The world cannot escape a US economy that has lost its footing.
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The big stories about money and politics in the race for the White House
Global stock markets just enjoyed strongest week since November, when investors shrugged off recession fears and the yen’s exchange rate in early August. Little has changed to make up for the recovery or even the collapse at the start of the month. This, in addition to the thin summer market, reflects deep uncertainty about the post-pandemic global economy and the outlook going forward.
Across advanced and emerging economies, inflation has improved but remains somewhat high, unemployment is generally low, growth is volatile, and public finances are strained even before the costs of geopolitical tensions and aging populations are taken into account. These are not stable conditions with a known anchor point for real interest rates that would stabilize inflation at full employment.
During the first two decades of this century, financial markets priced in increasingly low real and long-term nominal interest rates, necessary to compensate for the Asian savings glut, the global financial crisis, low productivity and population growth, fiscal consolidation, and low inflation. Many of these fundamental drivers of the global economy remain in place, but they have been countered by fears of recurring shocks, fragile global supply chains, and occasional excess demand, resulting in a world with potentially higher inflation and greater uncertainty.
ONE Goldman Sachs research shows that that financial markets currently expect higher long-term interest rates to be needed to stabilize the economy, but few should feel confident that this market assessment will persist. The study’s second finding is more robust—that countries can improve their own real long-term financing costs by pursuing effective economic stabilization policies. Maintaining low and stable inflation and improving current account deficits are the paths to relative economic success.
While Goldman Sachs arrived at these results by comparing countries’ relative long-term real interest rates to those of the United States, it is not too much to argue that what is good for others is also important for the United States and the rest of the global economy. Good U.S. economic policy reduces global real borrowing costs, sustains faster economic growth, and improves living standards. It is therefore difficult to overstate the importance of the U.S. presidential election to both the United States and other countries.
As she prepares to accept the Democratic nomination this week, Kamala Harris has give her economic outlookShe gave a full confirmation of the independent Federal Reserve to meet its dual mandate of maximum employment and price stability. She also announced a laudable ambition to break down barriers to home building. But the latter policy is not all it seems. A promise to ensure that an additional 3 million “affordable” homes are built for the middle class over four years is disappointingly timid. The United States has added 6 million homes since 2020 and now has a year housing completion rate 1.5 million a year.
Like every Democratic presidential candidate, Harris wants to tax the very wealthy more, using the revenue to ease the burden on middle-class families, especially those with children. Whether that happens will depend on the balance of power in Congress.
More troubling is her choice to flirt with left-wing economic populism. Her vague talk of policies equivalent to grocery price controls and rent controls represents a dangerous triumph of hope over long experience of their failures. One can only read her words as a determined fight against anticompetitive practices using the tools of standard competition policy, but the fact that she has chosen to remain vague should be a concern.
The risks of a Harris presidency pale in comparison to the risks of Donald Trump if he is re-elected. The former president has made it clear that he wants to say in monetary policy decisions because they are based on “gut feelings” and he has the guts to make the right decisions. Since Trump has consistently favored low interest rates while in office and has not cut rates before the November election, controlling US inflation will certainly be on the ballot this fall.
Moreover, his economic populism extends to easily understood and dismissed concepts like the fact that higher tariffs will hurt American consumers and drive up prices even further. Call last week “Tariffs of 10 to 20 percent on foreign countries that have been ripping us off for years” are dangerous for the U.S. and global economies. With Republicans more interested in tax cuts than controlling spending, no one can be sure of the economic stability of the United States under President Trump, even if many of his instincts can be checked by Congress.
When faced with a choice between a candidate who instinctively blames corporate excesses and exploitation in the market system for inflation and a candidate who trusts his own instincts and theories over decades of experience, it is no surprise that financial markets are volatile.
The outcome of the election is highly uncertain, not just in terms of who will win, but also what they will seek to do and whether they have the legislative power to do so. There will certainly be more volatility in the months ahead. If you think none of this sounds credible, you’re right.
