by Greg Valliere, AGF Management Ltd.
IT WASNâT JUST ABOUT JEREMY CORBYN: Some analysts have attributed Boris Johnsonâs stunning landslide to the unpopularity of his opponent, but itâs more than that â the U.K. election was a repudiation of traditional thinking about government, similar to whatâs unfolding in the U.S., where Donald Trump is now the favorite to win re-election.
THE RISE OF THESE TWO POPULIST, NATIONALISTIC FIGURES has several common themes: a disdain for government bureaucrats (Johnson will fire many of them in coming weeks); a deep aversion to traditional trade policies; and â most startlingly â a rejection of the old conservative mantra about fiscal restraint. Spending is back, big time.
JOHNSON HAS PLEDGED TO SPEND BILLIONS on infrastructure, especially in the north, where he isnât popular. He also will unveil new tax cuts. Likewise, Trump will preside over a deficit in this fiscal year that will exceed $1 trillion, boosted by higher spending on defense, domestic programs, you name it. And he will campaign next year for more tax cuts and infrastructure spending.
SPENDING IS POPULAR: What a difference in a decade â the overwhelming sentiment ten years ago within both U.S.parties and most of Europe was to reduce budget deficits; the politicians disagreed over how: through higher taxes or deep spending cuts? But the public has rebelled against austerity, and Trump has led the way.
THE PUBLIC WAS WARNED that surging deficits would lead to higher interest rates, but it didnât happen. The public was warned that surging deficits would lead to higher inflation, but that didnât happen, either. Trump understands the public mood better than any politician in America, and he believes that spending will fuel stronger growth â at least in the short-run.
AT SOME POINT IN THE NEXT DECADE, as annual U.S. deficits soar well past $1 trillion, there will be a crisis; debt servicing costs will swallow up virtually all discretionary funds as U.S. debt surges to 100% of GDP or higher. But thatâs another problem for another day; for now the politicians see a path to re-election and solid growth.
AND IF INFLATION SHOULD FINALLY RETURN, so much the better. Despite his rocky relations with the Federal Reserve, Trump and Chairman Jerome Powell would both welcome higher inflation; be careful what you wish for. We donât think higher inflation is imminent, but aggressive fiscal and monetary stimulus should produce decent economic growth. This much seems certain: austerity is out on both sides of the Atlantic.
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This post was first published at the AGF Perspectives Blog.
