In this week's blog, we examine private credit markets, which are now estimated at over $3 trillion, according to industry research by the Alternative Credit Council (ACC). With business booming, what effect could the incoming Donald Trump administration have on that? Will there be a knock-on effect across all global lending markets? First, though, let's begin this story in the 1980s.
"Reaganomics" refers to the economic policies championed by President Ronald Reagan during the 1980s, centred on reducing government intervention and fostering free-market growth. Rooted in supply-side economics, these policies aimed to stimulate economic expansion by prioritising tax cuts, deregulation, and reduced government spending. Reagan believed lower taxes would bolster businesses and individuals' investment, leading to job creation and economic prosperity—a much-debated concept known as “trickle-down economics.”
A cornerstone of Reaganomics was the Economic Recovery Tax Act of 1981, which slashed income tax rates and provided incentives for investment. Additionally, the administration sought to curtail federal spending, especially on social programs, while increasing defence expenditures to counter the Soviet Union during the Cold War. Reagan also promoted deregulation, reducing federal oversight in banking, telecommunications, and transportation industries. Reaganomics had a profound impact. Supporters credit it with reducing inflation, spurring economic growth, and creating millions of jobs. Critics argue it exacerbated income inequality, ballooned the national debt due to high military spending, and prioritised corporate interests over working-class needs.
Now, we jump into our 1980s "Back to the Future" DeLorean and fast-forward through time back to 2024, to the era of "Trumpism." What are their lessons in the past as to what could unfold over the next four years? Trumpism and Reaganomics share core conservative principles, such as tax cuts and deregulation, but differ in scope and emphasis. Reaganomics focused on supply-side economics, reducing taxes broadly and promoting free markets. Trumpism historically combined tax cuts, notably the 2017 Tax Cuts and Jobs Act, with populist trade policies like tariffs. Reagan emphasised global free trade and alliances, whereas Trump favoured protectionism and “America First” policies. Both prioritised business growth, but Trumpism leaned heavily on nationalist rhetoric and immigration restrictions. While Reaganomics celebrated limited government, Trumpism embraced more direct executive action, reflecting shifts in Republican priorities over time.
So, how will this impact lending and credit markets? Ultimately, it may have a broader impact on the intertwined economies. The U.S. and UK economies are closely correlated due to strong trade, investment, and financial market linkages. However, while one economy can influence the other, the degree to which it can pull the other into a recession depends on several factors. The U.S. is one of the UK’s largest trading partners. Economic slowdowns in the U.S. can reduce demand for UK exports, affecting growth.
Similarly, UK downturns can impact U.S. companies operating in or exporting to the UK. The financial markets in both countries are interconnected, with London and New York being global financial hubs. Economic shocks in the U.S., such as stock market crashes or Federal Reserve policy changes created by political change, can ripple through UK markets, affecting credit availability, investment, and consumer confidence. Importantly for private credit markets, cross-border investments mean that recessions in one country can lead to asset devaluations and reduced investor confidence in the other. For example, U.S. economic troubles can reduce foreign direct investment in the UK and vice versa.
If the “Reganomic” strategy of tax cuts, deregulation, and reduced government spending is somehow muted by an insular and nationalistic approach in the modern Trump era, a U.S. recession is more likely to impact the UK because of the larger size and global influence of the American economy. U.S. economic contractions can lead to reduced global demand, capital flight from riskier assets (including UK investments), and tightening global financial conditions. However, there is no evidence to suggest that even if we see inequality rising stateside due to these interventionist policies, typically in the short term, it's about wealth creation, economies, and confidence bolstered, creating a healthy market for global investment. To put it simply, rightly or wrongly, extensive wealth is created in those types of economies.
By emphasising strong economic growth and deregulation in the U.S., Trump's policies could encourage global investment in stable economies like ours. If the U.S. economy remains robust, wealth generation among investors might spur demand for UK properties, particularly in high-value areas like London. Additionally, a strong U.S. dollar, a hallmark of Trumpism, could make UK real estate relatively affordable for dollar-based investors. This influx of foreign capital could bolster the housing market, not just by creating a more substantial bid but by creating competitive price movement in competing sectors of the mortgage market. On the lending front, the Trump administration’s favourable stance towards financial markets could promote liquidity and risk appetite among global lenders, feeding into all sections of the alternative lending markets.
There is also a lead-by-example element in play here; even though we are uncorrelated in our policymaking and governance, seeing a country embrace progressive attitudes to financial innovation will impact our domestic government's decisions. The Trump administration supported fintech and modern financial services by fostering innovation and reducing regulatory barriers. It prioritised a business-friendly environment, encouraging technological advancements in banking, payments, and lending, and by balancing innovation with consumer protection, it historically enabled fintech to thrive, contributing to a dynamic financial ecosystem that blended traditional services with modern technological solutions. These exciting policies and initiatives could be adopted here in the UK if proven in this second term to yield results, and P2P only ever stands to gain from that as a player in the ever-changing technological landscape.
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