… Yeah, think the unthinkable: Suppose Donald Trump were to get elected. From recent behaviors of markets, it’s plausible that having him as President, or his reversing moves to zero Carbon energy, or banning research on climate change would be the least of our collective troubles, at least initially. In fact, it would bring new meaning to the term “dump Trump”.
In particular, the U.S. national debt is okay to the extent to which others are willing to give us credit. Our country has been, until recently, considered the safest of safe havens. Countries have, in the recent past, threatened to liquidate their investments here for a variety of reasons. Saudi Arabia is the third largest owner of such debt (petrodollars), and has threatened to dump them over the Congressional probes of its role in the 11 Sept 2001 attacks. It could liquidate for other reasons. China threatened to dump Treasurys back in 2007 and actually liquidated a bunch in 2015. My idea and concern are hardly original:
Any suggestion that he might promote populist fiscal policies would point towards deficit spending and, therefore, higher yields. Another important consideration would be his administration’s attitude towards the Fed. Even a hint that the central bank’s independence might be attacked would spook bond markets.
Further afield, an antagonistic foreign policy could compound this situation. The US relies on foreign investors to fund its current account deficit and a significant share of the Treasury market.
Any wrong move internationally might risk the willingness of foreign central banks to maintain the high levels of reserves they currently hold in Treasuries. Equally, foreign investors own a significant chunk of the US corporate bond market; recent estimates put the figure at about 35 per cent and rising after a period of sturdy growth in overseas appetite. International relations would need to be highly mindful of this domestic cornerstone.
Mr Trump’s mooted policy on redeeming Treasury debt under par could also have a radical impact if it were followed through. In a television interview this year, the Republican nominee outlined the approach as a solution to the US government’s dependence on low interest rates to keep its debt sustainable.
Of course, there is the question if investors dump dollars, where will they place their assets that’s safer? But I think that’s precisely the point: If Trump were elected, the safety of the United States as a haven for wealth would be greatly undercut. The expatriation of U.S. wealth would be a crisis, and investors need to consider the possibility that a mercurial President Trump would take direct action and prevent currency from leaving by fiat. And China found a place to put its US$200 billion when it dumped in 2015.
If Treasuries and stocks were liquidated, not only would there be a 1929-style Depression like crash, the currency would move into deflation, jobs would be lost by the millions, companies would bankrupt, and tangible assets and production independent of currency would be financial king. People would lose their retirements, now invested in the stock and bond markets since the 1980s Republican conversion of retirement to self-managing, and the numbers on public assistance would go way up. Ironically, a President Trump would have a situation as bad and possibly worse than what faced President Obama when he came into office, but in this case it would have been instigated by the threatened isolationist and protectionist policies Trump championed.
In such an environment, revenue and production from home solar panels priced in terms of deflated dollars with minimum price guaranteed by the state would be handsome. Just trying to look on the bright side of a horrible possibility …