Bidenomics - What challenges does the President face?

Biden’s inauguration marks the start of his second fight against an economic crisis. It could be argued he is faced with more economic challenges than beforehand, which will require him to be more cautious with his policy decisions. But what are some of the challenges he is facing?

Biden’s most obvious issue to address will be COVID-19, which has killed over 430,000 Americans and is scarring America’s economy, with the unemployment rate sitting well above pre-pandemic levels. America’s situation has forced his hand in proposing a $1.9 trillion relief bill, aiming to bolster the economy through increasing stimulus payments, unemployment aid and grants for small businesses. Whilst this may seem ideal in the short run, the effects of this ‘helicopter money’ tactic may cause currency depreciation and prove to overheat the economy through price inflation.

The U.S. Dollar Index has already seen a 10% depreciation since the first stimulus package (CARES Act) was signed in March due to the COVID induced recession, and this could be exacerbated by a third relief bill.

Source: DXY- Depreciation diagram- Yahoo Finance

Typically, increasing the supply of a currency (through printing money) results in reducing its value, and the impact of this will be felt across U.S. Businesses. In particular, larger companies making up the S&P500 will suffer depending on the extent of their reliance on foreign resources, as the cost of importing increases.

Given the low 0.25% Federal rate, this stimulus package will also run the risk of creating asset price inflation and bubbles. With trillions of more dollars being pumped into the financial system, we could potentially see prices depart further away from their fundamental values.

Recently there has been a stark increase in rash investing on a retail level due to greater accessibility to commission-free trading apps. Notably, Reddit users have been able to profit through organising short squeezes via r/wallstreetbets, without any care of company fundamentals. Directly supplementing this audience with $1400 in cash may add to this betting behaviour, inflating stock prices until they burst.

Source: S&P500 reaching all-time highs last week - Yahoo finance

This injection of $1.9 trillion will come at the cost of Biden’s plan to hike taxes, possibly raising corporation tax to 28%, including a 15% alternative minimum tax on profits above $100m.

Biden has inherited one of the most indebted countries in the world, sitting at a debt-GDP ratio of roughly 100%, having increased by 48% under Trump’s single term in office. Whilst the greater tax measures will inevitably face opposition due to the current fragility of businesses, it will be necessary when considering their national debt.

Source: US Debt chart - Statista

Biden is also set to propose a doubling of the current national minimum wage to $15 an hour. This should help to lift people out of poverty which has been fuelled by the pandemic, whilst boosting consumption. However, this poses a serious risk when considering the fragility of businesses, possibly causing firms to lay off staff due to higher costs. Unemployment is something Biden will want to keep low, currently standing at a relatively high 6.7%.

The Democrats clearly have urgent issues to address, however when the smoke clears, we can expect to see the U.S. begin to build back on a greener note.

Within hours after his inauguration, Biden began his fight to restore America’s policies to combat climate change. Re-entering the Paris Agreement has demonstrated the Democrat’s determination to push both the U.S and global emissions down.

Investors can expect to see similar impactful actions taken to reduce the level of fossil fuels within the U.S. and global economy, with Biden’s pledge of investing $2 trillion in clean energy, and a goal of fully decarbonising the power sector by 2035. Throughout 2020, we saw an increase in demand for more sustainable power through greater levels of ESG investing, with the Wilderhill Clean Energy Index up 244% last year outperforming the S&P 500 benchmark of 15%.

Source: Wilderhill Clean Energy Index chart reaching new highs - Yahoo Finance

Ultimately, the challenges facing Biden’s administration lie in mitigating the economic impact of COVID-19 within a hostile debt environment, all while pushing forward a more sustainable economic agenda. The success of the proposed stimulus package will be seen in America’s rate of economic recovery. The outlook is tough, however, has to be tackled if America wishes to maintain its position as one of the economic superpowers of the world.