The writer is non-resident senior visiting fellow at New York University’s Center for Global Affairs.

Which of these two forces will Donald Trump unleash next year: growth or instability? Because you know he’s capable of both.

Here’s the case for growth. His Tax Cuts and Jobs Act of 2017, plus deregulation of the business environment, bolstered an already-expanding US economy. In February 2020, the US economy hit 128 months of consecutive growth — only the pandemic stopped the US growth machine. Now, those that voted for him — among other folks — expect round two. Upon news of Mr Trump’s win, US equities surged and crypto currencies soared. His promise to let oil companies “drill baby, drill” could lower gas prices and improve consumer sentiment. 

Only, not so fast.

As we saw during his first tenure in the White House, Mr Trump also does instability. His unpredictability is a source of risk. His new tariff plans, such as a 60% duty on all Chinese imports and up to 20% on everything else, have many economists warning that upward price pressures will return. And guess what? Under those circumstances, the Fed would hike interest rates again.

Tighter monetary conditions will hardly boost the US economy. The stock market would not be happy. Meanwhile, the Committee for a Responsible Federal Budget forecasts Mr Trump will add $7.75tn to the already hefty national debt. 

Rules of thumb

So once again, both growth and instability are perfectly easy to imagine under a second Trump term. Are there any rules of thumb for investors to consider to assess which Trumpian force is winning? Here’s my attempt at three. 

First, don’t think about tariffs in isolation. Yes, Mr Trump is going to say his favorite word, at least three million times before inauguration day. Tariffs are a race against time on the US’s ability to match manufacturing supply with demand. Mr Trump needs the fastest, quickest way to replace lost Toyotas with new American Jeeps. Rule one: investors should carefully study signs suggesting Mr Trump will dismantle Joe Biden’s industrial strategy. If so, there will be too few goods to make up for the loss of imports, and Mr Trump’s tariff plan will fail in the long term.

Second, interest rates. You have to hand it to Federal Reserve chair, Jerome Powell — not only did he land the US economy softly, he knows his rights. Following the incoming president’s repeated threats to dismiss Mr Powell after the election, the latter unequivocally said he wouldn’t bow to political pressure to step down and can’t legally be fired by the president. This is the point: do not underestimate central bank independence. All eyes will be on Mr Trump’s economic agenda. He will have three of the four economic policy aces: trade, fiscal and regulation, but the Fed has monetary policy. The second rule of thumb for investors is that if the data requires it, Mr Powell will hike rates. 

Third, policy responses abroad. The international economy is imbalanced. The US over-consumes and over-borrows. China under-consumes and over-saves. As Mr Trump breaks with the rules-based multilateral trading system and introduces new tariffs, keep an eye on both Brussels and Beijing. Will they take these tariffs lying down? Doubtful. Rule three: the full Trump effect will be decided overseas. 

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Avoiding the sugar high

If Mr Trump is smart, he will pursue holistic supply-side reforms. The US and world economy are ecosystems. Pull one lever in one place, and you’d best be ready for a reaction someplace else. Sure, go for tariffs — but only if you keep Mr Biden’s industrial policy in place. We needed a new global system to govern trade and finance anyway. 

However, if all Mr Trump wants is another sugar high, oh boy, this will not be good. US debt-to-GDP is already set to hit its war-time high of 106% by 2028. If the national economy becomes even more debt-heavy, while cutting back on trade, its fundamentals will look increasingly less attractive to investors. Perhaps the 250th anniversary of the US’s founding in 2026 will coincide with the final defeat of Alexander Hamilton’s fiscal prudence. Regardless, one day, disgruntled capital markets will warn Uncle Sam that he needs to put the credit card down.

In the immediate term, investors need to watch these rules of thumb. They’ll be a good indicator as to which version of Mr Trump enters the White House next year. 

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