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US Treasury secretary Steven Mnuchin listens to a question from the media outside the White House in October 2019. Photo: Bloomberg
Opinion
Anthony Rowley
Anthony Rowley

Mnuchin may be right to wind down US crisis lending as ‘easy money’ worries spread

  • The US Treasury decision to pull back crisis lending is seen by some as Trump’s bid to sabotage Biden’s administration, but it actually reflects wider global unease over easy money conditions

If Donald Trump wishes to lay waste to the territory he is being forced to vacate ahead of the arrival of the Biden-led forces, there can be few more effective ways than sabotaging the US stock market, which has been the main fortress of Trump’s economic policies.

The possibility that a president of the United States could resort to such scorched-earth tactics might seem remote, yet it seemed to be in prospect after Treasury Secretary Steven Mnuchin declared his intention to wind down some of the government’s crisis-lending facilities.

As the Financial Times noted: Mnuchin’s decision “fuelled concerns that US President Donald Trump is seeking to constrain the incoming Biden administration’s capacity to tackle the economic fallout from the pandemic, as part of a broader effort to delegitimise and damage the future Democratic presidency.”

But was Mnuchin right (even if inadvertently) in refusing to renew some government credit lending facilities beyond the end of this year? A strong undercurrent of unease emerging beyond the confines of the Treasury over the consequences of endless credit expansion suggests that he might be.

Mnuchin denied that his move was political and claimed that the Treasury still has “a lot of firepower” without further lending facilities. But critics such as former Treasury secretary Larry Summers suggested that Trump’s “burn the house down” approach was behind the move.

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Biden says Trump challenge to his election victory is ‘totally irresponsible’

Biden says Trump challenge to his election victory is ‘totally irresponsible’

Maybe, but while Mnuchin’s hints of less accommodative fiscal policy cannot be justified by his claim that “financial conditions are in great shape” (a truly Trumpian boast), the outgoing Treasury secretary is not alone in believing that easy money conditions cannot persist forever.

The implications of this groundswell of unease (although not yet open opposition) over “lower for longer” interest rates, central bank money creation and government handouts should be sobering for financial markets that are still indulging in bouts of irrational exuberance.
Former Federal Reserve chairwoman Janet Yellen, who is widely expected to step into Mnuchin’s shoes, could find herself inheriting a poisoned chalice. Instead of riding a liquidity-driven bull market, she could preside over an economic wasteland if there is any sinking of the water table of financial liquidity that has kept the stock market and the economy afloat during the Trump era.
Janet Yellen appears before a Senate hearing in 2016. She is expected to be the first woman to head the Treasury, after being the first women to chair the Fed. Photo: EPA-EFE

Even if the outgoing Trump administration stops short of foul tactics, the Biden team will need to be prepared for the possibility of a major US stock market correction not long into its tenure of office, while also facing a possible combination of financial, debt and fiscal crises.

The Covid-19 pandemic plus Trump’s pre- and post-election theatricals have obscured what has been going on in the financial economy in recent weeks and months, but the advent of a calmer and more collected Biden administration is likely to allow the potential crises to emerge.

So much has come to depend upon the ability of markets, businesses and even governments to drink at the well of central bank-fed financial liquidity – including elevated stock prices, the seeming solvency of zombie companies and the continuing financial viability of governments.

World economy needs smart stimulus, not just any stimulus

Yet unquestioning acceptance of the need for “more of the same” may be giving way to a feeling that “enough is enough”. As International Monetary Fund (IMF) managing director Kristalina Georgieva put it recently, “additional monetary stimulus may pose important risks to financial stability.”

Central banks and monetary authorities, she noted, are searching for ways out of the trap policymakers have created by easing economic pain at the expense of future financial health. As she put it: “More of the same is not possible.”

IMF managing director Kristalina Georgieva attends a session on the first day of the Munich Security Conference in Munich, Germany, in February this year. Georgieva has warned of the financial risks of more monetary stimulus. Photo: AP
The liquidity “fix” has meanwhile allowed the world to avert its gaze from the mountain of global debt, which, according to recent data from the Institute of International Finance (IIF) in Washington, has soared to a record high of over US$272 trillion, mainly among companies and governments.

Synchronised policy measures by central banks and governments in advanced and emerging economies have “helped fuel a massive wave of borrowing, particularly by sovereigns and corporates”, said the IIF. Debt service concerns are rising as a result.

We appear to be near the point where abundant liquidity and fiscal handouts become as effective as pushing on a piece of string

New debt “has less and less capacity to generate GDP growth in an environment of corporate zombification, subdued investment and weak productivity gains,” the IMF observes. Yellen is said to be among those who worry about the ever-growing debt burden.

Central banks created the liquidity but since the pandemic, it has mainly been governments that channel it, to businesses and households. Yet, as IMF’s Georgieva says, interest rates have been pushed to the floor “limiting the scope for government debt purchases to boost the economy”.

We appear to be near the point where abundant liquidity and fiscal handouts become as effective as pushing on a piece of string (a saying attributed to economist John Maynard Keynes) when it comes to transferring benefits to the economy. Inflation could be one result, plus a lot more nasties as this realisation dawns on markets.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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