A New Era of Slow Growth, Low Inflation and High Debt

The Economist Intelligence Unit
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The extraordinary fiscal measures unveiled in the wake of the coronavirus pandemic have provided relief from the economic strains of the pandemic, but they are also expected to create high levels of indebtedness. This spending has caused governments to turn to central banks as financiers of their stimulus packages by purchasing public and private debt – for example, the US Federal Reserve currently holds more than 11% of US corporate debt. Low inflation will lead to the erosion of sovereign debt and low service costs. This debt pile-up will require a significant amount of political capital on both the expense and revenue sides of the equation, a commodity expected to be in short supply after an often inconsistent pandemic response. However, should nominal growth remain above interest rates, this debt should simply disappear; with interest rates close to zero, this is not an unreasonable expectation, especially if fiscal stimulus has the desired effect. While this outlook depends on continued investment in sovereign bonds, the generally elevated debt-to-GDP ratios across the developed world may increase investor’s risk tolerance in these securities. That said, generous support measures will prompt an increase in “zombie” firms and weigh on productivity as beneficiaries of government loans will spend years repaying debt instead of investing in research and development. Another risk is inflation, which could rise as recovery sets in; as banks hike interest rates to curb price growth, the cost of sovereign borrowing would rise as well. On the other hand, the recovery from the 2008 financial crisis has unlinked inflation and unemployment, and there are no indications that the excess liquidity created by the central banks will necessarily provide fuel for inflation. While the coronavirus may not last once a vaccine is found, the triple threat of slow growth, low inflation, and high debt will become a challenging landscape for advanced economies in the post-coronavirus age.

Biden or Trump? Americans may have to wait days to know who won

The Economist 
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It is no surprise that we have not had a presidential winner declared yet. With the unprecedented number of ballots cast by mail this year, this has been a likely scenario for the last several months. As of Monday, 63 million mail ballots had been returned and another 31 million were still outstanding. By contrast, in the 2016 presidential election only 8.2 million Americans voted by mail. With so many mail-in ballots comes longer counting periods. Though some states will not accept ballots after election day, others require they be postmarked on November 3rd and can be received days after. The deadlines for Pennsylvania and North Carolina, both important swing states in this election, are November 6th and 12th respectively. 

President Trump called for a final total on November 3rd and has been outspoken in his belief that counting ballots for weeks is inappropriate. He declared premature victory in the early hours of Wednesday morning despite the fact that no winner had been declared and millions of votes had yet to be counted. This isn’t the first time in American history that a winner wasn’t declared on election night. The 2000 election wasn’t settled until December 13th and the final House race of 2018 wasn’t called until November 28th. Regardless of whether Biden or Trump is declared winner, it is possible that weeks of legal fighting will follow. Both Trump and Biden’s campaigns have already sent lawyers across the country and are raising money for the cause. We could be waiting days, or even weeks for a final decision.

U.S., China Friction Will Persist After the Election. Here’s What Investors Should Expect.

Reshma Kapadia, Barron’s 
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Regardless of the US election outcome, tensions between the US and China are not going to ease. However, the outcome of the election will determine what the US-China relationship looks like moving forward, in both the near and long terms. The US has recently taken a tougher stance against China amid human rights concerns, and a souring public opinion of China over Beijing’s mishandling of the pandemic. Regardless of a Trump or Biden win, there will likely be a continued push towards a partial decoupling but the nuances of the decoupling will differ. 

If Trump wins the election, we can expect the trade deal to come back into focus. He would likely push China to meet the commitments of the deal since they have only made about half of its expected US purchases as of the end of September. On the other hand, Biden’s approach would be much broader, focusing more on human rights issues and looking for areas for cooperation, such as climate. Biden’s approach is expected to be much more multilateral, strengthening partnerships to create a more sustainable pushback on China. In the near-term, investors are anxious about what could happen in the lame duck session. If Biden wins, the Trump administration may take a final opportunity to make an imprint on US-China policy by employing new sanctions, delisting more Chinese companies, and/or restricting access to Chinese technology companies. Investors should also watch the Uyghur Forced Labor Prevention Act in the Senate which could result in measures to ban imports from companies whose supply chains touch the Xinjiang province. Nonetheless, there is still so much uncertainty on how much China will be prioritized during a lame duck session and on who will win the election.

As COVID-19 cases surge, the country’s economic recovery is losing steam

Sarah Crump, MaryAnn Placheril, Alab Berube, Brookings 
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The US economic recovery in terms of jobless claims and unemployment rates is slowing. As Covid-19 infections have been rising over the past few weeks, there are heightened concerns that the economic recovery could be derailed. While jobless claims and jobless claims have dropped in the majority of metro areas since August, job growth and small business recovery is slowing. As the pandemic resurges, many small businesses are closing or cutting hours again. This is particularly evident in the largest Midwestern metro areas where infections have skyrocketed. Metro areas across the US added fewer jobs in September than August, marking the smallest increase since employment began recovering in May. Tourism hubs are especially having a hard time bouncing back, with many having job deficits of at least 10% in September. Though we saw relatively steady progress this summer, we are now entering a more uncertain phase of the recovery. 

Spend, Spend, Spend Raises Global Debt to Precarious Levels

Dambisa Moyo, Financial Times
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As mentioned earlier, the international debt situation has reached a precarious level. Equally worrying is China’s position as a creditor, elevating the debt concerns from merely economic to geopolitical as well. Strained relations between China and the US, combined with China’s position as the largest trading partner and foreign direct investor for many developing countries, create considerable risk for indebted nations. Even before the pandemic, concerns over unsustainable debt weighed on economic analysts in the US and the UK. The Congressional Budget Office projects the federal deficit will reach 5.4% by 2030, nearly four times the 50-year average; the UK’s Office for Budget Responsibility is similarly concerned about meeting its goal of balancing the budget by 2025. With the traditional remedies for excess debt – GDP growth, fiscal spending cuts, bailouts, and printing money – out of reach in the current climate, the debt issue seems unlikely to go away any time soon.