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A Trump win need not be as bad as markets fear

In relation to the Iran-Iraq war, Henry Kissinger once said: "It's a pity they can't both lose".

Plenty of people surely feel the same way about this week's US Presidential election. But there will be a winner, and who it is could have momentous consequences for issues such as defence and security.

Putting those to one side, though, what difference is the result likely to make to the economy and financial markets

The first thing to say is that we really don't know. This is not peculiar to this contest but is common to all elections. All we have to go on is what opposing candidates have said and, in some cases, their record, which obviously does not apply to Donald Trump because he hasn't held any public office.

For all his bluster, Trump is not bound to be a disaster. I know it sounds farcical, but he could even turn out to be a successful president.

So we are left with the words.

The trouble is that during the heat of the campaign all politicians are prone to promising things that they cannot deliver.

Trump wants to slash tax on corporations, on high income individuals, low income individuals - in fact tax on just about every individual - while substantially increasing defence spending and, of course, reducing the deficit.

OK, this is just about possible to achieve if you believe that the stimulatory effects of lower taxes are very strong. This is the idea behind the so-called Laffer Curve. But President Reagan tried this and it didn't work. The US ended up with huge twin deficits, budget and external.

At times Trump has seemed to suggest that the US government should renege on its debt. If you want to turbo-charge the Chinese rise to global economic and financial leadership, that would be just about the best way to do it. At other times he has seemed to threaten the Fed with an end to its independence, and he openly criticised the Fed's chair, Janet Yellen.

She is up for renewal in February 2018. On current form he seems unlikely to reappoint her. Some people in the markets fear that she might resign well before then.

Meanwhile, Trump has made some radical statements about international trade. He has threatened to pull out of the North American Free Trade Agreement, put tariffs on imports from Mexico and other emerging markets and row back on globalisation.

For all his bluster, Trump is not bound to be a disaster. I know it sounds farcical, but he could urn out to be a successful president.

Mind you, in order to curry favour with the traditionally Democratic blue collar vote, Clinton has also made lots of protectionist noises, in particular attacking the proposed American-Asian trade deal.

Yet, for all his bluster, Trump is not bound to be a disaster. I know it sounds farcical, but he could even turn out to be a successful president.

Getting elected is one thing; being president is quite another. So much depends upon who he appoints as officials and advisers - and whether he listens to them. More importantly, politicians tend to find office constraining. This is especially true in the US, where the constitution is designed to limit the powers of the President through two independently powerful chambers of Congress and the Supreme Court.

Indeed, the outcome of the Congressional elections, held at the same time as the Presidential vote, may be just as important. And as long as the Federal Reserve remains independent, one of the most important policy levers, monetary policy, is out of his control.

It is easy to exaggerate the economic impact that particular politicians have.

In general their influence is minor. The really important factors are the tide of ideas, that sweeps over politicians of all parties, and the economic facts of life that have a habit of imposing limits on what politicians can do.

Getting elected is one thing; being president is quite another.

If you plot more or less any economic variable - economic growth for instance - against changes in the political colour of the government, you find little connection. Indeed, when pondering the US economic outlook the first thing I think about is not the result of the US election, but rather how the Federal Reserve will respond to gathering inflationary pressures and how the economy and financial system will react to rising interest rates.

Similarly, the really important question is what will happen to the growth of productivity. If the recent sharp slowdown continues then, whatever politicians say, for most of the population there will be no chance of realising the American dream.

We do have some clues as to how the markets are likely to react to a Trump win, because we know how they have reacted over the past few weeks to news about Trump's position in the polls.

When his position has strengthened, equities have fallen, prospects for immediate interest rate rises have dimmed (because it is thought that the ensuing uncertainty would persuade the Fed to stay its hand), the dollar has weakened, and supposed safe havens such as the yen and gold have strengthened. Perhaps most notably, the Mexican peso, and Mexican assets in general, as well as the currencies of other emerging markets, have weakened.

Were Trump to succeed, we could expect more of the same effects. This would reverberate around the world, with global equities falling, not least because of fears of protectionist policies, and might have the effect of softening monetary policy, and not just in the US.

By contrast, although Clinton is the continuity candidate, to the extent that the markets are already giving some weight to the possibility of Trump winning, then market reactions to a Clinton win would be the opposite of the ones described above for a Trump victory.

If none of this sounds exciting, imagine how things would be if the result were indecisive. Do you remember all those "hanging chads" that made the outcome of the Bush/Gore election unsure? Elections: don't you just love 'em?

- Daily Telegraph UK

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