Did you see that presidential debate a couple weeks ago? I kinda wish I hadn’t.
And then how about President Biden this week? Losing his thoughts in a press conference that was specifically called to calm his supporters’ fears about him losing his thoughts.
Get your popcorn ready. It’s going to be an interesting news cycle the rest of this year.
I don’t think it matters whether or not Biden remains in the race, I think this election comes down to Trump vs the Democratic establishment. And I think the economic ramifications could be big.
If we don’t have a strong and sustainable economy, all our other problems are a lot harder to fix. I believe much of the societal angst and polarization today is a direct result of widespread economic struggle.
Let’s take a look at what each candidate potentially brings to the table from an economic standpoint. Please understand that I don’t favor either party in this election, so this is intended to be as unbiased of a perspective as possible.
The US Economy
The US economy is extremely complex. There are so many variables that come into play, in determining its direction. And for the most part, presidents have very little control or impact over it. It often takes years before new policies create any significant impact.
That being said, the upcoming election could greatly impact interest rate policy. Which can significantly impact the economy in the short-term. So, when I evaluate the two candidates, this is easily the largest consideration for me.
In his first term, it was clear that Trump favored low interest rates. There were even times when he suggested we should cut down to negative interest rates.
He publicly pressured Fed Chairman, Jerome Powell, to lower interest rates several times during his last term. While the Fed is an independent agency, it was reported in April that a Trump administration could potentially move to erode the Fed’s independence and allow the President to formally influence interest rates.
On the other hand, Democrats have been resolute with the Fed’s decision to raise rates at the highest clip since the early 80’s. And they’ve consistently supported Fed independence, when asked about interest rates.
Under a Trump administration, it’s possible he gains formal influence over the Fed. And if not, it’s likely that he’ll nominate someone new when Powell’s term ends in 2026. Someone who he feels is aligned with his administration’s agenda.
Thus, there’s a higher probability of hasty rate cuts in a Trump presidency. And while these would likely drive a surge in economic activity and stock market gains in the short term, the long-term sustainability is a lot less certain.
Under a Democratic administration, the Fed will continue to manage monetary policy independently. Which means hasty rate cuts are less likely. On one hand, this could potentially mean slower economic growth if rates stay higher for longer. But on the other hand, it could also lead to more value creation and sustainable economic growth.
While higher rates may not bring the quick boom that lower rates might, it should lead to more productive use of capital. In other words, when rates are higher, it costs more to borrow money. And when it costs more to borrow money, the borrower has a higher incentive to invest it wisely.
When rates are too low – on the other hand – if often leads to a general disrespect for the value of money, which then leads to wasteful spending that actually hinders the economy.
Then there’s the issue of government debt weighing on interest rate policy. Regardless of which party is in the White House, there will be an incentive to bring rates down in a strategic and methodical way in the coming years. This is because higher rates significantly increase the debt burden. Considering the fact that US Government Debt has reached nearly $35 Trillion, every tick higher with interest rates puts significant upward pressure on government expenses.
Personally, I’d prefer an economy that grows slowly and sustainably. Versus the boom-bust cycles we’ve become accustomed to from aggressive cuts and abnormally low interest rate levels.
Based on this, I’d prefer the party that is less likely to promote rapid interest rate reductions. And that gives the edge to the Democrats.
The Global Economy
It’s pretty hard to dispute that we’re in a transformation to a full-fledged global economy.
For one, I think the internet has changed everything. Social media is eliminating social borders. FinTech is eliminating commerce barriers. And AI is eliminating knowledge gaps. I believe there’s no stopping the growth of the global digital economy. And the CATO Institute suggests that globalization isn’t going anywhere, even in traditional economic terms.
Whether we want to admit it or not, I believe globalization is the only way forward. So we may as well accept it and do our part to make it work for our country.
Under a Trump administration – while plenty has been made about his isolationist worldview – I don’t think it’s realistic for him to fully follow through on any US-only rhetoric he throws around.
Yes, he’ll likely play hardball with foreign trade. He’ll want to win deals versus creating mutually beneficial ones. But remember, he wants to compete fiercely with China. And moving forward with an isolationist economic policy would hinder this effort.
Chinese companies are now investing billions to set up manufacturing operations in Mexico – as a backdoor into the US. The arrangement allows for their final product to be considered completely Mexican, skirting any US tariffs on Chinese goods. The end result for Chinese companies is quite nice: low labor costs of Mexican workers, lower shipping costs into the US, and increased revenues from US consumers.
And even if Trump were to flex his muscles to close this loophole and place tariffs on these goods, China still stands to benefit tremendously from setting up manufacturing operations in Mexico. Do you think he would just stand on the sidelines and watch China establish a meaningful economic presence in North America? Or do you think he’ll want to compete with them by seeking attractive deals with Mexico and other foreign partners?
While he’s certainly not a globalist, I think any talks of Trump being an isolationist are overblown.
Under a Democratic administration, I think it’s pretty clear that US policy will lean toward globalization versus nationalism. And since no US leader will want to lose our world-leading economic status, I think we’ll see a similar competitive approach with China. Albeit with a little less combativeness and bravado.
Thanks to macro-economic trends that are outside their control, I think both candidates will have no choice but to bolster foreign trade relations. Which makes this a very close call in my mind.
On one hand, I like Trump’s aggressiveness in placing America’s interests first. A strong US economy is not only important for our country, it’s important for the whole world. But political rhetoric aside, both Republicans and Democrats realize this. Which means both sides are incentivized to prioritize US economic interests.
However, the fact that Trump is so unpredictable, forces me to give the edge to the Democrats on this. When the leader of the US creates so much uncertainty in the world, it can create a lot of anxiety in the global economy.
I have personally talked to international money managers and economists that fear a Trump presidency for this reason. It can create negative unintended consequences.