President-elect Biden unveiled his bag of stimulus goodies this morning, with an impressive headline figure of USD1.90 trillion. None of it appears to be funded by tax increases, so another torrent of bond issuance is on the way. By my rough reckoning, the US has spent nearly USD4 trillion on backstopping the economy since the start of the pandemic. All of it funded by debt. Mind you, the Trump administration was running a trillion-dollar deficit even before Covid-19, so deficits are definitely not just a Democrat problem.
Thankfully, Federal Reserve Chairman Jerome Powell overnight signalled that tapering the Fed’s bond-buying targets was not even considered at the moment, nor would it be for the foreseeable future. Given the amount of issuance coming, that is a good thing. The incoming Yellen-Powell axis may yet have to ponder a Japan-style yield curve control strategy though before 2021 is out.
The Biden announcement overnight though was just stage-one of his spending plan. Next will come the Biden “New Deal” remaking America package. That will also be several trillion, one would think. I’m all for counter-cyclical government investment, especially when debt is so cheap. But Mr Biden’s next plan will almost certainly require tax increases to pay for it.
And herein lies the rub; namely the US Senate. The Democrat majority in the House should be sufficient to ensure the passage of Mr Biden’s wishes. The Senate though is another matter, even with a Vice-Presidential 50-50 casting vote. Not all of Mr Biden’s spending wishes can be passed with a simple Senate majority, notably the aid to states and municipalities. It runs into a process called reconciliation and the Byrd rule that can only be overridden by 60 Senate votes.
I won’t try to explain reconciliation and the Byrd Rule to readers. Having wrapped a cold towel around my head the past day or so trying to understand it, I still got a headache. The general gist seems to be that Congress gets three one-shot simple majority bills on revenue, spending and the federal debt limit. After that, anything else has to be “reconciled” by “committees” (I’m already crying as I am impatient by nature), and certain areas such as state aid and Social Security automatically go into this process. Otherwise, it can be “filibustered” in the Senate, doomed to a Ground-Hog day hell of never-ending political delay unless the Senate acquires 60 votes to override it.
So, that is the challenge President-elect Biden faces immediately on taking power next week. Given the distaste Republicans have for state aid, Mr Biden’s bi-partisan hopes will be immediately tested. We have no visibility from the Republican Senators about how bipartisan they will feel, if at all. And that is before the remake America bills come through with the almost certain increases in taxes. The US Senate minority may yet filibuster the hopes of President Biden. On a more positive note, getting the bad news out of the way on the fiscal front may be a wise move for both parties, leaving plenty of time to salve wounds before the 2022 mid-terms.
That may explain the neutral response by financial markets in Asia after the stimulus package details were unveiled. Talk is cheap, especially when the contents were already well telegraphed and disseminated. Financial markets in North America had already spent much of the day in wait-and-see mode, and Asia appears to be on much the same course.
Any bullish tones were muted overnight by the sharp deterioration in US Initial Jobless Claims, which jumped to a seasonally adjusted 965,000. Following on from an abysmal headline Non-Farm Payrolls number last week, it appears that Covid-19 restrictions are eroding employment, notably in the services sector. One positive note could be that it may focus the Republican Senate minority’s attention on bi-partisanship benefits, at least early in the Biden administration.
Adding to the notes of caution in Asia were sanctions on Chinese companies and their officials by the outgoing Trump administration overnight. Oil giant CNOOC and some of its officers were slapped with sanctions over alleged bully-boy activities in the South China Sea. Phone maker Xiaomi Corp., and civil aircraft maker Comac were on a list of Chinese companies added to the US no investment list for various reasons, mostly national security-related. The restrictions will hit Comac particularly hard. In their wisdom, the US and French aerospace companies have packed Comac’s civil aircraft so full of their high-tech products, that stripping them all out would leave an engineless shell with a tail and a fuselage.
The incoming Biden administration has been deafening in its silence regarding China relations and those with allies that rely on the US for security, but happily do business with China and Russia. Yes, I am talking about you, Germany, among others. The new administration will likely not be as belligerent but may also not be as willing to unwind Trump-era policies as many might hope. The overnight US restrictions and lack of clarity may temper bullish spirits in Asia until after the Biden inauguration and diplomatic clarity.
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