Trump’s victory and the UK’s vote in favour of Brexit are two of the biggest challenges in recent years to the global economic status quo. One of the main outcomes is a renewed debate about the impact of globalization on the developed world.

On the issue of trade, the move by rich countries to locate manufacturing hubs offshore and the associated loss of jobs in rich nations have both been identified as negative consequences of free trade by populist politicians.

In order to assess the impact of globalization on low- and middle-income households, analysts have used the ‘elephant curve’, which shows how average household incomes have grown between 1988 and 2008 for each part of the global income distribution, from the poorest to the global top 1%. Incomes for the poorest half of the world – typically those in emerging markets, in particular emerging Asian economies – have grown as fast as those of the world’s richest 1%. However, incomes for the lower middle class of the developed world (between around the 50th and 80th percentiles) have at best stagnated. As a result, it highlights how many have missed out on the much-vaunted benefits of globalization, and helps explain the rise of nationalism across the developed world.

However, one of the economists who created the chart has suggested that his research has been misinterpreted. Branko Milanovic, a leading scholar on income inequality, has suggested the problem isn’t trade itself, which has lifted hundreds of millions out of extreme poverty. It’s that countries don’t design policies to support those that suffer as a result of lowering trade barriers. According to Milanovic: “Trade and globalization are forces for good. The problem is that in many instances globalization is implemented in a way that makes the playing field slanted in favour of the rich. Also, the gains from globalization are never likely to be even for all the participants.”

Of course, the rise of populist movements is too complex to be explained by a single graph. There are many other factors at play, including protest votes on existing government policy, and issues connected with immigration. The key question that economists now face is assessing the impact that a more inward-looking US will have on the global economy. If countries begin to renege on trade agreements and begin to raise tariffs, we may see countries enter into a vicious circle of action and reaction, which would ultimately lead to a contraction of global growth. In this environment, everyone loses.

Regardless of the trend towards growing dissatisfaction with globalization, it would be extremely difficult for advanced economies to reverse it now. Those that turn inward may be temporarily successful in boosting growth through growing private and public debt levels, but ultimately risk deep recession as inflation and unemployment begins to rise. An increase in borrowing today by consumers and governments is merely stealing growth from the future. For bond markets, this could lead to a renewed focus on the creditworthiness of government bonds, the traditional ‘risk-free’ asset, resulting in higher yields in the not-too-distant future.

As we’ve already noted, Trump’s election has led many to speculate that the US is likely to shift to a highly expansionary budget policy. Proposed fiscal measures include a reduction in the corporate tax rate to 15% and a decline in the top rate of household income tax from 39.6% to 33%. Trump has also proposed a large increase in infrastructure spending (he likes building walls) and large increases in the defence budget.          

Bond investors are worried that this will further boost already rising inflation. In response, the Fed may be forced to hike interest rates, which could, in turn, lead to a further appreciation of the US dollar. While Fed chair Janet Yellen has stated her intention to remain in post until the end of her four-year term in early 2018, Trump could slam the Fed for hiking rates and putting a brake on his economic growth plans in this environment.

The yen and euro appear particularly vulnerable given the continued expansionary stance of monetary policy set by the Bank of Japan (BoJ) and ECB, respectively. The BoJ’s transition to yield-curve targeting ensures that real yields will drop as inflation picks up, implying that financial conditions will turn increasingly loose as the recovery progresses. There are good reasons to be cautiously optimistic: after all, despite a triple whammy of feeble domestic demand, weak commodity prices, and a stronger yen, Japanese inflation measures are showing early signs of bottoming out. The Japanese government has also approved an economic stimulus package of roughly 5.5% of GDP.

The BoJ’s move to yield-curve targeting is not a new monetary policy development. In 1942, the Fed and US Treasury agreed to cap the long-term US Treasury yield at 2.5%, the 7- to 9-year yield at 2%, and the 1-year rate at 0.875%. The caps on long-term interest rates were never formally announced, perhaps to avoid embarrassment in case the policy proved unsuccessful. The US authorities pursued a policy of yield-curve targeting until 1951, when the Fed became openly frustrated with the constraints on monetary policy associated with the commitment to support yields on government securities and pushed for an end to the policy.

In the UK, Chancellor Philip Hammond’s Autumn Statement confirmed that there will be no budget surplus, there will be looser fiscal rules and lower tax receipts due to weaker average earnings and lower household consumption. In my opinion, the UK government is probably – prudently – holding back some fiscal ammunition in anticipation of the eventual triggering of Article 50 and the two-year negotiating period with the EU.