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Populism driven by debt, low growth and a broken social contract

US President Donald Trump may perplex and exasperate the old order of established geopolitical interests, but his maverick style may turn out to be a boon for the global economy.

That’s the word from Dr Pippa Malmgren, a former US presidential adviser and founder of DRPM Group and now a consultant to the British ministry of defence. Dr Malmgren was speaking at the annual i3 Summit presented by Sanlam Investments and Glacier in Johannesburg last month.

Malmgren said Trump is the ‘Uber’ of politics. He is disintermediating traditional media companies by posting directly on social media; he’s shrinking the government’s staff constituent; and also declared it his aim to disintermediate Washington. And those who are decentralising power in America are clearly winning. ‘We will continue to see a president who thinks his job is to cut deals,’ said Malmgren. ‘And markets like deals.’

One of the proud products of the rise of populism, PresidentTrump, has almost stumbled upon an unexpected trade and military deal with China as a result of North Korea’s recent sabre-rattling.

‘Nuclear weapons are not the main issue,’ said Malmgren. ‘China wants most of all to protect its borders – its biggest fear is 25 million refugees from North Korea, which would swamp its economy and that of its vital trading partner, South Korea. The tradeoff is for the US to provide a military deterrent in the region, in exchange for participating in China’s grand expansionist infrastructure vision. And stability in the East and the success of the “one belt, one road” expansion is a buy signal for markets.’

Malmgren said China’s ‘one belt, one road’ plan was to develop a vast economic corridor spanning the entire width of Asia to the gates of Istanbul and Cairo, and ultimately into Western Europe, East Africa and even America. Unprecedented expenditure by China on infrastructure, including roads, ports, railways and power supplies would obviously pique the interest of a US president eager to ease the way for US companies to take part in the cross-border bonanza.

‘Financial markets will come to celebrate a situation that right now seems to be frightening,’ said Malmgren. ‘The buy signals should be flashing because of this geopolitical cooperation and coordinated investment in infrastructure.’

Malmgren said the roots of the current global geopolitical realignment were twofold: firstly, Western democracies have been shaken by a populist uprising – ordinary citizens are feeling the debt load weighing down on them and they don’t see how their tax money is benefitting them. Populism is an effort to push the establishment out and bring in ‘new’ ideas. Hence we’ve seen the likes of Trump and Brexit, not to mention separatist movements in Scotland, Spanish Catalonia and high-flown talk of Texas and California seceding from the USA.

‘One can’t underestimate the global scale of pain and angst. Financial markets have been half blind, dismissing it as irrelevant – all they care about is data, polls and quantitative analysis. In the US, nobody can retire at 65 – it’s more like 93. Pension funds are undercapitalised. Wages are falling. People are angry. Governments have broken the social contract with their voters; politicians are seen to be not serving people’s interests.’

Secondly, Malmgren said the angst in the West was the same in China, but the reasons differ. Chinese authorities have, however, recognised this angst – particularly around inflation – and the resultant threat of social unrest. Inflation worldwide is a vice, which destroys hope. The only good thing to come out of this vice is innovation and Malmgren expects to see much more of that in the next few years.

In response to the threat of rising inflation Chinese authorities have been forced to raise wages – raising them five times in three years. But in turn Chinese exports have become uncompetitive. The practical solution, she said, was that China – leading the rest of the world – was preparing to invest in the ‘real economy’ instead of in overvalued stocks or the ‘safe’ but unnaturally low-yielding bond market.

The goal of China’s extremely important ‘one belt, one road’ global policy has been to situate China’s GDP outside the country, effectively exporting capital in order to generate cash flow. In this way it could send excess capacity and labour offshore, promote consumption of Chinese brands and products, and exploit diplomatic and economic ties with the likes of South Korea, Japan and the US.

‘It is bigger than seeking a return on capital,’ said Malmgren. ‘It’s strategic, it’s about finding pathways for assets to come home. China has limited time because of lost competitiveness and is seeing economic threats from countries such as Mexico with its cheap labour.’

China needs allies to move fast. It’s therefore a possibility that China could enter into an alliance with the US to expand its ‘one belt, one road’ policy even further. Enters Trump, a dealmaker and eager for quick-fix solutions, and he desparately needs to deliver on his promises of upgrading US infrastructure. There seems to be a ‘deal’ here – completely opposite to what the world expected.

Malmgren said this geopolitical shift meant investors chasing growth need not invest in mainland China’s stock market. There are new ways to put capital to work and still invest in China, she said, pointing to investable opportunities in Chinese-funded enterprises as diverse as Burmese ports, Belgian rail links and Manchester Airport in the UK – as well as in countries that welcome foreign direct investment such as Djibouti, Madagascar, Tanzania, the Seychelles and the Maldives.

Apart from China’s initiative, Malmgren said it was instructive to study Russia’s ‘Arc of Steel’ attempt to establish military bases in the Arctic, the eastern Mediterranean and North Africa, all aimed at forging ties to exploit fresh resources, which potentially could be a threat to South Africa, as a net exporter of resources.

Malmgren’s prognosis is simple: ‘The world is in the process of forging a new social contract. We’re already in the new Industrial Revolution.’

Malmgren’s view was echoed by Nazmeera Moola, co-head of fixed income at Investec Asset Management, and speaker at the Cape Town event of the i3 Summit. Moola highlighted how the socio-political events of the last decade can be linked to the global financial crisis.

‘History shows that a weak economy is one of the main causes of populism,’ she said.  ‘If growth picks up, we could see a reverse in the current populism trend.’

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Dr Malmgren said most countries are experiencing the same problems due to the re-negotiation of the social contract, and that might not necessarily be a bad thing.

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Economist Nazmeera Moola views the volatility and uncertainty of the current day as a ‘return to normal’. If anything, the 1990s and the 2000s were an anomaly.

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