Finance and Politics: Review of Trends
The US, the third largest populated country in the world and leading economy, is home to the world’s most powerful financial institutions and markets. Due to globalization, the US financial system supports the financial markets and transactions in all parts of the globe. The fact that the IMF and World Bank headquarters are both seated in Washington, DC corroborates this claim. From Africa to the Middle East and Asia, the level of integration into global finance is evident across the stock markets and other investment dealings in Nasdaq where firms from all across the world are listed in unison. Ultimately, Wall Street measures the heartbeat of the world’s finance. Although it seems that China’s economy has overtaken the US economy, America retains its position as the global financial hub and watchdog.
China has been trying hard to circumvent the US dominance of the global financial system. The proposed New Development Bank (NDB) founded by the BRICS countries (Brazil, Russia, India, China and South Africa) in 2015 is intent on challenging the authority of the World Bank. However, this threat has not come to fruition, despite China’s domination of the global trade. Another factor is the indisputable role of political institutions and processes in determining the behaviour of economic agents, financial markets as well as financial institutions. This is evident in the wake of the recent US elections. The state of the financial markets across the globe and institutional expectations in the presence of Covid-19 has led to market uncertainties and volatilities (see Detrixhe 2020).
US political institutions are acknowledged as the main determinants in formulating fiscal and monetary policies across the world. This premise rests on the importance of the US national election which happens every four years. The winning party, either the Democrats or the Republicans, has a heavy bearing on the world’s fiscal and monetary policies. This effect has become evident since the Bretton Woods conference in 1944.
Finance and Politics: Economic impulse
The global financial system is currently experiencing an unprecedented level of instability such as fiscal and monetary imbalances due to the Covid-19 pandemic which invokes all sorts of risks to public, private, institutional and individual finances. While global monetary authorities are busy fighting the impact of Covid-19, the US election exacerbates the financial pandemic, as evident in dropping global investments and a huge sell-off in equity markets across the globe. Investors and financial asset managers from Asia to Europe witness volatility of considerable proportions, albeit short-termed and only due to the recent uncertainties surrounding the outcome of the presidential election, and the concern which party will control the Senate and the House of Representatives. The prospect of Joe Biden as president and a Republican-controlled Senate was a heart-trickling moment for American investors. Positive and negative expectations rested on either a blue wave or the Democrats losing both the presidency and the control of the Senate.
The implications of the two possible scenarios have been different for the political and economic allies of the US and the wider global community. Similarly, the impact of the election’s outcome was not a level play for the investors. At US national level, a Biden presidency would have meant significant changes in the monetary and fiscal policies. We may not have to look further than to the expected changes pronounced by the incoming chair of the Federal Reserve, Janet Yellen. Based on the record left by the Obama administration, one could make an accurate conjecture about the upcoming changes. The US system is well-acquainted with short-term changes in policies after every election period. However, making adjustments to the monetary and fiscal policies affecting foreign countries is not that easy. For the majority of the developing or emerging economies, fiscal imbalance is a normal phenomenon, even without a major election or a raging global pandemic. Considering these and other factors, we can determine the economic and political influence America exerts on the global financial and economic systems elsewhere. The spillover of the US election and the Covid-19 crisis has a measurable effect on the European economies and the central banks (see Elliott 2020).
Finance Markets and Politics: Investors and investment impulse
In the case of individual and institutional investors, their assurance and confidence in US institutions echo the magnitude of financial investment holdings in the US money markets alike. This fact cannot be overemphasized. In fact, the holdings of central banks worldwide, in both public and private financial institutions and markets in the US, reflect to what extent US events have an effect on the global financial system. This effect is manifested in the wake of the recent elections. According to Rojas and Sillars (2020), the trend in US stockmarket shares demonstrated that it was uncertain whether the Democrats would dominate the election, which would affect the level of future tax reductions that the American conglomerates had enjoyed under Trump. Most observers were anxious about the much-needed financial stimulus package to cushion the failing US economy amid the pandemic. Financial markets such as Dow Jones, S&P 500, Nasdaq, FTSE 100 closed up with 1.3%, 2.2%, 3.8% and 1.7% respectively, after the negatively effect of the uncertainty surrounding the election outcome. At the industry level, the expectation was that Joe Biden would indeed claim victory, which meant secured stimulus packages to support pharmaceutical, banking, and other sectors at home and abroad.
Likewise, the reports of Ossinger and Carson (2020) and Detrixhe (2020) on the market reactions in Luxembourg, Paris, Frankfurt, and Tokyo reveal that the failure of the Democrats to win a Senate majority meant that the global markets would remain volatile in the long-run. It signals an expected policy tension in the US political landscape caused by a Republican-controlled Senate and a Democrat President. This tension was most likely to spill into other areas as well as such differences would have a direct impact on the US fiscal and monetary preferences over the next four years.
Finance and Politics: The end justify the means
Ultimately, the expected transformations such as reinstating pro-globalization policies after four years of Trump’s anti-globalization policies and applications of quantitative easing will have a considerable impact on the fiscal and monetary policies of the other countries, especially those with developing economies. Similar effects will also be experienced by the advanced economies, albeit at a lesser rate. Therefore, the spillover effect of the recent US election into the global financial institutions and markets cannot be underestimated.
Even if we accept that China is the strongest economic power today, as claimed by some observers, it will not be for China to determine global financial and economic policies of the rest of the world. Economic leadership is of undeniable importance but it is only one part of the game. The US is likely to retain its global political and financial supremacy but not its economic hegemony. Thus, America serves as volatility gauge for the existing global financial and economic systems, and as such, the expected disintegration of the powerful US financial and political institutions is not as imminent as anticipated. If such a complete disintegration was indeed to materialize, the result would be another Great Depression.
Lukman A. OLOROGUN
Dept. of Economics and Finance
Faculty of Economics, Administrative, and Social Sciences
Istanbul Gelisim University
Avcilar - Istanbul
Email:
yinluk2000@yahoo.com
References
Detrixhe, J. (2020). Traders are positioned for a clear US election outcome. QUARTZ. Retrieved November 3, 2020,
https://qz.com/1926288/vix-falls-as-traders-position-for-a-clear-us-election-outcome/?utm_source=email&utm_medium=daily-brief&utm_content=10117912
Elliott, L. (2020). Stock markets soar as City traders anticipate Joe Biden win: Markets rally across Asia and Europe as analysts expect Democrats to triumph. The Guardian. Retrieved November 4, 2020,
https://www.theguardian.com/business/2020/nov/03/stock-markets-soar-as-city-traders-anticipate-joe-biden-win
Ossinger, J. & Carson, R. (2020). Two Bad Election Scenarios Come Back to Haunt Global Markets. Bloomberg.
https://www.bloomberg.com/amp/news/articles/2020-11-04/two-worst-election-scenarios-come-back-to-haunt-global-markets?in_source=amp_trending_now_1
Rojas, J. P. F. & Sillars, J. (2020). US election 2020: Wall Street shares rally as 'blue wave' prospects fade. Sky News. Retrieved November 4, 2020,
https://news.sky.com/story/us-election-2020-financial-markets-cautious-as-result-too-close-to-call-12123263
