Bewildered by Brexit? Traumatised by Trumpism? Blame monetary policy

Donald Trump and Nigel Farage © Getty Images
Brexit and Trumpism: the causes are the same

At the Beyond Borders festival at Traquair House last week, a panel of Americans discussing Trumpism agreed between them that America has “lost its soul”. What other reason could it have for even beginning to think about voting for someone as totally nuts as Donald Trump?

They are wrong, of course. America hasn’t lost its soul, it’s lost its expectation of regular real wage increases. And it is behaving exactly as people who have made losses behave. It is doubling down to try and get those losses back.

Think of this simply in terms of money and it makes sense. There have been countless studies into the way we think about losses and the consensus is clear: we get much more pain from a loss than we do joy from an equivalent gain. Drop £20 in the street and you will lose more satisfaction than you would gain were you to randomly find £20 in the street.

The result is that we do everything we can to avoid losses. We are naturally cautious if we think there is chance of making a loss. And the really interesting bit: once we have made a loss – once we are in a ‘loss frame’ – things change; then we will take a bet that comes with the possibility of a much larger loss so as to not have to accept the original loss.

It is why people drive faster after a traffic jam than before one. It is also is one of the reasons people hold on to stocks long after it is clear they are no hopers (they wouldn’t dream of buying them, but they won’t sell them).

And it could be why those who feel that they have lost out from globalistion – lost out as extreme monetary policy has made the price of assets they don’t own boom; lost out as the bankers they blame for the GFC appear to have got away scot free; and lost out as rising public deficits have hit their public services – appear to be prepared to bet on hugely uncertain and potentially volatile things that don’t make much sense to those who haven’t lost out. Hello Brexit. Hello Donald Trump.

This is a conclusion the US press are beginning to come too (I’ve seen articles linking Trumpism to classic financial loss aversion as first noted by Daniel Kahneman and Amos Tversky in the New Yorker and in the Washington Post). And we are coming to the same conclusion here.

In a debate at the FT Weekend Festival on Sunday, I sat on a similar panel to the one I listened to in Scotland. We came, I think, to the correct conclusion: Trumpism (loosely defined as the revolt against tin-eared elites across the West) isn’t about soul – or anything half as complicated. It’s about low growth, the policies the monetary and fiscal authorities are using to try and fix low growth and the very depressing fact that those policies aren’t working.