Effects of the fiscal policy announced by Biden

With the last meeting before the presidential election on November 3, the Fed yesterday set the tone for the next few weeks on the financial markets, which will be as tormented and nervous as its final statement which, like every three months, also provides macro estimates for the next three years.
Recall that Fed members are largely members of the regional Fed and are therefore Democrats in the coastal Fed and Republican in the domestic Fed, with the Dallas Fed traditionally sensitive to the influence of the Bushes, proud anti-Trumpians. Perfectly aware of the importance of commas, decimals, shades, whispers and silences in influencing the stock market in the coming weeks (and in giving or taking away a hand to Trump, who plays his chances of recovery precisely on the economy and stock market) Fomc have found a difficult compromise and produced a result that is at times inconsistent and more vague and tormented than usual. The result sounds on the less expansive margin compared to the post-Covid tone and the markets, which have recently lost the inertial force of the formidable recovery of the last six months, have perfectly grasped the change in tone.

The next US election will be fundamental to decree a recovery of the post-coronavirus international economy. US fiscal policy will be fundamental and will have repercussions across the globe. As regards the intentions of the two candidates, we find two clearly contrasting positions.
There will be no change in the event of Trump’s victory, who will devote himself to international politics and who has not even bothered to write a credible program knowing full well that he will have against Congress, in whole or in part. Trump and Congress, in other words, will block each other out.

The case of a Biden victory is completely different, especially if supported by a democratic conquest of the Senate (more important, in this election, of the White House).
If Trump and the Republican Congress cut taxes by a trillion dollars in 2018 (a figure considered by many to be abnormal), Biden will raise taxes by 4 trillion (these are figures from the Biden campaign, not inflated by opponents), particularly hitting the businesses and high incomes. On the other hand, Biden plans even larger additional expenses of 8 trillion, with a net expansionary effect of 4 trillion, four times that of Trump.
For those who invest the consequences will be on four fronts.

The first will be a weaker dollar, due to the greater current account deficit generated by the public deficit and to the even more expansive policy by the Fed. For the economy and for European stock exchanges, the expansionary effect driven by America it will be more than offset by the loss of competitiveness, unless Europe decides to launch other expansionary measures in addition to those already approved.
The second effect will be an increase in the revenues of many companies that will benefit from public spending offset by a reduction in profit margins (more taxes, reregulation, increase in labor costs due to the re-unionization that Biden is committed to favoring). A lot of work for the analysts, who will have to evaluate every single company in light of the new scenario.

The third effect will be an increase in the tax burden on the market itself, with a possible introduction of a tax on financial transactions and an increase in the tax on capital gains, which will induce sales before the revision of those who have large capital gains today.
The fourth effect will be a rotation from sectors affected by the new taxes and new rules towards sectors that will benefit from extensive public subsidies and funding, especially renewable energy.

These changes will be very challenging to metabolize. However, it should never be forgotten that everything will take place with, in the background, an ultra-expansive monetary policy that promises zero rates until 2023 and, in all likelihood, other doses of Quantitative easing in addition to the 120 billion per month that the Fed is already buying today.

By Domenico Greco

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