As Donald Trump prepares to move into the White House, investors are becoming increasingly anxious that his economic policies might come to resemble those of former US President Richard Nixon, rather than those of Ronald Regan's presidency.
The US share market rallied strongly after Trump's surprise victory last November, as analysts pointed out that Trump's promises of huge tax cuts, less regulation and increased defence spending meant that Trumponomics had a striking resemblance to Reagonomics.
But sentiment has since soured, leaving the blue-chip Dow Jones Industrial Average in negative territory for the year, as analysts have highlighted the parallels between Trump's economic agenda and those of Richard Nixon.
After all, Trump's insistence on a better deal for US exporters and his threat to slap hefty tariffs on imports is reminiscent of Nixon's New Economic Policy, released in August 1971, which introduced a 10 per cent surcharge on import duties, and which effectively ended the ability to convert the US dollar into gold at $US35 an ounce.
In addition, Trump's comment this week that the US dollar was already "too strong" reminded some analysts of a similar remark made by Nixon's Treasury chief John Connally. Back in 1971, Connally shrugged off complaints from other countries about the US devaluing its currency and quitting the gold standard, saying "it's our currency, but it's your problem".
But it's undoubtedly the fear that the US central bank is again on the verge of politicisation – as it was during the Nixon era – that has investors most worried.
'Audit the Fed'
After choosing Arthur Burns to take over as head of the US Federal Reserve in early 1970, Nixon applied relentless pressure on his appointee to run an expansionary monetary policy aimed at boosting economic activity in the run-up to the 1972 presidential election, in which Nixon was hoping to win a second term. Burns complied, pushing down interest rates, which helped to deliver Nixon one of the largest landslide victories in US history.
But Burns' compliance helped fuel a rise in inflation, with the US consumer price index spiking to 9.6 per cent in 1973 and 11.8 per cent in 1974.
Investors are worried that there are parallels with the present day. Trump and his supporters have been outspoken in their criticism of the US Fed, claiming that the US central bank is controlled by Keynesians and that its policies of keeping interest rates extremely low since the financial crisis and buying up huge quantities of US bonds have created a massive asset price bubble.
Congressional Republicans have already revived legislation aimed at subjecting the US Fed's monetary policy decisions to greater public scrutiny. The "Audit the Fed" measures aren't aimed at the Fed's financial statements which are already audited. Instead, they're aimed at shedding light on how the Fed makes its decisions on monetary policy. Last year, Trump tweeted his support for auditing the US Fed.
Supporters of the legislation argue that the public deserves more information on how the US Fed makes important interest rate decisions, which affect the borrowing costs of households and companies across the country. Opponents, including top US Fed officials, argue that they could result in more political pressure on the US central bank.
The "Audit the Fed" push comes at a sensitive time for the US central bank, which is preparing to discuss how to pare back the huge portfolio of bonds they amassed trying to boost economic growth in the wake of the financial crisis. The Fed launched three rounds of bond buying, known as quantitative easing, that caused the US central bank's balance sheet to balloon to more than $US4.5 trillion ($5.9 trillion).
The process of reducing the Fed's balance sheet is an extremely sensitive one. Investors will be watching very closely, fearful that any misstep could temper a fresh "taper tantrum" – the name given to the vicious sell-off in bond markets back in 2013 when the then Fed chief Ben Bernanke suggested that the US central bank could end the bank's bond-buying program.
Analysts warn that financial markets could again be rattled if there's a suggestion that the US central bank is hurrying to pare back its balance sheet in order to shield itself from criticism by Republican lawmakers and to reduce the legislative push for auditing Fed decision-making.
