Foreign Policy

The markets need much more than only a Biden win

This article is part of Election 2020: America Votes, FP’s 24/7 coverage of the US election results as they come in, with brief dispatches from correspondents and analysts from around the world. The America Votes page is free to all readers.

As we wait for the US election result, the global economy is drifting listlessly, paralyzed by the shock of COVID-19 and geopolitical and political uncertainty. As Gita Gopinath, chief economist of the International Monetary Fund, warned, we are in a liquidity trap – a situation with chronically low interest rates and depressed demand. Former US Treasury Secretary Larry Summers spoke of a monetary policy black hole.

The way out is to increase aggregate demand. With the private sector in shock, government taxes and spending are vital. This is what gives the US elections their capital economy significance. No other government, not even the Chinese, can compete with America’s fiscal influence.

The nightmare scenario is that America’s choice will make things worse. A controversial election followed by a constitutional crisis would heighten the need for security, which would further increase the demand for liquidity and drive the dollar higher. This is the perverse logic of global dependence on the US currency as the de facto global currency. A crisis increases the demand for dollars, even if the crisis originated in the United States.

The second worst situation would be a split balance of power in Washington, with the Democrats in control of the White House and Mitch McConnell in the Senate with a policy of disability. This would reduce the scope for an appropriate response from public finances and slow the US economic recovery.

What the markets are hoping for is not just a Joe Biden victory, but a blue wave in Congress that opens the door to massive spending on Biden’s priorities for green energy, infrastructure, childcare and education. This would accelerate the recovery and flood the bond market with new American debt. This would increase returns and depreciate the dollar. A cheaper dollar would benefit US exporters at the expense of their competitors, but it would also bring relief to those around the world who owe money in dollars. All in all, there is little better for world trade and growth than a weak dollar.

Trillions of dollars are currently driving in this scenario. The concern is that on November 4th we will wake up to both an uncertain political future and a violent financial backlash.

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