Higher for longer, no matter who’s in charge

Election day is just a few hours away, and with the Financial Times bringing you 24-hour coverage tomorrow (including news and opinion blogs), I’m going to focus on one economic subject: inflation.

This has obviously been a major election issue and will be an ongoing issue for policymakers, regardless of who is in charge. While overall U.S. inflation is now 2.1 percent, just a bit above the Fed’s 2 percent target, the core index of personal consumption expenditures (the measure preferred by the Fed) is now rising at its fastest level since April.

If we had no more inflation this year, the number would be close to the Fed’s target of 2 percent.

But recent measures of GDP growth, personal income and even travel data all point to the same conclusion: Higher inflation will persist for some time.

The reasons we are not returning to a cheap money environment are not so much cyclical as structural. All major macroeconomic trends, with the exception of technological innovation, are inflationary. Decoupling and relocation? Inflationary. Regionalization and reindustrialization in rich countries? Inflationary, due to the large amounts of capital expenditure involved. The clean energy transition? Disinflationary in the long term (since it will reduce energy costs), but inflationary in the short to medium term, as countries rush to subsidize and deploy green technologies, from wind turbines and solar cells to lithium batteries and vehicles electrical.

On the latter note, as China seeks to dump cheap clean technologies on the global market through a massive industrial stimulus program designed to reduce the slowdown in the overinflated real estate market, it will be politically impossible for the United States and China. Europe to accept this. . This recent FT Big Read describes how European car manufacturers are now experiencing the crisis. Sudden end to Chinese dumping in the electric vehicle space.

Regardless of who occupies the Oval Office next January, I very much doubt that cheap Chinese goods can produce the disinflationary effect they have had in the past. Gone are the days when China could easily export its own economic problems – such as unemployment and an outdated growth model – to the rest of the world.

Demographics are the latest inflationary trend. Baby boomers are still healthy, working and spending. They have no plans to transfer their wealth anytime soon – in fact, many of them (like my own parents) are expanding their homes or going on trips. Although economists have always viewed the aging population as a disinflationary factor, as older people spend less, I suspect this generation of baby boomers will buck the trend in the years to come.

What will all this mean for the next president? To begin, I expect a big conversation about the debt and deficit, as well as the independence of the Federal Reserve. Future interest rate developments will have major consequences for the U.S. fiscal trajectory, especially as the cost of interest on the public debt continues to exceed almost every other item in the federal budget. According to the Committee for a Responsible Federal Budget, a one percentage point increase in interest rates beyond forecasts would add $2.9 billion to the national debt by 2032.

This may, in itself, be inflationary if it erodes confidence in America and thus increases the cost of capital. Many international creditors are concerned about the American political system, social cohesion and the ability of either candidate to limit debt (although it must be admitted that Kamala Harris’ plan should create half as much debt as Donald Trump would do, and it is even possible that he will be debt neutral if he increases growth levels).

America’s future hangs in the balance no matter who wins the White House (see my column today on how and if nations in decline can ever renew themselves). Peter, do you agree that debt will pose an immediate challenge for the next president? Or do you think this is a usual slow burn problem that’s being sidelined yet again?

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Peter Spiegel responds

Rana, this question is difficult to answer because the urgency with which the federal government addresses its deficit addiction depends heavily on the vagaries of financial markets. There have been times when the so-called “bond vigilantes” had the upper hand and forced the White House to get serious about deficit reduction. Do you remember James Carville’s famous quote, during the presidency of Bill Clinton, when he said that he hoped to reincarnate himself in the bond market so that he could “intimidate everyone”?

But that was 30 years ago, and it’s been a long time since we’ve seen sovereign debt markets express this kind of concern about U.S. borrowing. There were discussions about the recent liquidation of treasury bills it’s attributed to growing fear among bond traders that a Trump presidency would significantly increase the deficit – but I’m not convinced. I think investors are more concerned that the Fed’s September 50 basis point cut went too far, especially at a time when asset prices are at record highs and the economy is running at a brisk pace. .

What Could Trigger a Negative Treasuries Reaction? I spent six years in Brussels covering the eurozone debt crisis, and Greece was forced into a bailout because its debt was considered unsustainable. As I regularly remind my colleagues, at the time of Greece’s first bailout in 2010, Athens’ debt represented around 120% of its economic output. What is the current debt-to-GDP ratio in the United States? According to the Saint Louis Fedit’s 120 percent. It is not a good idea to find ourselves at the same debt levels as Greece before the bailout.

However, the United States is not Greece. Treasuries remain a safe haven, meaning people invest in them regardless of US debt levels, because the US has a history of paying what it owes and still has the strongest economy. largest and strongest in the world. Furthermore, unlike Greece, the U.S. government has a central bank that has been willing to tap sovereign debt markets in times of crisis to fend off vigilante attacks. As the late investment guru Martin Zweig once said: don’t fight the Fed. Nobody has ever said that about the European Central Bank.

However, there will come a time when the bond market will be much less inclined to finance the budget deficits accumulated by the US government since the financial crisis. As in the 1990s, the bond market will start to “intimidate everyone” again. But until then, I don’t see a new president taking urgent action to reduce the national debt.