At the end of the XNUMXth century Europe had fully overcome the Black Death and the demographic crisis of the previous century. The economy is booming even as the political turbulence is intense and unrelenting. Trade takes place along two lines. Along the north-south axis, the production chain starts with English wool and fabrics which are then processed in Flanders, Burgundy and northern Italy. This axis is cemented by the dynastic kinship between the English monarchy and the Dukes of Burgundy. The east-west axis, which runs from Antwerp to Russia, is instead managed by the Hanseatic League, which refers politically to the Empire and focuses on metals and timber.
In 1496 the north-south axis gave life to the Intercursus Magnus, an area of regulated and almost free exchange (which includes Venice and Florence) to which the Hanseatic League subsequently also adhered. As can be imagined, the agreement is extremely complex and, over the years, has undergone continuous modifications linked to the evolution of the political and military framework. In 1506 it was completely renegotiated and the new balance of power made it much more favorable to English interests (so much so that the Dutch controversially renamed it Intercursus Malus) except to return to its original configuration in the following years.
The Intercursus is a relatively free trading area around which an even freer area of smuggling and piracy lives and sometimes thrives. However, the dissolution of the Burgundian duchy and Spanish control over Flanders will put an end to the fascinating experience of the Intercursus. Globalization will project itself on an extra-European scale, but Europe, internally, will once again raise national and regional barriers to the circulation of goods.
The historical experience of the Intercursus induces some reflections. The first is that it is growth that generates globalization rather than globalization that generates growth. In fact, the treaty was signed (by states that would like to fight each other) under pressure from English wool producers and continental processors, both in search of commercial outlets and raw materials after the increase in productivity caused supply to grow, while the increased general welfare has stimulated demand.
The second reflection, as demonstrated by the parenthesis of the Intercursus Malus, is that commercial agreements, even when inspired by the promotion of exchanges, reflect the evolution of the balance of power between the contracting parties with the precision of a seismograph and are therefore constantly renegotiated or applied more or less correctly. The impartial management of commercial disputes by the courts of justice was one of the most thorny issues of the Intercursus experience.
Trump's economic program has been well received by the markets for its tax, deregulation and infrastructure parts. However, there is still a shadow over protectionism. He fears the raising of even very high customs barriers. In reality, analyzing the positions of economists in the Trump area, the effort will not focus on tariffs, which will remain in the background only as a threat, but on two other guidelines.
The first is the fight against multilateral bodies and their self-referential technocracies. It is a question of sovereignty, in hindsight, in which the traditional republican aversion to bodies such as the UN and the International Court of Justice is present. Organisms, it is said, not democratically elected and increasingly intrusive. Large regional or global treaties will therefore tend to be replaced by bilateral agreements.
The second direction is the updating of the bilateral treaties on the basis of the new political will. Traditionally, America has often conceded a great deal to its trading partners relying on the strength of its economy and control of the dollar as a possible remedy for situations of excessive imbalance. The relationship with China, for example, is clearly biased against America. For this reason, the fear of a negative-sum deglobalization for all seems out of place for now. The sum will be zero, but the zero will be the result of a positive sign for America and a negative sign for the rest of the world. The strong dollar will partially balance things out, restoring competitiveness to the rest of the world. But where will the dollar go?
If you look at the fundamentals, the dollar shouldn't appreciate. America is in fact in deficit compared to the rest of the world. Before Trump's unexpected victory, moreover, many houses exchanged the euro for the end of 2017 between 1.15 and 1.20. The Eurozone, in particular, is in a structural current account surplus and it is only due to the now semi-permanent political risks and thanks to the ultra-expansive monetary policy that the euro manages to remain undervalued. Let's not talk about the Chinese surplus, which an accelerated falling renminbi will further strengthen. The strength of the dollar therefore appears to be due to the renewed political dynamism of the new administration but it owes even more to the interest rate differential.
And it is here that the Fed, which has quietly exited the scene in recent months in anticipation of handing back the command post to fiscal policy, comes fully into play. In fact, it will depend on the pace of US rate hikes whether the dollar will overshoot or not. And this is where things get really complicated. The starting point is an ultra-dovish Fed and an ultra-hawkish Trump (more his economists than him, actually). However, the Fed, together with the Supreme Court, is also the only area of power left to the Democrats in Washington. Within 12-18 months the Fed and the Supreme Court will be trumpified, but in the meantime they could do a lot, if they wanted, to weaken Trump and his party.
The Court still has the votes to make unconstitutional the practice of designing electoral districts to favor those in government (a practice that has always been adopted by everyone but which currently favors Republicans) with the effect, in two years' time, of unthreading Congress from Trump and handing it back to the Democrats.
The Fed, for its part, could begin to raise rates more aggressively than the two hikes (in addition to the one in December) already discounted by the market and more than enough to keep everything in balance. Indeed, Trump would be embarrassed to accuse the Fed of being too harsh when he has so far accused it of laxity. However, three or more hikes would lead the dollar to too strong levels and would abort the re-acceleration of the economy, one of the pillars of the Trumpian program. However, if the Fed keeps its promise (made when Clinton appeared to be the certain winner) to go and explore the limit of non-inflationary unemployment, i.e. if it wants to keep the economy warm (as Yellen said before the elections) the increases will be just two and bond and dollar will stop.
Those who lack foresight would therefore do well to leave room for two scenarios, the first that of the overshooting of the dollar and the bond and the second of the bond and the dollar which, after giving a few more weeks to those who were on the wrong side to painfully correct positions, will stop at levels not too far from the current ones. In practice, it still seems early to buy Treasuries and sell dollars. The same logic goes for bags. Many portfolios came light on equities at the election and were blown away by the subsequent rally as the end of the year approaches. The Italian referendum will be the last opportunity to enter, but precisely because many are waiting for it, the reduction, if any, will probably be short and superficial.
