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