As Donald Trump, Boris Johnson and other populists loosen the purse strings, what about the economy?
- Politicians promising to spend more or cut taxes to woo voters give central banks little wiggle room if the economy overheats
- Investors will have to work hard to seek income in high-yield bonds, high-dividend equity or alternative assets
Politicians earn voters’ support by offering them the prospect of a better living. This can be through improved education, health care or a more equal society. This social contract is a cornerstone of democracy.
Ideals aside, real-world situations are often rife with complexities, such as when a well-intended solution creates unintended consequences. Also, most of these services are not free. Options to raise money to pay for them may not be popular.
The US administration’s sometimes unpredictable stances on trade policies are adding to business uncertainties. The US ISM manufacturing index, a key gauge of business confidence, has been steadily falling since August 2018. Respondents have mentioned the disruption in supply chains as a result of tariffs with China.
Many would argue that the Fed would be content with its current policy stance if there were no risk of slower business investment from rising protectionism. Although the Fed may be attempting to use monetary policy to try to compensate for the implications of trade uncertainties, we have to recognise there is only so much that a central bank can do.
