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  • Writer's picturePete Jonson

Sat Sanity Break, 26 November 2016, Mr Trump in action.

The shock of Donald Trump's election as the next President is wearing off. The Donald has been charming to most people and has backed off some of his more dramatic but clearly not-set-in-concrete promises. Like legal action against Hillary Clinton. Making the Mexicans pay for the wall, that may be mostly a fence. Amazing how fast pollies who had been dismissive of the Donald sought to ingratiate themselves - eg our man who had described him as a 'Dropkick'.

The biggest question for Australia concerns the strategic alliance with Mr Trump's America, but the right soothing noises have apparently been made. The second most important issue is whether The Donald's promises to bring back jobs to America's rustbelt requires widespread protectionism. We know as well as anything is 'known' in economics that America's retreat into protectionism in the 1930s made the global Great Depression far worse than it needed to be.

We are pleased to bring to our readers an informative article on Mr Trump's economic policies and what this may mean for the Australian economy. This is by Professor Warwick McKibbin who is a global expert on trade theory and how economies work, and we commend his article to our readers.

Here are two key paragraphs. 'President Trump does not need Congress to withdraw from the Trans-Pacific Partnership and to renegotiate NAFTA or even to levy a tariff on Chinese imports in retaliation for currency manipulation. A trade war cannot be ruled out if in fact the forces of protection dominate the Trump presidency. How costly would this be? In a study for the World Bank, Andrew Stoeckel and I simulated a global trade war. We estimate that if the US levied a 40 per cent tariff on all imports, US GDP would fall 1.2 per cent.

'If all countries retaliated, US GDP would fall 5.2 per cent and thus enter a deep recession. Australia's GDP would fall by 5.6 per cent in this trade war. If China then withdraws financing of the US budget deficit, the negative shock to the US is magnified even more. Ironically some of this capital would probably flow to Australia providing a GDP benefit'.

Warwick McKibbin also discusses Mr Trump's macroeconomic policies. Mr Trump has expressed the view that US interest rates are too low and 'perhaps we need a Republican at the Fed', and has been told in no uncertain terms that Janet Yellen in not going anywhere. Mr Trump is also attracted to fiscal stimulus, in particular large-scale infrastructure building funded from both private and public sources.

With interest rates very low, and a lot of America's infrastructure old and in need of refurbishment, this is a good idea. Two problems will arise. Who will decide what projects are to be funded, and one notes that infrastructure development is often done badly and at great cost. The second point is that assuming debt financed infrastructure actually gave the US economy a significant kick, interest rates would need to be hiked and this would knock the bubble out of asset prices globally. (As noted previously, Henry is keen of a relatively fast return to normality with global interest rates so that asset prices can be deflated less than will be required if the existing cheap money asset boom goes on for several more years.

Henry's long-shot suggestion is that the Donald eventually will declare a global debt moratorium. This is how his business debt was dealt with, four times according to reports, and how many excessive debts have been handled. Inflating the problem away is another approach a really innovative leader of a great nation could try.

In distant Australia, the Turnbull government seems to have had some wins as a result of showing willingness to dicker with cross-bench members of the Senate. Amazing really - pollies being pollies, a nice change. Polls are still favouring the opposition, however, and it will be a long way back for the government, especially given the unhappiness and even rage of many former Liberal Party members and financial backers at Treasurer Morrison's supposed 'reform' of superannuation.

The Liberal Party's refusal to reform Negative Gearing has been tested by a NSW proposal to address this problem. This ideally should be part of a widespread reform package which would make taxation of Superannuation income more acceptable - always providing the senior pollies and bureaucrats shared the pension pain equally to self-funded retirees - fat chance of that Mr Morrison.


Fiona Prior investigates Fantastic Beasts and Where to Find Them and highly recommends JK Rowling’s latest extension of her magical universe here.

The Sporting Life.

At last, comrades, fight from the (male) Australian batters. In Adelaide our bowlers again shook up the South Efrican batters and the young batters brought into the team all performed bravely, with Peter Handscomb making a nice 54 runs to validate the brave selection of younguns. Now as I write Khawaja has been dismissed for 145 and Mitchell Star looks capable of his first ton, having failed once before when dismissed for 99.

Meanwhile, the Aussie women's cricket team go from strength to strength, proving again that Aussie women deserve all the extra push they are getting in job markets and various honours and general acclamation.

STOP PRESS. The Aussie men have finally won a test. The bold selection policy - 'think yooth' - has paid off. We await further progress.

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