before acting. In World War Two, isolationism again kept the US out of the fray as Europe burned, until provoked by Pearl Harbour. Meanwhile the Holocaust proceeded.

Are we on the doorstep of more chaos if a newly-crowned Trump retreats, letting Putin, Xi or Kim out of their cages? Will Trump protectionism threaten its trading pacts with Canada and Europe by imposing the kind of tariffs and barriers that were a hallmark of his first administration? The inevitable result would be a lessening of economic activity and global incomes. Trump now suggests a 60% tariff on Chinese goods. Economists say that would be a recipe for recession, despite the political appeal in the heartland.

The possible result for investors of a Trump victory: higher bond yields and interest rates. Lower corporate earnings. Pressure on equity prices. A trade war. Geopolitical instability as Ukraine falters, Russia is emboldened and Europe is forced to militarize. A downward slide in the value of the American dollar.

“The outsized performance of U.S. equities in the post-war era can be largely attributable to a lower cost of capital,” says the report. “Trump’s isolationist policies that dismantle Pax Americana threaten the U.S. financing advantage. If investors are relying on the historical experience of U.S. asset returns to project their future returns, they may be disappointed under the scenario of a second Trump term.”

Are you paying attention?