Biden turns up the heat yet again
Last week we wrote about the bold experiment of the new American administration. While we in the European Union are being presented with new lockdowns by our cautious governments that continue to wrestle with the vaccination rate, the United States seems to have thrown all timidity overboard. Anyone who wants to can be vaccinated well before the summer. The central bank is conducting a historically generous monetary policy and the government is unleashing an unprecedented support programme on the economy. Where the OECD expects an economic recovery of 3.9% for the European Union, the United States is going for a somewhat more ambitious figure of 6.5%. It is hardly surprising that the financial markets are gasping for breath. Increased inflation is now widely expected as a result of this “sugar rush”. In anticipation of this inflationary expectation, interest rates rose and stock exchanges corrected briefly.
Even more support
We noted that the 78-year-old president seems far from worn out. In fact, while the stock exchanges have yet to recover from his previous outburst, the old beast is stepping up his game. The 1900 billion dollar aid plan has only just been approved by Congress and converted into the American Rescue Plan Act, or the next initiative is already in the pipeline. The Biden administration is considering a new aid plan of – don’t be alarmed – 2000 to 4000 billion dollars. The aim of this new aid plan is to raise the level of infrastructure, energy supply, and education to a level better suited to the requirements of the 21st century. The new law amounts to an expenditure of between 200 and 400 billion dollars a year for ten years. Good for an uptick in GNP of 1 to 2 percent per year.
Not like Obama
Biden does not seem to want to make the same mistake as his former teacher, President Obama. Whereas Obama, in the first two years after his election, did not use the majority of the Democrats in both the House of Representatives and the Senate and instead sought consensus with the Republicans, Biden – to speak in sports terms – goes all-out. In two years’ time, the mid-term elections will follow, with the risk of losing the current majority in Congress and with that having to serve out the rest of his term as a lame duck. So Biden has barely two years to thoroughly overhaul the American economy. So thoroughly that a future Republican majority in Congress – or president – will not be able to turn the tide.
Raw materials benefit
An estimated USD 3,000 billion in aid for infrastructure, in particular, is unprecedented. The plan in itself still has the approval of the Republicans, but the financing of it does not. This will mainly have to come from an increase in the profit tax for companies from 21 to 28 percent, effectively reversing half of the policy of his predecessor. In addition, Americans earning more than $400,000 a year will have to pay more in income tax. What will be the possible implications for financial markets? Business bank JP Morgan expects that the suppliers of the required raw materials, in particular, will benefit. Energy producers and miners are mentioned in particular. But won’t that further fuel inflation, which is already priced in? Various raw materials are already scarce and such an infrastructural bonanza will push prices up even further. And higher inflation will force the central bank to raise interest rates at some point.
A new economic world
But that remains to be seen. It seems increasingly likely that we, as investors, are witnessing the emergence of a new economic world. Just think, governments worldwide are facing enormous deficits as a result of the exceptionally expensive corona crisis. Debts that, in an ordinary way, can hardly be cut back or taxed. What is the solution in such a situation? Yes, inflation. Because of inflation, the value of the debts disappears like snow in the sun. If in the meantime, central banks also help by keeping interest rates low, governments can finance their debts all the more easily. For the record, such a policy was also pursued after the Second World War. With success. Central banks currently expect no more than a short-term inflationary bump. This also seems to be the most likely scenario. Certainly, if we consider the situation in the European Union. But if the United States continues to go full throttle, the world could look somewhat different in a few years’ time