Friday, March 5, 2021
Martin Hennecke

Biden's Keynesian fix puts world at greater risk
<p>Many on Wall Street were disgusted by Donald Trump and especially disliked the former US president&#39;s tough policies on China, which made it more difficult for Chinese firms to get listed in the United States, with listed firms even facing the threat of being kicked off US exchanges.</p><p>Of course, Wall Street has now welcomed the new US President Joe Biden because of his Keynesian approach to economic governance, which means the next four years should see renewed economic stewardship in the United States.</p><p>So, most people will now expect US financial markets to flourish and the bull run to continue.</p><p>But even if Trump&#39;s foreign policy was more hawkish, did US financial markets really have a bad time?</p><p>Not really, because the S&amp;P 500 and the Nasdaq rose 65 percent and 133 percent, respectively, during Trump&#39;s time in office, which is not bad at all.</p><p>Of course, Trump&#39;s constant pressure on the Fed during his tenure, coupled with the coronavirus pandemic, led to an unprecedented degree of monetary easing and contributed to the surge in US stocks.</p><p>But can monetary policy remain loose?</p><p>At the same time, can Washington continue with its massive fiscal stimulus? The most optimistic current forecasts put America&#39;s deficit at around US$5.345 trillion (HK$41.69 trillion), which means the United States will inevitably increase the issuance of bonds.</p><p>But, given America&#39;s huge trade deficit, bond interest rates will have to be increased and the US Federal Reserve will pay the price eventually, leading to a vicious circle.</p><p>Overseas investors currently own about US$27 trillion in dollar-denominated financial assets and deposits.</p><p>If they start to worry about the risk of these dollar-denominated assets and sell them for cash, the price of the assets will fall sharply, which will surely trigger a crisis in the financial markets.</p><p>At the same time, we must not forget that because of the ultra-loose monetary policies of central banks across the world, many enterprises over the past few years have come to depend on bank financing to support their operations.</p><p>This dramatically increases the risk of bad loans and the consequence is that some banks may have to be nationalized to avoid them going bankrupt.</p><p>No matter what solutions are proposed, it will be only the monetary and fiscal policies in various nations that can solve these problems. If not, the global economy will inevitably fall into a depression.</p><p>What&#39;s more, it should be noted that the above scenarios will put severe depreciation pressures on mainstream currencies, especially the US dollar.</p><p>The only major impetus for the US dollar is that investors and the public in the America have not lost confidence in the greenback, and the US dollar is still the main settlement currency.</p><p>But if Biden choses to base his policies on Keynesian economics, the bubble in global financial markets will only get bigger, and because the economic benefits of the policies are not as significant as the effects, the global economy will inevitably fall into a depression.</p><p>Keynesian policies make gross domestic product too big while ignoring the fact that GDP does not reflect the essence of the economic situation.</p><p>Therefore, if Biden&#39;s government only focuses on GDP data, while ignoring potential problems such as the wealth gap between the rich and the poor and falling middle class numbers, the US economy will be worse off four years down the line, and global economic problems will become much more severe than what they are today.</p><p><em>Andrew Wong is chairman and CEO of Anli Securities</em></p>
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