The United States 2020 Presidential election has been called by pretty much every organization
that covers the event in any capacity and while the final decision is not made until
the special club that is the electoral college has presented its final decision,
it’s apparent that Joe Biden will be the next president of the united states.
This is the first time in almost 3 decades that an incumbent president has been voted out before
serving a second term and it has come in the midst of national and global catastrophes galore.
To add fuel to a fire that threatens to ignite the global economy,
the outgoing president has been vehemently challenging the results which is casting
doubt over the smoothness of the transition, the continuation of much-needed government
support, and the foundation of the nation’s systems in their entirety.
And this all begs the question, either unwittingly or maliciously, how much
damage could a president do to the American economy, and by extension the global economy.
There are checks and balances in place to control the influence of any one man in the united states
around things that were relevant when those checks and balances were been written. But it must be
remembered economies back then depended a lot more on successful harvests, and a lot less on tweets.
Our modern economies are incredibly complex, and incredibly fine-tuned,
but complex fine-tuned things tend to be very easy to break,
and the outcomes of throwing a proverbial spanner into the works could be just as devastating.
Thousands of people die when unemployment rises, and many more could loose access to healthcare,
housing and livelyhoods during even a minor period of economic turbulence.
All of this is to say that a president waging war on an economy
could be just as dangerous as waging war on a nation.
So
What kind of influence does a president directly have over an economy?
Do they deserve the credit for things going well?
And what could a president do to tank the economy if they really wanted to?
Now of course standard disclaimer time, this video is not going to be directed at any
particular president specifically and it’s more an exploration of the power of the office over
an economic system. But common, I know you guys aren’t silly and yes these hypotheticals may very
well be tested in the coming weeks. But either way we are not here to get political, as much
as can be avoided. Trump’s plans for 2021 could be claiming squatters’ rights in the west wing of
the Whitehouse and that is none of our concern, beyond the impact it would have on the economy.
Now one of the final press conferences that will be held by the current presidential
administration was a victory lap of sorts to celebrate the
dow jones industrial average passing 30,000 points, which was it’s highest level ever.
We have made many video’s discussing just how crazy these stock market records are
during a global economic catastrophe but one of the key takeaways was that the policies
of the Trump administration have been good for business.
Things like the massive tax cuts rolled out in 2017 and the trillions of dollars
in stimulus given to business in 2020 were only really going to pump up stock prices,
but the stock market is not the economy and short term gains are pretty easy to facilitate
even on a nationwide level, lower taxes, raise government spending you’re done.
Of course, this comes at the expense of taking on more and more government debt
which could be the first major weapon a president could use to destroy their own economy.
They could go over the national
Credit limit
If you get a credit card it will be given to you with a credit limit that takes into account your
income as well as your credit score. People who have higher incomes and have proven themselves
to be responsible with money will be able to use credit cards with higher limits than someone who
only has a part time jobs and has maybe missed a few payments here or there.
The same kind of common sense approach is taken to how much money the US government can borrow.
And trust me that’s probably one of the few times that common sense
and US government debt will be used in a sentence together.
Anyway the government wants to make sure that it is not giving complete free reign to itself to
spend whatever it wants so there is a control in place called the debt ceiling.
This is a number set by Congress that the government debt can not exceed until it is raised.
Now this figure is normally raised quite regularly because the American government
has not had a budget surplus since 2001 so naturally, it is taking on more and more debt.
Now you might think oh no this is really bad, stories about taking on more and
more debt normally end with sad garage sales and involuntary camping trips. And
look in reality, it’s not ideal but government debt works very differently from personal debt,
especially for the united states, because they are special. Go and watch our video
on modern monetary theory if you want to learn more about the actual mechanics behind this.
In reality this government debt is just a running tally of the difference between
government spending and taxation over the last 2 decades or so.
Now another reason why constantly raising the debt ceiling isn’t as scary as it might sound
is that just like a regular person, economies tend to make money as time goes on.
Some bottom-feeding scum of society like a grad student should rightfully only qualify for a $500
credit limit on their no frills credit card. But as they progress throughout their career and get
a job with a decent salary they might upgrade, and upgrade and upgrade again until they are
some upper management executive with a wiz-bang platinum amex with a limitless spending cap.
In the same way the American economy has doubled in size since 2001,
which means that there are more people making more money and paying more taxes,
so the government has more capacity to repay a larger and larger debt burden.
This might be part of the reason why in August of 2019 the debt ceiling was suspended,
meaning that America became that corporate executive with a no-limit credit card.
There was a catch though, this spending holiday has a deadline
which will end in July of 2021, which is uhh oh geez only 7 months away... how did that happen.
Now if this debt limit isn’t raised or suspended again
it could have some very serious impacts on the economy. Record spending on fiscal
stimulus has meant that the balance on the government credit card is at an all time
high and not being able to extend this limit will have some very serious consequences.
For starters, it could stifle all government activities causing yet
another government shutdown. These are major hiccups in their own right to the economy.
People have more or less forgotten how serious the fallout from the December 2018 shutdown was
because it got corrected quickly, but it could have easily sent the whole nation into a tailspin
especially if it hadn’t occurred during a time of relative prosperity.
Which is where things could get ugly in 2021, the same kind of shutdown would have much
more serious consequences because it would be combined with the halting of continued stimulus
which is likely to continue to be necessary well into the new year.
If public servants are out of work at the same time that government assistance dries up
it could make for a very bumpy ride indeed, but not
nearly as bad as what could happen in a potential doomsday scenario.
If the debt ceiling was not altered quickly enough it is possible for the government
to lose access to enough money to make repayments on the money it already owes.
Every few days the US treasury has to roll over it’s debt, by replacing bonds that are expiring
with new bonds to pay off the old bonds. Kind of like refinancing a loan on a much larger scale.
Now the debt ceiling shouldn’t actually matter to this process too much because technically
the old debt is being replaced by new debt and the total outstanding liability has
remained exactly the same but this ignores potential accrued interest,
or the possibility that investors might demand higher interest rates
on government bonds from a government that is actively trying to suffocate itself.
Now is this likely? Well no especially in todays low interest rate environment.
but it is possible. Has something like this actually happened? Well yes sortof.
In 1979 the treasury accidentally missed a payment on a 122 million dollars to government
bond holders. This was caused by basic human error and was corrected within 24 hours.
You might think ahh well that’s no big deal… but it was a big deal.
A 1989 research paper later found that this minor slip up raised the cost of borrowing by 0.6%
which may not sound like much, but if it was applied to the current outstanding debt today
it would cost the government an extra 132 billion dollars a year in interest.
That’s enough to pay for NASA, 6 times over.
This is also assuming that the cost of borrowing will only rise by 0.6%,
there is a big difference between a human error that was swiftly corrected and a
sovereign government playing chicken with itself for political points.
It might already be starting to happen. In the same way that a credit card user that takes on
too much debt or starts to get a bit shaky about repayments may lose points on their credit score,
the US governments debt has already been downgraded from triple A to double A plus.
This downgrade was announced in august of 2011 and since then the government
has been unable to reclaim it’s perfect credit score, and infact there are murmurs
that in the light of global uncertainty that US bonds could be downgraded again.
Now what does this have to do with the president? Or specifically
a president hell-bent on taking down their own economy?
Well these credit extensions are passed by congress but they need to be signed off by
the president. At this point, a malicious head of state could just veto the changes
to the debt ceiling, or just refuse to sign it, which is called a pocket veto.
Congress can get around this by passing the law again with a two
thirds majority in both the house and senate. But cmon who are we kidding,
congress didn’t pass a law granting life-saving treatments to 9/11 heroes by a 2/3rds majority
this kind of politically heated fiscal bill would have no chance.
Since 1789 less than 7 percent on presidential veto’s have been overturned in the united states,
and a majority of those overturned during a
time when politics was slightly more partisan than it is today.
Now the fallout of the US defaulting on it’s debt would be so catastrophic to
the world economy that it really truely is hard to speculate about what would happen,
but it would make borrowing far more expensive for the government, and it would potentially mean
the US dollars defacto use as the worlds reserve currency would be in jeopardy.
You see major institutions and we are talking real big fish here,
fortune 500 companies, sovereign wealth funds, and even entire nations all have cash but they don’t
keep it in a regular old bank account like you or I, they will note it as cash and cash equivalents.
Apple for example is the most cash-rich company in the world,
it has more than 200 billion dollars listed on its global balance sheet as “cash” but a vast majority
of this money is kept in Ireland, and it’s kept as US government treasuries. Why ireland you may ask,
go and watch this video here, the short answer is tax shenanigans, it’s always tax shenanigans.
Now the idea is that treasuries are so priced stable and easy to sell for cash
that they are basically as good as cash itself.
Hence cash equivalents. Infact for large piles of money, they are actually safer than cash itself.
Cash in a bank account is only guaranteed up to
$250,000 by the federal government. But treasury bills are guaranteed by the government up to an
unlimited amount of money on account of them literally being guarantee by the government.
Now, this is all fine but if there is ever an inkling that these bonds would not get paid,
well then these big money institutions will look to more stable alternatives.
Now you might be asking. mr economics man, did you just use the news cycle
surrounding the election turmoil to trick me into learning about reserve currencies,
debt ceilings and corporate cash equivalents? And well hMmmmm yes,
But please still like the video,
chances are that will be more relevant information to all of you rather than
how to cook your own economy as a tyrannical head of state. Or at least i would hope so.
But I don’t want you to be angry at me so alright alright, can trump take the American economy
down with him? No not really, any major policy decisions will be made by the next administration,
so to will the process of raising the debt ceiling. The Senate might be able to cause
some drama there but that’s not going to be at the discretion of the president.
Congress isn’t going to support a frivolous war, and even threats directed at trade
partners or specific companies are not carrying the same weight they once did.
Quack quack I suppose.
But with the benefit of a bit more time here is
Economics Explained’s simple guide to destroying your own
economy that you can do right now from home.
Assuming this is your home
There are going to be 3 key areas that you need to take out,
currency, industry, and the skilled population.
An economy can lose one or two of those three things at a time and still
effectively bounce back. A skilled population, given access to advanced industrial capital,
will be able to thrive and create a well-respected currency.
A smart population with a well-respected currency will be able to buy up industrial capacity,
and even a nation with strong industry and currency but a less than stellar workforce
will be able to bring in professionals from overseas or train up their own population.
Even if a nation only had one of these they could fill in the
blanks quiet easily by leveraging that position.
So starting with currency we already saw how to do that, run up massive debt that you then
don’t pay back, or alternatively print away all value in the currency causing hyperinflation.
With any luck, you will then need to adopt a foreign currency as your
own and be beholden to that country for all monetary policy decisions.
Getting rid of the industry is a little bit harder,
unless you can convince the military to wage war on your own nation
it’s going to be difficult to directly remove the countries productive capacity overnight.
Instead what you should do is massively underfund infrastructure spending
so that bridges, highways, canals, shipping ports get to a point where
they are no longer usable to increase the efficiency of the nation’s workers.
Now as for those workers, well you are going to want cut off the supply of skilled labor by
reducing funding for education and making tertiary studies prohibitively expensive,
and it’s probably also wise to reduce skilled labor migration as well
just to ensure that none of those intellectual blanks get filled.
If you can do all three of these in unison you will also decimate any confidence people
have in the stability of the nation and be sure to cement the demise of your economy.
Congratulations you have completed the program, I hope you had short calls on SPY.