Investor: US national debt likely 'winner' of next month's presidential election
Whoever wins next month's United States presidential election the real "winner" will be the size of the ensuing national debt in that country, while any consequent inflation is highly likely to become an issue in other parts of the world too, according to head of investments at Redgate Wealth, Peeter Koppel.
Koppel gave an interview to Vikerraadio's "Uudis+" which follows in its entirety.
When viewed from Europe, it seems everything in the U.S. seems to be going pretty well. The U.S. economy's total output has grown faster than that of the EU for 20 years now, and it continues to do so; in both the second and third quarters, the U.S. economy grew by three percent, while in the EU, that growth was essentially zero point something-or-other. Unemployment remains low in the U.S. is low, the rate of inflation is lower than it is in the EU, and people's purchasing power is better. So how do we explain this widespread dissatisfaction with the economic situation to be found with many ordinary Americans?
You stated that inflation is lower than it is in Europe, but if we take a somewhat longer perspective, the cumulative rate of inflation is still relatively unpleasant, which is something Americans really don't take to. One might also reference wage stagnation. Then if we think about the period preceding the current rise in the consumer price index, asset price inflation, which was a result of printing money, was seen.
This served to create a situation whereby an explosion of historical inequality happened: Meaning static wages, cumulative inflation, and a perceived inequality. These circumstances have made Americans feel that, despite the stock market rising and the economy seeming stronger, having to work two jobs just to make ends meet is not such a great thing.
So let us take a look at the presidential candidates: Kamala Harris and Donald Trump. Trump has referred to Harris's economic policy as "Marxian-socialist." How much is this a rhetorical mechanism, and how much does his claim reflect reality?
Marxism and socialism are both fairly well-defined approaches.
Harris's approach is neither Marxist nor socialist, in a direct sense. Certainly, she is more left-leaning than Trump, and there is even a label for her stance: Progressive capitalism.
This is something more in line with European approaches, perhaps even somewhat similar to social democracy, where market relations generally prevail, but the state intervenes more and redistributes more.
True, rhetorically speaking, I believe that even economists wouldn't have a problem calling this approach "socialist," but in terms of strict definitions, Harris's approach is certainly not socialist.
When I look at Kamala Harris's pledges: She has promised to make housing more affordable, to reduce childcare costs, to limit unjust food price hikes, and to cut prescription drug prices. For example, on prices, Harris has promised to send a bill to Congress within the first 100 days of taking office to ban the unjust food price hikes and to give prosecutors greater authority to investigate companies over the justifications for their price increases. How would something like this work in a market economy?
One could confidently state that this is where the potential future president of the world's largest country is making a big mistake. The reason for rising food prices is the same as that behind inflation overall. The cause of inflation is nothing other than the fact that at some point, due to the economic situation, came the felt need to engage in printing money.
So as to avoid inflation, a fiscally responsible policy needs to be pursued. When economic policymakers, be they the central banks or the governments, shift the blame for inflation onto the private sector, this is always spin, it is always populism. You'll find very few people in the private sector who would call for any justification for it.
Milton Friedman, who is not so popular today, once said that inflation is always and everywhere a monetary phenomenon; a phenomenon caused by governments and central banks. Perhaps it is not always a monetary phenomenon, but mostly it is. To fight a monetary phenomenon in this way is like trying to chop down a butter storage house door, with an axe.
I'm reading more on the Harris promises. A key topic is her pledge to alleviate the housing crisis, offering a US$25,000 tax credit for first-time homebuyers and a tax credit for companies to build three million new homes over the next four years, with US$40 billion invested in a fund aimed at solving the housing shortage. How compatible are these proposals with a free market economy?
Well not very much, but they do fit under the umbrella of progressive capitalism. We need to return to the matter of just why housing is so expensive. Housing is expensive thanks to money printing and asset price inflation. The printing of money and asset price inflation happened because, at some point, the central bank and the [federal] state proved unable to pursue rational policies.
You could call it populism; attempting to paint over mistakes made by the government and the central banks. They're essentially saying, "We created the problem, but now we'll help to fix it."
If we're being honest, there are two aspects to this.
The first aspect is this: Housing prices rose due to asset price inflation.
Second, it is highly pricey to take out a mortgage. A 30-year mortgage in the U.S. comes with an interest rate of nearly 7 percent, which is quite costly. These are all consequences of economic policy decisions, and the so-called solutions are but a drop in the ocean.
Harris has pledged to hike the tax exemption on small businesses tenfold, from $5,000 to $50,000, and to continue President Biden's policy of not raising taxes on any American households earning less than $400,000 per year. But at the same time, Harris pledges to raise taxes on wealthier households and larger corporations. What would the economic impact of Harris's tax plans on the U.S. economy then be?
If we consider the economic impact on small businesses, this is likely mostly symbolic. But if we think about additional taxation of large corporations and wealthier households, naturally, we can't say that it would exert a positive impact.
Putting it technically, if a company has to pay more in taxes, it will have less money for investments, for instance.
And in the broader global context, the question is whether the U.S. is doing anything which could significantly worsen its global competitive position. Will this create a situation where perhaps companies will not want to be headquartered in the U.S. for instance, or will establish new companies elsewhere? Such risks are certainly present. And yes, the additional taxation of companies will not exert any positive effect on the overall environment so far as value creation goes.
So let us look at Donald Trump's pledges now. Trump has promised to widen his 2017 tax cuts but at the same time impose higher tariffs on imports, while canceling Biden's clean energy plan, and its associated spending. On businesses, Trump plans to reduce the corporate tax rate from 24 percent to 15 percent for companies that manufacture their products in the U.S. What would the impact of Trump's choice on corporate taxation be?
On the domestic front, it would be positive, as Trump has this "America First" approach, and the furthering of deglobalization. If corporate taxes fall and companies get benefits for doing business domestically, then it is positive for those companies. But if we are talking about the general effect of the deglobalization trend and tariffs, this will not have a positive effect on the global economy.
What would the impact on the U.S. economy of canceling the Inflation Reduction Act (IRA) be, and the effect of removing the green subsidies introduced under Biden?
Canceling green subsidies means more fossil fuels getting burned, more investments would go into fossil fuels, and energy costs would decrease at the expense of the planet. If the costs of energy, the most important expense, decrease, it will actually have a stimulating effect.
Clearly what touches on what we are saying about such a broader Biden approach, then this IRA's title was to my mind in itself already doubtful: So we one again create inflation ourselves , then try to reduce it stick on a title like "Inflation Reduction Act" on the very document that which does absolutely nothing to reduce inflation.
Let's take on tariffs. Joe Biden, the sitting president, has partly continued the tariffs that were set up during Trump's first term. Trump imposed tariffs on for instance solar panels, washing machines, steel, and aluminum. Kamala Harris has indicated that she has no plans to repeal these tariffs in the future, and intends to continue with them. But Donald Trump has in his election campaign promised to tighten the screws further still. Trump has pledged to impose a 20-percent tariff on all imported goods and a separate 60-percent rate on goods coming to the market from China. Can we say that the U.S. is backing out of globalization and free trade regardless of which candidate gets elected president? The question is only about the speed and extent of this withdrawal.
In principle, yes. If we think now about Trump's first term, he had quite a bone to pick with China, and it could even be said that it was justified because the Chinese didn't play fairly. They kept their currency artificially low, reeled in global production bases, and unfairly gained a global competitive advantage.
If this competitive advantage is to be combated, tariffs are in essence the only option. Sadly, if we now consider the concept of tariffs, however, they tend to slow global economic growth. In the U.S., when tariffs are placed on goods, the local consumer won't benefit because those goods ultimately become more expensive.
What is interesting historically is that, as in this context, the U.S. earlier struggled with Japanese car manufacturers, which produced high-quality, reasonably priced cars. Tariffs were imposed, and what happened? The big three American car manufacturers (Ford, GM and Chrysler - ed.) were for over 10 years essentially producing morally obsolete piles of scrap metal — that's what imposing tariffs amounts to."
In certain situations, losing competition can have a negative effect on innovation.
How would you sum up in a couple of sentences the global economic impact of a 20 percent tariff on all goods, and a 60 percent tariff on Chinese goods, if that actually materializes What would that mean for the world economy?
It means for the global economy this, that if you picture a hose with water flowing through it, then you step on the hose, the water still flows, but at a much slower rate. This is creating obstacles to the global economic "bloodstream." Yes, there may be justification for it in the context of China's actions, but in general, it's not a great idea. And with this in summary, a situation is created where everyone suffers, not only Americans.
Moody's has forecast that Trump's tariffs would raise U.S. annual inflation by three-quarters of a percentage point next year and by another half a percentage point in 2026. Kamala Harris has claimed that Trump's planned tariffs would tax lower-middle-class families and take $4,000 a year out of their pocket books. Is this rhetoric, or is there a real basis for these claims?
There is clearly a basis for these claims. If you look at where the cheap goods come from, well they come from outside the U.S. Who buys cheaper goods? Naturally, those on lower incomes. If tariffs get imposed on cheap goods, people with lower incomes will therefore suffer. So, this is not propaganda, but a point in fact.
If we talk about the burden of the presidential candidates' economic pledges on the U.S. federal budget and its deficit, Forbes has cited analysis forecasting that Harris's promises would increase the federal deficit by US$3.5 trillion by 2035. Trump's promises, on the other hand, would boost it by US$7.5 trillion. The New York Times referred to calculations by the Committee for a Responsible Federal Budget, suggesting that Trump's plan would raise the deficit by US$15 trillion, while Harris's would raise it by US$8 trillion. Of course, both campaign teams have derided the respective calculations as mis-informed. Harris has said that all her pledges are covered by revenues. Trump's team has said that the analysts didn't understand the true effects of Trump's policies. How do you see these assessments? Can we now evaluate the impact of one or the other candidate's policies on the U.S. budget and the deficit?
We really can instead put it in such a way, half-jokingly, that who or what the real winner of this election will be. The real winner of the U.S. presidential election is the size of the U.S. national debt. Both candidates talk about things that will raise the national debt. Of that, there is no question.
Let's also share the current figure with the listeners, then: The U.S. national debt is now $35.6 trillion, which comes to $105,000 per person, from womb to tomb.
Just so, and in relative terms, the size of the national debt is comparable with what it was during either of the world wars. But we're not in the midst of a world war, and the U.S. is not taking part in one. So, U.S. national debt is growing regardless, but neither candidate has addressed how to bring it back to even somewhat of a state of normalcy.
Yet, is the U.S. national debt even an issue, and why? The U.S. prints its own currency; the dollar is a reserve currency.
It is a problem for the reason that if we think about what happened when money was printed more freely, we all felt the effects in one way or another - asset price inflation followed by consumer price inflation. Essentially, we are all paying for that. Inflation in the economic system is like a cancer in the human body: It drains the economy, stopping it from growing. If the economy won't grow, neither will people's incomes or standards of living. Both candidates will likely continue inflationary policies, meaning we should prepare globally for inflation to remain a problem during the next term, regardless of who gets elected.
Should Kamala Harris win, things will likely continue as they have done, then. But as we've discussed, we could expect some changes if we believe Trump's promises in the event of a victory. How are you preparing personally for the economic effects, if Donald Trump implements his promises?
Because the winner of the presidential election will be the U.S. national debt and inflation will remain a problem, I'm not making any special preparations for any Trump victory. However, if I think about what might happen, my personal opinion is that Trump is likely to be more friendly toward fossil fuels over the longer term… and that might be where investment ideas start to evolve.
Redgate Wealth is an investment management business unit operating in all three Baltic states.
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Editor: Andrew Whyte, Mari Peegel
Source: "Uudis+"