Wednesday Briefs – 20 January 2021

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This week: President Biden; Trump’s Federal Judges; Foreign Policy Returns; Market Love.

President Biden

The 46th President was sworn in today. Like all presidents, he inherits a number of problems, foreign and domestic. But unlike other presidents, he will in addition have to contend with an aggrieved predecessor and his followers. As usual, the measures of success will be the general economy and living conditions at all levels of income.

Headwinds to the Biden economy include the pandemic (near-term), weak demographic trends (aging of the population) and rising budget deficits. Tailwinds are the post-pandemic recovery and related pent-up demand, increased investments in technology and health care, and low interest rates.

Trump’s Federal Judges

History books will mention that President Trump was the first president to be impeached twice, that he refused to concede, that his economic policies worked for a while until a global pandemic reshuffled the cards, and that some of his more fanatic supporters stormed the Capitol two weeks before he left office. These events have had and will continue to have significant consequences. But Trump did other things that did not create big headlines and that will nonetheless have a far-reaching and enduring impact on the country.

Among them is Trump’s reshaping of the Federal judiciary with the appointment not only of three conservative Supreme Court Justices but also of judges at all levels of the Federal courts. Trump’s judges are conservative in the sense that they are thought to be originalists on the Constitution and other laws. We addressed this issue in the 30 September 2020 Wednesday Briefs at the time of the nomination of Justice Amy Coney Barrett to the Supreme Court, noting that Justice Barrett had been critical of stare decisis doctrine (the ‘doctrine of precedent’) in the past.

Attorney Tim Busch writing in National Review provides an overview of Trump’s judiciary appointments:

“No modern president has made a greater impact on the judiciary… [In addition to his three Supreme Court nominations, Trump] placed a further 54 judges on the federal circuit courts, which issue important rulings that affect huge sections of the country. And he appointed 175 federal district-court judges. All told, Trump is responsible for about a quarter of the federal judiciary — an incredible feat in just four years. More important than the quantity of Trump’s appointees is their quality. By and large, they are “originalists”, which means they interpret the Constitution according to the meaning of its words at the time it was written.”

Expect this jurist’s debate between originalists and stare decisis advocates to heat up in coming months and years.

Foreign Policy Returns

In foreign policy, Trump chose his causes carefully and treated other issues with some neglect. In the first bucket were China, Iran, the former ISIS, Israel and the Arab states that could become signatories of the Abraham Accords. In the second were Russia, North Korea, Turkey, climate change and others. In order to pull off this unusual and precarious balance, Trump ignored or occasionally mistreated some traditional allies.

With a change of administration, the first bucket may remain more or less on the same trajectory but the second will likely be brought back to the front burner and to its former reality. Biden will certainly be less friendly to Putin and he will not be penning personal notes to Kim Jong-Un. Fighting climate change will be back to the front and center of US policy. Containing Iran’s and North Korea’s nuclear programs will figure again as major concerns.

Market Love

The Senate flip to Democrats after the Georgia run-off races has done nothing to dampen momentum in the stock market. The main explanation for this surge in optimism is President Biden’s promise of a larger stimulus plan that would send $2,000 checks to most Americans. With the last stimulus, the Economist had estimated that as much as 27% of the funds had been earmarked by households for savings (while 42% were spent and 31% were used to repay debt).

A share of these savings undoubtedly ended up in the investment markets. Free money being less risk-averse than earned money, the frothiest part of the market was likely fueled by large inflows of stimulus funds. Bitcoin and fast moving stocks scaled new heights.

Some scenarios could derail this momentum. One would be talk of higher taxes from Democrats controlling the White House and both chambers of Congress. Another would be a rise in treasury yields as the weak part of the economy recovers post-pandemic. A third would be expectation of higher inflation. On the last two, the Wharton School’s Jeremy Siegel expects both treasury yields and inflation to rise because much of the pandemic stimulus is going into private hands. He explains in this Financial Times article:

“The money created by the Fed is not going only into excess reserves of the banking system. It is going directly into the bank accounts of individuals and firms through the US Paycheck Protection Program, stimulus cheques, and grants to state and local governments.”

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