Observations On The North American Fiscal Outlook

The first Presidential debate was last night (which I skipped). From my perspective, the main hot button issues in the U.S. election are not about macro policy, at least from a high-level perspective. Obviously, economic outcomes for American households will be different, but from the vantage point of a foreigner owning U.S. Treasurys, direct impacts are harder to see.

Trump is obviously a good campaigner, but it seems difficult for him to win at this point. The albatross of the pandemic response is an imposing headwind. If he does manage to win, it is going to be hard to predict the outcome for policy. “Erratic” seems like the best adjective to use.

My instinct is that a Biden win would have the Democrats partying like it is 1992. A measured increase in spending balanced off increases in tax rates on the top brackets seems to be the desired script. (Whether this can get through Congress is unknown.) However, translating higher tax rates into higher taxes is the challenge (as a recent news cycle highlights). The net result is mildly stimulative, and the fiscal deficit would narrow (which it would do anyway during an expansion). If bond yields go nowhere (exactly like previous cycles), this will be taken as vindication for “Rubinomics 2.0.”

From a bond yield perspective, the reaction function of the central bank is what really matters. One can consult the eurodollar futures strip, or implied forward rates to see what the reaction function looks like (snore). Unless there is a sudden resurgence of inflation (why?), the only way to liven up the reaction function is for Trump to pack the Federal Reserve with gold bugs.

Finally, I ran across a piece written by a Canadian fiscal conservative. This piece is interesting in that the author clearly has no idea how interest rate policy works. Meanwhile, it is very hard to distinguish it from pieces extolling fiscal conservativism written by highly credentialed members of the Canadian establishment. This makes the situation in Canada interesting for me as a writer. Being surrounded by targets that have preserved their views in amber since the early 1990s is akin to dynamite fishing in a barrel. As such, I might finally turn my gaze to Canadian developments, which I previously had largely skipped over as they were too boring. (“Oh dear, shall I write the 10,000th piece worrying about a potential housing bubble collapse?”)

One interesting common thread in these two observations is that the establishment on both sides of the border are still stuck in 1990s. 

(c) Brian Romanchuk 2020