9 minute read

In a wide-ranging interview, influential economist Pippa Malmgren considers the Trump presidency, Brexit and the future of capitalism.

As an advisor to former US president George W. Bush and a current non-executive director of the Department for International Trade, Pippa Malmgren is better placed than most to opine on two of the main sources of uncertainty in the global economy – Donald Trump and Brexit.

While she does not discount the risks presented by both, Malmgren is less pessimistic than many. Of Trump, she argues he could “reach a complete standstill in the Oval Office, accomplish absolutely nothing and the economy will still probably get better because the US is more competitive again”. As for Brexit, Malmgren is amazed that “people here [in the UK] and in Europe think the fifth largest economy in the world is about to slide into the North Sea and simply sink”.

In addition to serving on several advisory boards, Malmgren founded her own economic advisory firm, DRPM Group, and commercial drone manufacturer, H-Robotics.

She spoke to AIQ about the interplay between politics, policy and economics, and why technology is the key to solving, rather than exacerbating, inequality. The views she expresses are her own.

The Donald Trump presidency has been more of a rollercoaster than perhaps anyone could have anticipated, with the threat of impeachment continuing to hang over him. Do you expect Trump will see out a full term in office and run again in 2020?

As long as the Senate is Republican, it seems almost impossible to imagine an impeachment will occur. We’ll see what happens in the mid-term elections. If the Senate goes Democrat, then all bets are off.

Yes, there are allegations of collusion with the Russians prior to the 2016 election, but it remains doubtful if these will result in legal actions against the president. It is really interesting that Vice President Mike Pence is now operating as the effective president. He’s the one holding the meetings and doing the day-to-day work while Trump swans in and out.

Pence is already doing fundraising dinners at $5,000 a head. Now why would he be doing that if he weren’t preparing to run for office in 2020? I suspect the more likely outcome is that although things get messier, Trump makes it to the end of his first term but Pence becomes the Republican nominee in 2020.

Could the US economy suffer if things get ‘messier’ for Trump?

The economy is doing fine and will continue to do so regardless of who is president. I don’t buy the story that the only reason the stock market is up is because of the promise of tax cuts. The reality is that some $18 trillion was thrown into the world economy in the aftermath of the financial crisis and that money is finally starting to come off the side-lines and go to work. That has made the economies of the world perform better than anyone expected.

Furthermore, the US is remarkably competitive again, with wages in China having increased. Trump can claim “It’s all my doing”, but it isn’t really; the economy was getting better anyway. So he can reach a complete standstill in the Oval Office, accomplish absolutely nothing and the economy will still probably get better.

Do you expect the populist forces that put him into power to dissipate?

As the economy gets better you would assume they would dissipate, but American society has become so splintered; creating gaps between the haves and have nots. An improving economy can help, but I’m not sure that will be enough to fix the divisions that are so evident now.

Could an even more extreme candidate emerge victorious either on the left or right?

An even more extreme version of Trump is a real risk. The American public elected Barack Obama because he stood for change, but when he left most people had the feeling he didn’t change things enough. Then they elected a guy who said “I’m really about change”, and for those who supported him, their feeling is that he’s not being permitted to change things enough. They think he is hamstrung by the system.

So one wonders what version three of this is going to look like. It is possible that we don’t go back to normal, but keep electing candidates who promise radical change. Bernie Sanders is a good example. His version of change is on the left but it’s equally radical. The right would call him a communist; he’s all about giving away free money to everybody and nationalising everything, but equally it’s just radical change. So we could be in a period where we keep electing radical-change leaders but they all want change in different directions.

I don’t see us veering back towards the centre ground for some time. It’s an existential period in American history when people are not just questioning the left or the right; they’re questioning the entire system. They’re questioning capitalism; they’ve lost their faith and trust in government and the courts. They’ve lost trust in the media; they’ve even lost trust in the Church. This is a global phenomenon. We certainly see the same breakdown of trust in Europe.

In fact, there’s only one institution left where we still see a high level of public trust and that’s the military.

My book Signals was about how debt is causing this. Debt is like a silent wrecking ball that breaks the promises holding society together. Every time a promise is broken – as people are told you have to retire later than expected or you’re not going to get the NHS service you thought, or your trash isn’t going to be picked up as frequently as promised – that’s when the whole society starts to question the system, not just the players in it.

Given Trump’s statements about institutions such as NATO and the World Trade Organisation, could the global architecture created by the US following World War II begin to disintegrate?

Globally we see a huge questioning of these structures. You could argue that is what the Chinese are doing with their Belt and Road initiative. They’re saying: “Look, we tried to reform and repair the IMF, World Bank and these other institutions that are supposed to prevent massive global financial crises, but it turns out the US wouldn’t let us do it so we’re creating our own.” They created the Asian Infrastructure Investment Bank, which opened last May with a balance sheet larger than the World Bank.

Trump is no fan of free trade. So we’re absolutely at risk of seeing the erosion of the rules systems that have been in place over many years. On the other hand, maybe part of this happened because we took it for granted that everybody understood why those rules were such a good thing and this is the opportunity to go back to the public again and explain again why it serves their interest.

It’s unlikely the West descends into chaos. I’m optimistic about the ability of the public to continue innovating and building tomorrow’s economy, whether governments get their act together or not. This is the thing; when people realise governments, pensions and social security are all underfunded, they start to say: “I’d better go and build my own future and not depend on the government to save me.” One of the weird outcomes from this is that you get more innovation, not less.

Trump and ‘Brexit’ to some extent reflect people’s questioning of the merits of capitalism, with particular concern about rising inequality. What can countries do to tackle that?

There’s only one way to address inequality, which is to open up opportunity. We pushed people to go to university and follow that with a white collar career, but that is not the only path to success. We have not given people any practical or vocational skills. This leaves them unable to make a living, which is a shocking and terrible mistake.

If you put vocational skills back into schools, I believe inequality would diminish and you’d get a lot more innovation. That doesn’t just come from the computer scientists at Berkeley: it also comes from people just making things and working with engines and knowing how to weld metal.

There is a rising risk of geopolitical conflict. We definitely see this between the US/NATO and Russia; and between the US and China as they spar over the South China Sea; and we see it between India and China in the Himalayas.

You have written and talked extensively about the benefits of technology. Do you have any concerns that technological advancement is exacerbating inequality?

The reality is that the economy constantly forces us all to change. But the speed at which this is happening, against the backdrop of inequality, is definitely going to make people agitated. We’ve got to get people into the new technology faster because it will create new jobs and new things to do.

In fact, I think it’s incredibly democratising and empowering, because you won’t need to be an ‘expert’ to employ this technology or benefit from it. It has the ability to narrow inequality, and raise the incomes of the people at the low end. But it can be sold the other way too, so it’s a big discussion that society has to have about how it gets deployed and who gets access to it. Again, it’s about creating opportunity.

Wages are rising for the first time in a long time. The question is whether they are rising enough. Wages as a percentage of GDP have been at an all-time low and profits at an all-time high. Even in a capitalist system, that’s not sustainable. So the fact that wages are beginning to rise for lower-income people is a symptom of the fact that change is beginning to happen. And that’s why inflation is starting to pick up.

I think this is the beginning of the reversal of the longer-term trend, but the question is will it narrow the difference between low incomes and high incomes enough to make the problem go away. I think it can but it’s going to take some care.

Turning to Brexit, what’s the risk of the UK leaving the EU with no deal and how damaging would that be for the economy?

My views on this are my own and don’t reflect the department I work for. But as an American and an outside observer, I find it fascinating that people here and in Europe think the fifth largest economy in the world is about to slide into the North Sea and sink. It makes no sense given that money is like water and it always flows to wherever it faces the least resistance. So where you have the lowest taxes, least red tape and most profitable opportunities, that’s where it’s going to go.

What I hear from investors around the world is that they’re deploying more capital into Britain because they think the British are never going to raise taxes above the EU level; it’s definitely not going to have more red tape than the EU; and the economy has become competitive again, in no small part because its currency has devalued.

So you don’t think it’s naïve to think the UK will be able to negotiate favourable trade deals with the likes of China and India?

I think the current trade frameworks are sufficient for Britain to be able to export to the world much more successfully than it does today and that’s the key point. After all, fewer than 20 per cent of British businesses export at all. This can be improved. The British are used to exporting to the EU because it was easier. But there’s a whole world out there and there is a rules system governing that trade. It may not be as favourable as the trade rules under the EU, but it’s not necessarily unfavourable either. So I’m optimistic British exporters will figure out how to make money.

As for Europe, has populism disappeared?

I don’t think so. I was surprised people thought the election of Macron had ended it. What we’re actually seeing is that Macron’s popularity has fallen twice as fast as Donald Trump’s in a shorter period of time. So pinning all your hopes on that seems unwise. Everyone thinks populism is a local phenomenon, but it isn’t; it’s global and unfortunately I think it has more life in it. We can neither ignore it nor pretend it will go away: we need to deal with what’s causing it.

In your book Signals, you talked about the negative consequences of quantitative easing. Is there any alternative?

I didn’t say central banks shouldn’t have done QE, but they ought to have started reversing it a lot sooner. The problem is we’ve put $18 trillion into the world economy and now they’re saying: “We created an ocean of liquidity and we’re going to take two cups of water out of it.” Tiny and well-broadcasted rate hikes don’t really change anything. The policy of keeping liquidity in the system is working. Inflation is starting to appear, which is the purpose of QE. But inflation, even if it is small, brings adverse social consequences. So we should start to think how are we going to reverse out of this.

My view is that they’re just not really doing that. Central banks are trying to pretend one or two rate hikes fixes it but it doesn’t. They haven’t even normalised policy, let alone tightened.

Are economies and markets capable of weaning themselves off central bank support?

I believe so. Once you start hiking rates (too late) and inflation is already starting to rise, investors decide they can’t hold cash any more and need to invest in the real economy. That’s why people are buying stocks; they’re buying real assets like property; they’re investing in businesses, which was exactly what central bankers had hoped for. I’m just saying you can have too much of a good thing.

Let’s say you’re wrong and there’s another recession around the corner. What can policymakers do in that eventuality?

The consensus view is that we’re about to have a stock market crash, we’re going into a serious recession and policymakers will have no tools this time. But what the market doesn’t understand is that the best tool a policymaker has is a pen in his hand and a flag at his back. With these, policymakers can write legislation; you can invent assets out of nothing; you can increase the size of the government’s balance sheet many times over. The power of government is almost endless when it comes to this.

If you were an investor right now, where would you be putting your money?

The real economy is performing better than financial assets. Owning real businesses with real cash flows makes a lot more sense to me than owning stocks and shares in big, established businesses just because they’re big. I think there are more returns to be had in building real businesses than just investing in them, which is a big change. We are seeing almost a reversal of the predominance of finance. We’ve had 30 years of financial markets producing the best returns. I’m arguing this will get you something if you invest in stock markets, which, contrary to the consensus, I believe will keep going up. But the building of companies will get you more. So let’s just say sweat equity is now more valuable than financial equity. That’s one reason I am building a British manufacturing company in robotics that makes commercial drones: I am guessing the payoff will be far better than anything the stock markets can offer. 

Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at September 11, 2017.  This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

Aviva Investors Global Services Limited, registered in England No. 1151805.  Registered Office:
St Helen’s, 1 Undershaft, London EC3P 3DQ.  Authorised and regulated by the Financial Conduct Authority and a member of the Investment Association.  

This article is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited for distribution to institutional investors only. Please note that Aviva Investors Asia Pte. Limited does not provide any independent research or analysis in the substance or preparation of this article. Recipients of this document are to contact Aviva Investors Asia Pte. Limited in respect of any matters arising from, or in connection with, this article.

Issued by: Aviva Investors Asia Pte. Limited, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and is an Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583.

Compliance code: 20171023_07