What do Trump, Salvini, Orban (to name a few) have in common? They are “populists”. Populism has become a more common word in the past couple of years and in this blog post we will try to understand what the word actually means and what lessons from the past can be influential in order to understand what to expect from our modern-day populists.
The Populist Phenomenon
Populism is something that has not been seen since the 1930s. Ray Dalio has been interviewed recently and always refers to that era as the most relevant for understanding today’s political landscape. As we will notice, Populism doesn’t come out of nowhere: its’ roots lie in the economic conditions of a nations’ population, conditions that take years to bring fourth and that become evident when it’s too late and the trend is already in motion.
The graph below, put together by the team at Deutsche Bank, shows how support for populist parties is at a multi-decade high, and is in fact just below the level of the 1940s.
The commonalities between the 2 populist periods seem to be:
A) Income Inequality
B) Government perceived as working against the people. I’m taking some liberty and expanding on this concept in order to make it “tangible”. Government cannot produce anything, by definition. It simply collects taxes and redistributes in ways that seem necesary. Governments can do some good, by maintaining law enforcement, hospitals, public infrastructure, but also (and most importantly) by promoting productivity growth. However, that is NOT what has been happening. It seems that government has expanded too much, and is absorbing too many resources. The charts below are relative to the USA (because it’s always easier to find data for the USA rather than other countries for some reason) but the trend is seen across developed nations.
C) Perceived cultural threats from immigration. We understand this well here in Europe, with the massive inflows from Africa in recent years which have led to many political battles.
D) Anti-Establishment Sentiment. This is the perception that people in power are very much detached from the common joe, and becomes evident with civil unrest (strikes, riots, etc.).
The economic pressures build, and the people vote for charismatic leaders that cater to their needs: protectionism (vs. immigration), nationalism (vs. exposure to other countries’ woes), tax cuts (vs. the previously large government), increased military spending (given the protectionist impulses).
Leaders with strong opinions influence the population by increasing the polarization of views. There seems to be more of a “with us or against us” herd mentality that forms and this promotes clashes both within the country and between countries.
The danger is self-evident: as civil unrest (strikes, protests, etc) grows, there is more pressure to dominate the masses and suppress them. In the past, this kind of civil unrest prompted democracies in Italy, Germany, Spain, and Japan to choose dictatorships because there was an urgency for firm decision making, compared to the more “tolerant” democratic behaviour.
It follows that the real tell-tail for monitoring the severity of the situation resides in the way civil unrest is handled. If populism is a reaction against the elite and the “system”, it follows that the (political) elite and must weather the storm if they want to avoid potential civil war or outright dictatoriships. Here are some useful questions to keep in mind:
- are the populist leaders confrontational or flexible? (both domestically and internationally)
- is there any room for debate amongst the opposing forces inside the country – any signs of coexistance – or is there only animosity and mutually exclusive sentiment?
- does the country have a history of political stability through democracy? (obviously in countries such as Germany, Italy, Spain, Japan, etc.) where there has been a dictatorship once, there is a higher probability of seeing another one come to pass.
Campaigns of hatred, strong wording, mutually exclusive options, closure…these are the signs that the situation is heading downhill.
Over to You
Populism is essentially a sentiment of rebellion of the common man against the elites and against the system. Populism does not lead to dictatorships or civil wars necessarily. That is dependant on how flexible the populist leaders are, and how they handle themselves internationally, as well as how they handle the domestic civil unrest.
It does seem that Trump, for example, is much more willing to negotiate with international leaders (look what he did with North Korea!) than European counterparts. It does seem that a nation’s cultural history is influential when evaluating the probability of a peaceful posture rather than a more combative posture.
For a more in-depth understanding, here are the resources used for this article:
- Who is afraid of Populists?
- A Review Of Populism
and for a more complete analysis of economic conditions, please refer to these blog posts:
- What Ray Dalio Can Teach Us About Economic Success
- Basic Economics for Traders: How Policymakers Influence The Economy
- Basic Economics for Traders: Forecasting with Monetary and Fiscal Policy
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.
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