Trumponomics is just like Reaganomics without the inflation. (Antara Photo/Aprillio Akbar)
Trumponomics: Make America Reagan Again?
BY :ARISTO PURBOADJI
MAY 31, 2019
Jakarta. As we near the end of the first half of 2019, this might be the time to assess the current state of the global economy and to evaluate investment opportunities within it.
One approach we can use is "Global Macro," an investment strategy that makes use of economic theory to make educated guesses about the macroeconomic environment and interpret geopolitical events to inform large-scale investments around the world.
Famous name synonymous with this investment strategy (or trading strategy, if you will) include legendary hedge fund managers George Soros and Ray Dalio.
One of the most interesting theories on the current global economy is one that views Donald Trump's economic policies as pretty much identical to those of Ronald Reagan's.
Even Trump's "Make America Great Again" slogan was copied from Reagan.
In 1985-1986, Soros turned out a deep analysis of Reagan's economic policies and executed a successful investment strategy based on it.
In his first term as president, which started in 1981, Reagan put forward two economic objectives: one, reduce the role of the federal government in the economy by reducing taxes, and two, assume a strong military posture in confronting the looming Communist threat.
The result of these two objectives was a runaway budget deficit.
Since Jimmy Carter's presidency in 1977-1981, the US Federal Reserve had embraced a strict monetary policy to combat a strong Deutschmark, Germany's national currency at that time.
Since the budget deficit had to be financed within the limits of strict money supply targets, interest rates rose to unprecedented heights early in Reagan's presidency, reaching a high of 20 percent in 1981.
The Reagan recession began in earnest in 1982, mainly thanks to conflicting fiscal and monetary policies, and brought about an international debt crisis.
The Fed responded by decreasing the interest rate. Then magic happened. As deficit accelerated (peaking at 4.8 percent of GDP in 1985 and 1986), the US economy took off as spending rose.
The record interest rate stabilized and then accelerated, attracting foreign investment and resulting in a "dollar on steroids."
Soros called his thesis on Reaganomics the "Reagan’s Imperial Circle," marking an era that coincided with falling oil prices due to internal conflict in OPEC.
Soros knew what to do. He shorted crude oil, went long on the short end of the US interest rate curve and went long on the long end of the Japanese interest rate curve, as Japan was dependent on imported oil.
In addition, he shorted the US dollar against the Deutschmark and the yen. He made a killing of a lifetime and chronicled the whole process in his book The Alchemy of Finance.
What's been happening in Trumponomics? Since Trump took office in 2017, budget deficit had risen to 3.4 percent from 3.1 percent, and is still rising.
The dollar also keeps appreciating, from $1.23 against the euro on April 13 last year to $1.12 on May 3 this year.
Powell's interest rate was at 2.41 percent in April compared to 0.66 percent in January 2017 when Trump assumed office.
Against the backdrop of a trade war with China, the US trade deficit jumped 19 percent in December 2018 alone, a record 10-year high.
On the surface, Trumponomics faces the same prospects as those faced by Reaganomics: a tax cut to stimulate the business climate, a budget deficit to strengthen the military, a trade deficit and a high interest rate and a strong dollar to lure foreign investors who can compensate for the budget deficit.
But there's one big difference: inflation, or lack of it.
In the 1980s, inflation had haunted the US and the world economy, but now it seems to have gone off the face of the earth.
Bloomberg Businessweek's latest cover story was "Is Inflation Dead?" Articles after articles in it tried to unravel today's economic mystery: "Why is inflation so low?"
Some experts think the Philips Curve has broken down, and others think Trumponomics is just Reagan's Imperial Circle without the inflation, speculating that the unsustainability in the system will last longer this time.
We need to remember though that Reagan's Imperial Circle was also noninflationary due to two counterforces: high interest rate and a strong dollar.
The current state of the global economy has made Emerging Markets (EM) all the more attractive.
One country touted as the main beneficiary of the US-China trade war is Vietnam, due to its low manufacturing costs, along with other Southeast Asian countries, including Indonesia.
The latest Goldman Sachs "Global Viewpoint" recommended the purchase of Indonesian 10-year bonds due to their cheap price and good yield.
Another factor in Indonesia's favor is a prudent practice by the government to keep fiscal deficit close to 2 percent of GDP despite a statutory allowance of 3 percent in 2018, and besides a stable currency and accelerating infrastructure outlay. This should be a big confidence boost for President Joko "Jokowi" Widodo's new government.
Any country wanting to benefit from the US-China trade war must have the following three elements: cheap wages, perfect demographics and political stability.
All efforts must be taken to ensure that last element is met after last month's polarizing elections. If it positions itself well in this new world order, Indonesia could be on the way to become China 2.0.
Aristo Purboadji is a member of the Jakarta Regional Legislative Council (DPRD) and a doctorate candidate at Bogor Agriculture Institute (IPB).