Rabo: Is $2.25 Trillion Even Much Money Anymore?
By Michael Every of Rabobank
Learn Your Lines
The Biden infrastructure plan has been rolled out, and it seems the Washington Post was kept in darkness by its source: the total was ‘only’ $2.25 trillion. Is $2.25 trillion even much money anymore? I ask that in all seriousness seeing the sums thrown around us daily.
The plan speaks about the lines associated with infrastructure. Yet US politicians are already repeating their own ones: “None shall pass,” from Republicans over a corporate tax hike from 21% to 28%, and making some firms pay some tax; “Double or quits,” from progressive Democrats, who may have been the ones leaking to the Washington Post about the USD4 trillion figure.
Markets also used their own lines on screens to try to guess where the largesse of the government might flow: Cement? Steel? Paint? Solar panels? Electric batteries? Belts, to prevent builders’ usual brand of décolletage? US 10-year yields are at 1.75% at time of writing and the DXY was slightly down on the day, as the market peruses what this all means. It still isn’t quite sure.
I have long flagged we would end up moving to a world where markets would have to listen to politicians, not central banks, to know where the goodies will flow in the economy. Yet in that regard, for me the most important part of the package is not in the details. Rather, it’s in the packaging of *why* it’s needed, which I think represents where far more money will ultimately have to flow. First of all, we see this from the text of the American Jobs Plan:
“Like great projects of the past, the President’s plan will unify and mobilize the country to meet the great challenges of our time: the climate crisis and the ambitions of an autocratic China.”
So American jobs and unity are immediately linked to the climate and Beijing. Which they are in many ways, but saying so has huge implications as neither are going away. Second, we see this:
“By ensuring that American taxpayers’ dollars benefit working families and their communities, and not multinational corporations or foreign governments, the plan will require that goods and materials are made in America and shipped on US-flag, US-crewed vessels. The plan also will ensure that Americans who have endured systemic discrimination and exclusion for generations finally have a fair shot at obtaining good paying jobs and being part of a union.”
If the Trump White House had released this, would it have looked much different in key areas? Yes, there is a *huge* difference between word and deed. A large slice of the plan is for ‘social infrastructure’, for example, which is not the same as bridges and ports, etc. And could global supply chains really be shifted to the US? Even in the text above there lies a question: if new capital goods are to be made in America, why do they need to be shipped on US-flagged, US-crewed vessels?
Yet against the backdrop of the Republicans transforming into a working class party, this Biden plan sees *both* competing more for Blue Collar voters. That means being anti-free trade, or at least far more Hamiltonian; and competing on who is the more vociferously anti-China. Stimulus will ultimately come; and stimulus will ultimately mean more US decoupling – or at the very least, global realignment of shipping lines away from China and towards others the US prefers for national security reasons. It’s a trend already underway: politics simply shows it will accelerate.
How rapidly? While taking no normative stance, and knowing that tax hikes are political anathema – yet MMT is always available! – what I can say is that an infrastructure spend, especially if sold as national-security related, is probably going to be popular with voters.
Part of that view is admittedly personal: the last time I was State-side pre-Covid, a business trip from New York to DC involved a train that broke down in-between trundling along like those in southern Thailand (but without the charm of hordes of food vendors getting on and off at every stop to help you get diabetes – you had to do that at the New York station, and then wait four hours to do it again in DC); and then a much-delayed flight back through an over-crowded 1980’s-vintage airport with straining air-con, manned by sullen staff offering awful service (who can’t get the tips needed to boost their low wages, of course, so it was hard not to sympathize with them). My honest impression was that this was an alternative timeline where the USSR had won the Cold War. Logically, that makes it hard for the US to win a new one.
Against that backdrop, other lines remain in focus.
The BBC yesterday announced its China correspondent will be based in Taiwan from now on for his own safety, which makes a statement – yet US defence voices are wondering how long it will be before his next move might be required;
Note the BBC didn’t opt for Hong Kong. Because as Bloomberg says “Hong Kong Police Warn residents to Avoid Red Lines on Politics”, including the quote from a police officer “Do not tempt the law – it’s simple. A healthy attitude is to say ‘How can I be a responsible citizen and just make sure that I contribute to the overall harmony and peace and security of this place,’ rather than say ‘Hmm, let me see how far I can push this envelope, so that I can almost touch the red line, but you can’t touch me. This isn’t how we want to police Hong Kong.”;
There are reports of a Russian troop build-up on the border with Ukraine, which will see the EU respond with immediate mobilisation of a working group to decide on the voting system to be used in a committee that discusses the matter; and
The blockage of the Suez Canal has seen renewed interest in a building a Med-Red ‘Suez Canal 2’ along the Israel/Gaza/Egyptian borders – at least this time the plan isn’t to use nuclear weapons to do it. If the US now gets serious about its own Belt and Road Initiative, perhaps with US-sourced capital goods to build it, shipped on US-manned and flagged ships, then all this duplication of lines on maps will get even more interesting.
But back to (housing) markets to close. The RBNZ will be unhappy to see that Kiwi house prices rose 16.1% y/y in March, up from 14.5%. Why? Because now it’s openly their job to do something about it: what, exactly? Aussie house prices also went up 2.8% m/m in March, says CoreLogic, or 33% annualised, and investor home loans jumped 4.5% in the month vs. 9.4% the month prior. Yet we all know what the RBA are going to do about it: and it’s the total absence of any kind of plan at all.
Thu, 04/01/2021 – 10:13