Blame the Fed for Trump's Victory
Worried by the rise of populism in politics? Blame the central banks.
Every populist politician in the world will go to bed tonight dreaming the dream after Donald Trump's surprise victory in the U.S. presidential election. Every member of the so-called elite -- however you choose to define that amorphous concept -- needs to take a long, searching look in the mirror and ask whether the few have seriously miscalculated the mood of the many.
There's a strong argument that politicians are only now feeling the backlash from the economic crisis of almost a decade ago. And in particular, there's a case to be made that the so-called distributional effects of the monetary policies pursued by the world's central banks in an effort to stave off recession and avert deflation have directly contributed to the current disaffection with the status quo.
Trump's core economic message -- that the middle class hasn't had a pay rise in more than a decade -- clearly resonated with the U.S. electorate. The same is true in much of the rest of the world. For many voters, it feels like capitalism hasn't been delivering the goods for a long time.
In the boom times, most of the benefits accrued to capital, rather than to labor (which Thomas Piketty famously argued is a bug of capitalism). In the hard times that followed, quantitative easing and record-low interest rates from the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have mostly helped asset prices -- which isn't much help to those who don't own financial assets.
Early indications are that 53 percent of Americans aged 45 and over backed Trump; that's the demographic seeing its retirement planning undermined by the lowest bond yields the world has ever seen, a direct consequence of central bank policies.
Trump's victory has been applauded by extremists ranging from former Ku Klux Klan leader David Duke ("One of the most exciting nights of my life") to Greece's Golden Dawn ("This was a victory for the forces which oppose globalization and are in favor of clean ethnic states"). But it would be wrong to assume only crazy extremists voted for Trump and the U.K. Independence Party and Brexit, or might vote for Marine Le Pen, the Five Star Movement and the AfD party in French, Italian and German elections, respectively.
The first European victim of the populist backlash is likely to be Italian Prime Minister Matteo Renzi. His Dec. 4 referendum is ostensibly about constitutional reform; instead, it’s likely to become a plebiscite about the nation's 11.7 percent jobless rate, the fragile state of its banking system and the wrangling with the European Commission over its budget plans. Renzi has promised to quit if he loses the vote; the most recent polls show the "No" campaign in the lead.
I chatted electronically with Darren Pollock, a fund manager at Cheviot Value Management in Beverly Hills, California, before the U.S. election. He argues that central bank interference in the economy is akin to putting out small forest fires; it stops the natural cleaning processes that a larger conflagration brings:
In the last few years and ongoing, so many citizens are one way or another casting protest votes at their politicians. But I'm not sure the politicians are any more worthy of protest than those in the past. If not for the central bankers who have hampered their economies, we may not be seeing such dissent in so many parts of the world.
While I have every sympathy with the incredibly difficult job central bankers have faced in recent years, mostly without any fiscal help from their governments, the benefit of hindsight is making it harder not to feel that quantitative easing may have done more harm than good.
Trump's victory, Britain's Brexit vote and the rise of populism all around the world suggest that large swathes of the electorate may be as dissatisfied with monetary policy as they are with their current political leadership. Voters, though, get the chance to change their governments; they don’t have the same opportunity to expel the unelected guardians of monetary stability.
I've written before in favor of the so-called neo-Fisherism argument that low interest rates may turn out to be the problem, not the solution, to a feeble economy. Maybe the election of President Trump is evidence that central banks should at least be debating a different course of action.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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