The Markets Want Much More Than Just a Biden Win

The global economy is in bad shape—and Big Capital knows that only a blue wave can start fixing it.

Tooze-Adam-foreign-policy-columnist16
Tooze-Adam-foreign-policy-columnist16
Adam Tooze
By , a columnist at Foreign Policy and director of the European Institute at Columbia University.
Then-U.S. Vice President Joe Biden delivers a speech during the World Economic Forum annual meeting in Davos, Switzerland, on Jan. 20, 2016.
Then-U.S. Vice President Joe Biden delivers a speech during the World Economic Forum annual meeting in Davos, Switzerland, on Jan. 20, 2016.
Then-U.S. Vice President Joe Biden delivers a speech during the World Economic Forum annual meeting in Davos, Switzerland, on Jan. 20, 2016. Fabrice Coffrini/AFP via Getty Images

As we await the outcome of the U.S. election, the world economy drifts listlessly, paralyzed by the shock of COVID-19 and geopolitical and political uncertainty. As Gita Gopinath, the chief economist of the International Monetary Fund, has warned, we are in a liquidity trap—a situation of chronic low interest rates and depressed demand. Former U.S. Treasury Secretary Larry Summers has spoken of a black hole of monetary policy.

The way out is to raise aggregate demand. Since the private sector is in shock, government taxation and spending are key. That is what gives the U.S. election its capital economic importance. No other government, not even the Chinese, can match America’s fiscal clout.

The nightmare scenario is that America’s election makes things worse. A disputed election followed by a constitutional crisis would compound the craving for security, which would further increase the demand for liquidity, driving the dollar higher. This is the perverse logic of the world’s reliance on the U.S. currency as the de facto global currency. A crisis increases the demand for dollars, even if the crisis originates in the United States.

As we await the outcome of the U.S. election, the world economy drifts listlessly, paralyzed by the shock of COVID-19 and geopolitical and political uncertainty. As Gita Gopinath, the chief economist of the International Monetary Fund, has warned, we are in a liquidity trap—a situation of chronic low interest rates and depressed demand. Former U.S. Treasury Secretary Larry Summers has spoken of a black hole of monetary policy.

The way out is to raise aggregate demand. Since the private sector is in shock, government taxation and spending are key. That is what gives the U.S. election its capital economic importance. No other government, not even the Chinese, can match America’s fiscal clout.

The nightmare scenario is that America’s election makes things worse. A disputed election followed by a constitutional crisis would compound the craving for security, which would further increase the demand for liquidity, driving the dollar higher. This is the perverse logic of the world’s reliance on the U.S. currency as the de facto global currency. A crisis increases the demand for dollars, even if the crisis originates in the United States.

The second-worst situation would be a divided power balance in Washington with the Democrats in control of the White House and Mitch McConnell pursuing a policy of obstruction in the Senate. That would limit the scope for an adequate fiscal response and stunt U.S. economic recovery.

What the markets are hoping for is not just a Joe Biden victory but a blue wave in Congress, opening the door to massive spending on Biden’s priorities of green energy, infrastructure, child care, and education. That would accelerate the recovery and flood the bond market with new American IOUs. This would drive yields higher and depreciate the dollar. A cheaper dollar would benefit U.S. exporters at the expense of their competitors, but it would also provide relief to all those around the world who owe money in dollars. On balance, there are few things better for global trade and growth than a weak dollar.

Trillions of dollars are currently riding on this scenario. The worry is that we will wake up on Nov. 4 both to an uncertain political future and to a violent financial backlash.

Adam Tooze is a columnist at Foreign Policy and a history professor and director of the European Institute at Columbia University. His latest book is Crashed: How a Decade of Financial Crises Changed the World, and he is currently working on a history of the climate crisis. Twitter: @adam_tooze

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