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The stories that matter on money and politics in the race for the White House
Global stock markets have just enjoyed their strongest week since November as investors cast aside their recession and yen exchange rate concerns of early August. Very little of substance changed to generate the recovery or, indeed, the crash at the start of the month. Apart from thin summer markets, what this demonstrates is deep uncertainty over the global post-pandemic economy and the prospects ahead.
Across advanced and emerging economies, inflation has improved but remains a little too high, unemployment is generally low, growth rates are variable and public finances are stretched even before the costs of geopolitical tensions and demographic ageing are included. These are not the conditions for stability with a known anchor setting the resting point for real interest rates that will stabilise inflation at full employment.
In the first two decades of this century, financial markets priced ever lower long-term real and nominal interest rates, necessary to offset a glut of Asian savings, the global financial crisis, low productivity and population growth, budgetary consolidation and low inflation. Many of these underlying drivers of the global economy persist, but they have been countered by fears of repeated shocks, fragile global supply chains and occasional excess demand, leading to a more potentially inflationary world with great uncertainty.
A Goldman Sachs study shows that financial markets now expect higher long-term interest rates will be needed to stabilise economies, but few should feel confident that this market assessment will last. More certain is the second finding in the study — that countries could improve their own real long-term cost of finance by pursuing effective economic stabilisation policies. Maintaining low and stable inflation and improving current account deficits was a path to relative economic success.
Although Goldman Sachs achieved these results by comparing countries’ relative long-term real interest rates to the US, it is not much of a stretch to assume that what is good for others also matters for America and the rest of the global economy. Good US economic policy brings down global real borrowing costs, sustains faster economic growth and improves lives. It is therefore hard to overstate the importance of the US presidential election both for America and other countries.
As she prepares to accept the Democratic party’s nomination this week, Kamala Harris has been setting out her economic prospectus. She has given a full-throated endorsement of Federal Reserve independence to meet its dual mandate of maximum employment and price stability. She also announced a welcome ambition to break down barriers to house building. The latter policy is not all it seems, however. Promising to ensure an additional 3mn “affordable” homes are built for the middle class over four years was disappointingly timid. The US added 6mn housing units since 2020 and currently has an annualised housing completion rate of 1.5mn a year.
Similar to Democratic nominees in every presidential election, Harris wants to tax the very rich more, using the proceeds to lighten the burden on middle class families, especially those with children. Whether this happens will rest on the balance of power in Congress.
More concerning is her choice to flirt with leftwing economic populism. Her vague talk of policies that would equate to price controls in groceries and rent controls represents a dangerous triumph of hope over long experience of their failures. It is just possible to read her words as a firm fight against anti-competitive practices with the tools of standard competition policy, but the fact she chose to maintain ambiguity must be a concern.
The risks of a Harris presidency pale into insignificance compared with those from Donald Trump if he was re-elected. The former president has made it clear that he wants a say in monetary policy decisions because these rest on “gut feeling” and he has the stomach to get them right. Since Trump has always favoured low interest rates when in power and no cuts in rates before November’s election, US inflation control is definitively on the ballot this autumn.
More than that, his economic populism extends to well-understood and refuted concepts such as the fact that higher tariffs hit US consumers and would raise prices further. Calling last week for “10 to 20 per cent tariffs on foreign countries that have been ripping us off for years” was dangerous for the US and global economy. With Republicans much keener on tax cuts than spending control, no one should be sure of US economic stability under a Trump presidency even if many of his instincts could be checked by Congress.
When the choice is between a candidate that instinctively blames corporate excess and exploitation within a market system for inflation and one that trusts his own instinct and pet theories ahead of decades of experience, it is not surprising that financial markets are jumpy.
The post-election outcome is highly uncertain, not just regarding who will win, but also what they will seek to implement and whether they have the legislative power to do so. There is bound to be more volatility in the months ahead. If you think that none of this sounds reassuring, you would be correct.
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