Opinion | The economic consequences of Trump’s Twitter-happy ways4 min read . Updated: 01 Oct 2019, 10:50 PM IST
The president’s use of social media to fire missives has driven policy and economic uncertainty in the US to record highs
Remember the bizarre “covfefe" tweet by Donald Trump in May 2017? It was the typo to beat all typos. The US president had tweeted to complain about negative press coverage—but the last word came out as covfefe, providing political satirists a rich vein of gold.
Trump has produced more than 10,000 tweets since moving into the White House, and economic issues have become more important in recent months. Tweets about the ongoing trade war with China obviously dominate his handle, though Trump has of late also shifted some of his attention—and ire—to the US Federal Reserve for its refusal to bring down interest rates as rapidly as he wants the central bank to.
His frequent Twitter missives have thus had a deeper economic impact than providing source material for late night comedy shows. Financial markets have moved based on what Trump tweets. The message is often erratic. Investment bank JPMorgan Chase has recently developed a Volfefe index to assess the impact of US presidential tweets on the financial markets. Volfefe is a combination of “volatility" and “covfefe".
Analysts have examined the effect of 4,000 tweets by Trump that were not retweets issued during Wall Street trading hours since the beginning of 2018. His tweets with keywords such as “China", “products", “billions" and “Democrats" tend to lead to spikes in the implied volatility of two-year and five-year bonds in the US. Meanwhile, CNBC has reported that Bank of America chief equity strategist Savita Subramanian has written in a note that, “since 2016, days with more than 35 tweets (90 percentile) by Trump have seen negative returns (-9bp), whereas days with less than 5 tweets (10 percentile) have seen positive returns (+5bp)—statistically significant."
The erratic tweeting by Trump is part of a far bigger phenomenon—the sharp increase in global policy uncertainty. Consider a recent paper published by the National Bureau of Economic Research by Steven J. Davis of the University of Chicago, who is part of a team that has developed a policy uncertainty index based on the frequency with which certain keywords are used in newspaper reports. This index tends to spike around big political, economic and strategic events. The past decade has seen some of the highest levels of US economic policy uncertainty in six decades. The recent uncertainty is high even by these elevated standards. US trade policy is now a new source of uncertainty. As Davis writes in his paper, “Under President Trump, tariffs are threatened, announced, delayed, reversed, announced again, imposed, and removed—often in quick succession. Some countries get tariff exemptions, some don’t. Exemptions vary in duration, and they come and go in a head-spinning manner."
A lot of the historical data on economic policy uncertainty is now available online at www.policyuncertainty.com. Global monthly policy uncertainty index hit a peak of 348 in July. Compare this with the level of 198.97 in September 2008 when the US financial system came close to a collapse, or even the level of 304.74 in December 2016, soon after Trump won the US presidential election.
The US policy uncertainty index is also at a record level, though not too far above the previous high in July 2011. A look at other countries shows that economic policy uncertainty is generally going up. This is especially true of China. Its policy uncertainty index has gone up sharply since December 2017. UK saw a spike just after the Brexit vote in June 2016. It has come down since then, but is rising again as the deadline for leaving the EU gets closer.
And what about India? It is something of a global outlier right now. Policy uncertainty was at its peak in 2011 and 2012, when the economy was hit by a series of policy shocks from the government as well as the courts. This was the period of policy paralysis as well. The index saw peaks of 272.87 in July 2011 and 283.69 in May 2012.
Policy uncertainty as measured by this index has come down sharply. It is surprising that it went up to just 117.89 in November 2016, the month of the demonetization shock. It is now at 81.88.
The upshot: India has managed to avoid major policy uncertainty at a time when the rest of the world is being rocked by issues such as trade wars, financial stress and Brexit. Good economic policy should be predictable, and even policy changes should be clearly communicated. Trump seems to have thrown this bit of received wisdom into the dustbin.
For example, modern central bankers have used forward guidance—or what is more colourfully called open mouth operations—to move markets without actually using traditional policy instruments such as interest rates or open market operations. But erratic communication can have exactly the opposite effect. As a wit pointed out, borrowing from a famous song by the Beatles, Trumpian communication is not a case of “Speaking words of wisdom, covfefe".
Niranjan Rajadhyaksha is a member of the academic board of the Meghnad Desai Academy of Economics