Source: Barron's
Author: Matt Peterson

Biden and rival Trump will lead the US on a very different path.

Although the age, health, suitability, and unpopularity of Biden and Trump have raised various concerns, by election day on November 5, American voters were likely to be the same as in 2020, and must make a choice between them. Furthermore, just like four years ago, until the votes are counted, this will still be an evenly matched general election.

However, there are some important differences between this year's election and four years ago, whether the impact of these differences is good or bad. Currently, the US economy is growing in a way that Americans could not imagine during the 2020 pandemic. What is also growing is the debt that is driving this round of economic growth. Currently, the total debt of the US government has reached a record 34 trillion US dollars, and debt repayment costs have risen to 650 billion US dollars — these huge numbers will inevitably limit the choices of the next administration and Congress.

Biden and rival Trump will lead the US on a very different path. We will leave it to professionals in these fields to judge what this means for America's social policy and the world at large. For the US economy and the market, this means making a new interpretation of cliché issues such as US debt and the very different positions of Biden and Trump on issues such as taxation, regulation, and national roles.

Debts and deficits

Concerns about US debt and deficits are nothing new, but America's debt has doubled in the past 10 years. A report released in early February by the non-partisan agency, the Congressional Budget Office (Congressional Budget Office), set the conditions for debates on debt: by the end of this year, US government debt will account for 99% of GDP. The Fed's rate hike has also brought about an unsettling problem: increased interest expenses. The Congressional Budget Office predicts interest spending will rise to $1.6 trillion by 2034.

Both Biden and Trump are responsible for this “borrowing frenzy.” According to estimates by the Committee for a Responsible Federal Budget (Committee for a Responsible Federal Budget), the policies implemented by Trump during his presidency led to an increase of 8.4 trillion US dollars in federal government debt, and the federal government debt is expected to increase by about 4 trillion US dollars during Biden's presidency.

Increased debt burdens raise concerns

The US debt as a percentage of GDP is expected to exceed 100% during the next presidential term, which will be an important symbolic level.

Federal government debt as a percentage of GDP

Note: Data for 2024 and beyond are estimates.

Source: Federal Reserve Bank of St. Louis (2000-2022 data), Congressional Budget Office (2023 data and estimates).

The rating agency S&P Global (S&P Global) removed America's proud AAA sovereign credit rating in 2011 on the grounds that policymakers have been unable to cope with rising debt for a long time. In 2023, Fitch Ratings (Fitch Ratings) also removed America's AAA rating on the grounds that “the level of national governance has declined.”

Moody's (Moody's), the only major rating agency that has yet to downgrade America's sovereign credit rating, recently warned that the agency may also downgrade America's sovereign credit rating due to political polarization and rising debt.

Moody's CEO Rob Fauber (Rob Fauber) commented, “Whether they are Democrats or Republicans, they are not really committed to using sufficient revenue to cover the spending gap. This gap will get bigger and bigger, putting more pressure on America's balance sheet.”

Rating agencies' downgrading decisions have relatively little impact on investors, because it is clear that from an economic perspective alone, America's debt burden is manageable, and rating agencies are also aware of this.

Increasing government borrowing, causing buyers of US Treasury bonds to demand higher yields is a potential concern.

During Biden's presidency, there were already signs that the market might be entering a new era. Nathan Sheets (Nathan Sheets), chief global economist at Citigroup (Citigroup), points out that factors such as rising interest rates, high inflation, and political chaos have made this issue more prominent. “For at least the past 6 to 12 months, the market has noticed an increase in yield,” Hitz said.

At the end of last year, the 10-year US Treasury yield peaked at close to 5%, but has now fallen to 4.3%.

Investors will look at Biden and Trump's fiscal plans in terms of debt burdens. Both people's fiscal plans will be controlled by Congress, but the goals they want to achieve and how these goals will affect the market's views on US debt are very different. Just look at the tax issue.

taxation

Lowering taxes on individuals and businesses is one of the hallmarks of the Trump administration. For many Republicans, this is the Trump administration's greatest achievement. Another achievement is the entry of more conservative justices into the Supreme Court.

However, in order to pass the Tax Cuts and Jobs Act (Tax Cuts and Jobs Act) in 2017, Congress “made a trick” on the budget: the corporate tax relief program is “permanent,” but other major tax relief provisions in the bill will expire from 2025. Among a long list of provisions that are about to expire is a reduction in the marginal tax rate for individuals, which will be readjusted to a higher level; the estate tax exemption will be roughly halved to $5 million, plus inflation adjustments; and the limits on how much individuals can deduct state and local taxes will be re-established.

If Trump were to become president again, he could make all those terms that are about to expire “permanent.” According to data from the Congressional Budget Office and Joint Committee on Taxation (Joint Committee on Taxation), doing so would cost $3.5 trillion in fiscal revenue. Trump also proposed the idea of further corporate tax cuts.

In order to do these two things, Trump must cut spending, but the details are unclear. Furthermore, Congress also has a lot of say in this matter.

By contrast, if Biden were to become president again, he would invalidate some tax breaks. Biden's budget proposal seeks to extend tax cuts for households earning less than $400,000 a year. He will support his plan through measures such as imposing new taxes on the rich and high earners, raising corporate taxes, and raising stock repurchase taxes. Biden has also shown a willingness to compromise on spending issues: the Congressional Budget Office said the agreement reached last year to avoid breaking through the debt ceiling would reduce the deficit by 7%.

tariffs

Stephen Miran (Stephen Miran), who served as a former senior adviser to the US Treasury during Trump's administration, pointed out that tariffs — a source of fiscal revenue — are another difference between Biden's and Trump's economic policies.

Milan said the next president must be creative in increasing fiscal revenue due to high debt and concerns raised by US bond yields. He pointed out that tariffs, like other taxes, may have negative economic consequences, but “if the new government can correct previous problems, these negative effects will be reduced.”

Both parties in the US believe that the rise of the Chinese economy has had a negative impact on the US economy. On the China issue, both Biden and Trump are “hardliners,” although their degree of toughness is not the same.

During Trump's presidency, the core of the US government's strategy towards China was to drastically raise tariffs on Chinese goods. In addition to increasing fiscal revenue by tens of billions of dollars, these tariffs are also aimed at protecting employment opportunities in the US. The results of this strategy were mixed; one reason was that China imposed retaliatory tariffs on the US. Massachusetts Institute of Technology (Massachusetts Institute of Technology) economist David Autor (David Autor) and other economists have recently studied the impact of the “trade war” on manufacturing employment in America's “heartland”, believing that “a tie between the two sides” may have had a “moderate negative impact” on US manufacturing employment.

Critics were surprised that Biden continued to implement the Trump administration's tariff policy on China after taking office. Katherine Tai (Katherine Tai), the Biden administration's chief trade negotiator, said when asked by a former trade official about her views on Otto's research: “It is unfair to simply describe US trade policy as a conversation about tariffs.”

Biden's vision of the US-China relationship can be summed up as “managed competition” (managed competition). He is trying to keep US technology away from China through sanctions and export controls, and take measures to limit some US investments in China. This strategy may continue into his second term.

Meanwhile, Trump said that if he wins this year's election, he will raise tariffs on Chinese goods to 60% to complete the work he initiated earlier. A “trade war” under such high tariffs will certainly not just be a “fight”, but it may prompt the US to shift large amounts of trade from China to other places, thereby reducing the impact on fiscal revenue to a relatively low level.

Trump also plans to impose a 10% tariff on US imports from all countries in the world. Erika York (Erika York) of the Tax Foundation (Tax Foundation) predicts that these tariffs will be equivalent to an additional 300 billion US dollars in taxes on Americans.

However, these policies must not only be viewed from an economic perspective. Robert Lighthizer (Robert Lighthizer), who served as the US Trade Representative during Trump's administration, believes that Trump's policies are part of an effort to improve the strength of the US manufacturing industry. Under Biden's labor-friendly policies, employment opportunities in the US manufacturing industry have increased. Lighthizer recently wrote in “Foreign Affairs” (Foreign Affairs) magazine: “Manufacturing is not just about the economy.”

Lighthizer wrote, “Compared to the factors economists are concerned about, family stability, strong communities, income equity, and worker pride and satisfaction are more important factors.”

In other words, Trump and his allies see tariffs not only as a tool to manage trade flows, but also as a tool to restore balance to the economy and benefit US domestic industries.

Coupled with Trump's possible tightening of immigration policies, which in turn will limit labor supply, some economists believe this will lead to stagflation, that is, slow economic growth and continued rise in inflation.

The Federal Reserve

Some people think that the Fed ignored rising inflation in 2021 and raised interest rates too late, but so far, Federal Reserve Chairman Powell and his team have successfully contained the upward trend in prices through interest rate hikes, and have not let the US economy fall into recession. However, the January CPI data released on February 13 shows that the fight against inflation is not over. The core CPI, which excludes food and energy prices, rose 3.9% year on year, and is still far higher than the Federal Reserve's 2% target.

Who the next president will make the Federal Reserve chairman will make the fight against inflation more complicated. Powell's term will end in May 2026. Trump nominated Powell as the chairman of the Federal Reserve in 2017, but later seemed to regret making this decision. During his presidency, Trump called Powell and other Federal Reserve officials “idiots,” and publicly urged the Federal Reserve to lower interest rates below zero.

Biden nominated Powell for re-election in 2021 as he nears the end of his first term.

The Biden team declined to discuss whether they would consider re-electing Powell. White House spokesman Michael Kikukawa (Michael Kikukawa) told Barron's: “The President has made it clear that we will not destroy the independence of the Federal Reserve.”

Trump's campaign did not respond to reporters' requests for comment on this and other topics, but Trump made it clear earlier that Powell would no longer be the chairman of the Federal Reserve. In February of this year, in an interview with Fox Business (Fox Business), he said he thought Powell was trying to help the Democratic Party by cutting interest rates.

The Federal Reserve is expected to cut interest rates three times this year, but the timing of interest rate cuts is yet to be determined, and given the strong performance of recently released economic data, the Fed may postpone interest rate cuts.

Powell has stated many times that politics is not a factor for him to consider. At a press conference in December last year, he said, “What we are considering is beneficial to the economy.” At a press conference in January of this year, Powell said in response to a question that his focus was not on the third term.

Although there are many reasons for the sharp rise in inflation during Biden's term, if Trump wins and does not allow Powell as the chairman of the Federal Reserve, the market may protest because the next Federal Reserve may adopt a “dovish” stance on monetary policy, which will not help offset the inflationary effects brought about by continued fiscal spending. Marko Papic (Marko Papic), chief strategist at alternative asset management firm Clocktower Group, said: “If Trump wins, I think there will be a 'riot' in the bond market.”

Papik meant that nervous investors would significantly boost bond yields.

This is a frightening thought. Although a sharp rise in bond yields — and borrowing costs will rise as a result — may push the budget to face a '90s-style “liquidation,” Papique said, “This will probably be the best thing America has ever experienced.”

custodial

There are many other differences between Biden and Trump's economic policies. Charles Myers (Charles Myers), founder of research firm Signum Global Advisors, believes investors have underestimated Trump's energy plans; Signum Global Advisors is a long-term donor to Biden and other Democrats. Myers predicts that under Biden's leadership, the US has broken oil and gas production records, but Trump will further increase US oil and gas production.

“By the end of Biden's four-year term, America's biggest change will be becoming a larger producer and exporter of oil and gas,” Myers said. Myers also pointed out that Trump will continue to promote the development of the US oil and gas industry, and he may try “lowering environmental standards, speeding up licensing, opening up more land for drilling, and providing more subsidies for fracking, etc.”

To create a more dynamic business environment, Trump may also reverse or restrict many other regulatory efforts during Biden's administration, including high-profile crackdowns on mergers and acquisitions. These measures will be very well received by Wall Street.

stock market

When Trump won the 2016 election, the US stock market was sold off during overnight trading that day, but the stock market quickly rebounded, and the stock market's performance during Trump's tenure was good. Even taking into account the 34% decline caused by the pandemic in early 2020, the S&P 500 index still rose 83% during Trump's term.

The US stock market is likely to rise after Trump wins again, as investors expect him to introduce tax cuts and other business-friendly policies.

bull market

The US stock market has performed well under both Trump and Biden. If Trump wins in November, the stock market may rise, and if Biden wins, the stock market will not fall.

The trend of the S&P 500 during 1006 trading days during Trump's term and 773 trading days during Biden's term

Red line: during Trump's term

Blue line: during Biden's term

Note: Biden's term ends on February 14, 2024

Source: Bloomberg

The US stock market also performed well during Biden's term. Since he took office, the S&P 500 index has risen 35% and has continuously reached record highs this year. Biden's victory in the general election will probably not cause much waves in the stock market, because it is expected that Biden will continue to implement a series of policies during his second term, and these policies are fully reflected in stock price trends.

The Biden team claims they don't pay attention to the market. White House spokesman Kikugawa said, “President Biden and Vice President Harris are fighting for the middle class and ordinary people, not for special interest groups and Wall Street.”

One reason for the surprisingly strong performance of the US economy and stock market is because companies have the ability to plan for the future during this period. Although Biden and Trump were not ideal candidates in voters' minds, the US economy and stock market performed well during their presidency. This is at least one advantage of choosing between them. Whether they are happy or not, Americans have also experienced this kind of election situation in previous general elections.

Edit/jayden