The latest World Economic Forum is in full swing, ‘cooperation in a fractured world’ is the theme, and then the US President creates a huge new fracture - animal spirits are back, the dollar tumbles, US growth is soaring, but is it all irrational exuberance gone especially irrational?Jamie Dimon, boss at JP Morgan, waxed lyrical. He was talking about US tax cuts. “I can't believe that people think having an uncompetitive tax system is a good thing. The real benefit comes over time. Competitive taxes [will lead to] more capital, more jobs, more companies investing here,” then he turned to what this means to the US economy and growth in GDP. “I think it's possible you're going to hit 4 per cent some time this year," he commented in an interview with CNBC while at Davos, "I promise you, we are going to be sitting here in a year and you all will be worrying about inflation and wages going up too high."
Meanwhile, Wilbur Ross, the billionaire US Commerce Secretary, said: “Trade wars are fought every single day. And, unfortunately, every single day there are also various parties violating the rules and trying to take unfair advantage. So trade wars have been in place for quite a little while; the difference is the US troops are now coming to the ramparts.”
Meanwhile, the US dollar tumbles - sterling is at its highest level against the dollar since the Brexit vote. There is more than one reason for the fall. The impasse on Capitol Hill leading to a temporary government shut down didn’t help. But then again, analysts have been forecasting for some time that 2018 will be a good year for sterling and the euro, a bad one for the dollar. The underlying driver of falls in the dollar is the massive US current account deficit - which hit 2.1 per cent of US GDP in Q3, the highest deficit in three years. The Institute of International Finance reckons that the underlying deficit is even greater, and that the dollar is 10 per cent overvalued.
Steve Mnuchin, US Treasury Secretary said to journalists at Davos that “obviously a weaker dollar is good for us as it relates to trade and opportunities.”
But to other countries, the very idea that the US is the downtrodden victim of globalisation is a joke - the US, and what Nobel prize winning economist Joseph Stiglitz called the Washington Consensus, with the IMF acting as Uncle Sam’s foot soldier, helped create an economic depression in Russia and South East Asia in the late 1990s, fueling distrust of the west in Russia and providing the rationale behind economic policy in China ever since.
‘America first’ has nearly always been US policy, and more often than not, the ultimate casualty has been the US itself - certainly, many US politicians blamed the lacklustre performance of the US economy earlier this decade on China and that was partly the result of ‘America first’ policies in the ‘90s.
As for the weakening dollar, to the government in Brazil this is just Deja vu, it was earlier this decade that the Brazilian finance minister accused the US of waging currency wars via its policy of quantitative easing.
Jamie Dimon celebrates falling US taxes, but the euphoria over the cuts misses the point. They come with a massive cost - around $1.5 trillion, the Trump regime says the tax cuts will pay for themselves by creating economic growth, leading to higher tax receipts, but you could have made exactly the same argument if, instead of a $1.5 trillion tax cut, we had a $1.5 trillion boost in government spending, creating superior infrastructure and state education, we would have also seen a boost to the US economy.
As to which approach works best depends on your view of what the US needs most, more animal spirits or better education, infrastructure and some redistribution. Either way, the end result will be an economic stimulus.
But the timing is awful. The economic cycle has swung in favour of the economy and along comes the White House with a masssive stimulus. The UK tried such an approach once, back in the 1970s under the Ted Heath government, stimulus was timed to coincide with economic recovery, and ever since then, the UK has been more vulnerable to inflation than other similar economies.
Jamie Dimon is right when he says we will be fretting about inflation soon.
The stimulus, whether it took the form of tax cuts or government spending was required six years ago.
But be in no doubt, protectionism will be disastrous for the global economy - we saw it the 1930s with the US Smoot Hawley Tariff Act, which imposed tariffs on 20,000 goods imported into the US.
The result: a crisis in the US turned into a Great Depression and may have been a factor in leading to the Second World War.
We now know that President Trump doesn’t just talk he means what he says. The policy of America first will stimulate the economy short-term, but the end result will be quite different.