Investors have historically looked to the US as a safe bet, but rising social divisions could have a big impact on its economy over time, according to economist Sam Wilkins.
Speaking at Citywire’s Latin America Retreat in Montevideo, Uruguay, Wilkins, who is a senior advisor at research firm Oxford Economics, said populism created the mobilization of opposing social groups, which eventually undermines democratic governments.
Referencing a report from Bridgewater’s Ray Dalio that compared the economies of 14 populist leaders in across 10 countries, Wilkins said populist leaders often created boom and bust cycles in their respective economies.
‘The populist comes in and they are a lot more moderate than everyone expects,' he said. They like to reward their supporters with some financial benefits – there is a boom. Over the longer term the polarization of society takes its toll [causing the economy to fail] and then there’s a bust.’
He said US president Donald Trump was a ‘textbook populist’ and this puts the US in a less stable position.
‘The United States is and has been for a long time a safe haven market, but over the long term we’ve seen what happens because of populism around the world,' said Wilkins. 'Populism leads to this polarization which undermines centralism, mobilization undermines centralism…US society I expect overtime will become increasingly polarized. Democracy is strong but in the long term do not necessarily think of it [the US] as a safe haven now there is genuine political risk.’
Wilkins (pictured above) said that populist politicians often did not have a strong policy platform because they do not want to alienate voters and only take really radical decisions once they are ‘up against a wall.’
He warned impeachment could be Trump’s trigger.
If Trump was to implement some of the policies he campaigned on such as a trade war with Mexico and China and cut off immigration completely, the US labor supply could go flat, he said.
According to Oxford Economic’s data models this could cause a short-term, 20% shock to equity prices.
‘If there is an impeachment attempt against Trump, or it looks like there is an attempt—that’s when the risk of this scenario becomes pretty high,' he said.