A working Washington is necessary for constrained markets. Blockade Doesn’t Help.

The U.S. economy and its financial markets would suffer if President Biden lost his majority in the House of Representatives.

The last thing we need is a paralyzed administration unable to react to a collapsing economy at a time when the nation appears to be on the verge of a significant economic recession. The financial markets are already losing ground. The market for Treasurys seems to be unliquid. Political gamesmanship over the debt ceiling issue might drive up borrowing prices for the US government.

In more stable economic circumstances, a gridlocked Washington may be welcomed. Without a congressional majority, no administration would have the support needed to make significant increases in public spending or deep tax cuts. That might contribute to fostering the fiscal responsibility that has sadly been lacking during the previous ten years. Additionally, it might assist in putting the nation’s public debt on a more manageable course.

The fact of the matter is that our current economic situation is anything but typical. The Federal Reserve’s ultra-easy monetary policy and last year’s reckless $1.9 trillion American Rescue Plan both contributed to economic overheating and inflation rocketing to a multidecade high. Meanwhile, the Fed’s massive money printing and zero interest rate policy created a “anything” bubble in the property and credit markets in the United States and around the world.

It would seem more than likely that the U.S. will have experienced a significant economic recession by the time the votes are eventually tallied and the new Congress convenes in January, while the Fed maintains high interest rates to retake control of inflation. This upcoming recession will be driven, as in previous ones, by a significant implosion of the housing bubble. Additionally, it will be brought on by high interest rates, which will diminish consumer demand, and a strong dollar, which will lower U.S. export competitiveness and lower import prices.

U.S. financial markets have plummeted over the past year in response to the Fed’s newly discovered monetary-policy religion. The U.S. equities market is down 20%, the bond market is down 15%, and the cryptocurrency market has lost over 60% of its value since the beginning of the year.

At the same time, the global credit system has begun to show worrying fractures. Twenty other Chinese real estate developers have also defaulted on their obligations, including Evergrande. In the meantime, a number of emerging-market nations have started to fail, and the Bank of England has been forced to save the British pension system.

The fact that American and international financial markets have become acclimated to an environment with low interest rates and stable economic conditions is a serious problem. It is likely that we will encounter turbulence in the US and global financial markets before the new Congress has had a chance to get its bearings if the U.S. economy suddenly enters a recession and the Fed is forced to maintain high interest rates to battle inflation.

The last thing we need when the government reaches its debt limit next year is brinkmanship over lifting the debt ceiling, given the stresses now felt in the financial markets. Yet Kevin McCarthy, the likely next speaker of the House, is threatening to do just that. The country’s credit rating could be downgraded once more, as it was in 2011, which would increase borrowing costs for the government.

In order to prevent a negative economic spiral, Congress adopted significant budget-stimulus packages in response to the severe economic recessions that followed the 2008 Lehman bankruptcy and the 2020 economic lockout. President Biden’s loss of a congressional majority in the current divisive political environment would cause significant delays in addressing the problems with the economy and financial markets in 2013. If that turns out to be the case, we should prepare for a deeper economic slowdown than usual as well as additional market turbulence.

It seems likely that next year, during a recession and tense financial markets, will be the time when bipartisanship is most needed to confront our challenging macroeconomic and financial market concerns. However, I do not advise putting all your eggs in one basket and hoping that it will happen before things become further worse.

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