US Election 2020:
A look at the economy

By Brendan Mulhern, global strategist at Newton

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September 24, 2020
If James Carville, strategist for Bill Clinton’s successful 1992 presidential campaign, was right, and the deciding factor in any election is the economy—that would make President Trump’s chances in the November US presidential election appear bleak.

According to official statistics,1 the US has just experienced its deepest recession since records began,2 and, while the worst is probably behind us, much of the damage has already been done. Even as the economy recovers, it will be weaker and unemployment higher than before the economic downturn.

But this was no ordinary recession, and, as such, it may be unwise to put too much stock in Carville’s assertion, so rather than add to the countless opinions offered on who is going to win in November, we will consider a different question: in terms of the investment outlook, does it really matter who wins?

Generally speaking, markets view a US election as a time for caution – or at least as a reason to wait on the sidelines until there is some clarity on where to allocate capital. However, thanks to the pandemicinduced recession and the unprecedented monetary and fiscal policy response, US economic policy uncertainty is already sky high.

As we can see from exhibit 1, policy uncertainty has been most extreme during periods of financial and economic stress, and financial and economic duress elicits a policy response, which, in combination with business cycle dynamics, paves the way for economic recovery.

Against this backdrop, it is reasonable to assume that the result of the election is not as significant as it perhaps would have been otherwise; no matter who wins, the US government will continue to run large deficits until the private sector is back on its feet, and the Federal Reserve is likely to be footing the bill, either directly or indirectly.

Yes, the election outcome matters at the margins – particularly for the equity market winners and losers – but we believe the underlying market trends are unlikely to be affected.

What does this mean?

  • When central banks first began quantitative-easing programs in response to the financial crisis, the consensus view was that this would lead to a sustained acceleration of inflation.
  • This proved incorrect and as consumer price index (CPI) measures of inflation failed to respond to persistent central-bank largesse, a new consensus was steadily established – low inflation was now a fact of life.
  • With monetary and fiscal policy now acting in unison, there is a high probability that central banks succeed in realizing higher levels of CPI inflation.
  • This would likely lead to higher bond yields and steeper yield curves.
  • Financial repression will not go away any time soon – it is very much part of the monetary financing of fiscal deficits – and as such, real yields are likely to remain low; which is, in our opinion, just what gold needs to keep on ‘shining’...

Modern Monetary Theory (MMT) Here We Come!

It is likely that the Covid-19 crisis will come to be seen as a ‘through the looking glass’ moment for monetary policy. What makes this a watershed moment is the simultaneous commitments of central banks to purchase government debt and direct fiscal spending by governments to support household and corporate incomes – effectively the monetary financing of government deficits.

Consequently, the tether between taxation and spending – the most important macroeconomic policy relationship for our lives as citizens – has been severed. The tether has been fraying for over two decades now, but what remained of any pretense of a link between government revenues and expenditures has been expunged.

The US fiscal deficit had widened aggressively even before the crisis, but as we head into the election, neither Democrats nor Republicans are making any attempt to subscribe to fiscal prudence.

In his book Monetary Regimes and Inflation: History, Economic and Political Relationships, Peter Bernholz shows that the monetary financing of government deficits accelerates inflationary trends.

When life returns to normal, the global economy will return to work likely aided and abetted by monetary and fiscal stimulus on an unprecedented scale – certainly during peacetime. Under these conditions, there is a very real chance that we see a sustained acceleration of goods and services inflation.


1 IMF: The Great Lockdown: Worst Economic Downturn since the Great Depression. April 14, 2020.

2 US News: A US Recession Began in February in the Face of Coronavirus. June 8, 2020.

3 NBER: The National Bureau of Economic Research



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