President Biden’s decision to get out of Afghanistan was popular. The abrupt way of leaving was not.
President Trump was also in favour of leaving. He had negotiated a skeleton deal with the Taliban which left a lot more to do. It wanted the Taliban to reach a peaceful settlement with the Afghan government.
President Biden ignored that, pulled out without the consent of the Afghan government and had to watch as the Taliban took over the country and inherited a large amount of US equipment. Some of it the US left behind in their hurry for the exit. The rest came from the Afghan forces which it had liberally supplied. The resulting pictures of chaos at the airport, the deaths of US personnel just before the final flights left, and the victory photos of Taliban soldiers in US uniforms using sophisticated US equipment has not played well with the US public, nor with America’s allies.
None of this has damaged markets, though it does have implications for the future of various Middle Eastern countries and may have longer term impacts on oil and trade. However, it does matter as it opens up issues about how the US and its mammoth recovery may evolve given a change in perceptions of their President.
A change in support
Until recently, President Biden’s message that he is not Donald Trump has played well with Democrats and some floating voters, giving him a comfortable majority support for his record to date and allowing Democrat poll ratings to stay at levels that make the mid-terms next November an open contest.
The Afghan flight has led to a very sharp fall in the President’s personal ratings and is now putting some downward pressure on his party’s support. Both President Clinton and President Obama suffered major reversals in their first midterm elections. Whilst both of them went on to win a second term, they had to govern without a majority in Congress. It meant their major achievements occurred in their first two years when they had enough Democrats in both Houses to get things done.
It would be a fairly normal pattern for the President’s party to lose its fingernail control of the Senate and or its reduced majority in the House of Representatives next autumn. This now looks more likely as the media shifts from admiring support for the new President to a more critical stance.
Suddenly little mistakes matter, as with the President looking at his watch during a solemn ceremony to commemorate veterans. It will also lift Republican aggression against the administration and give them more permission to speak critically than they have had so far.
So, what does this mean for the economy and markets?
It is likely to intensify the Democrats wish to crowd as much as possible into their one big partisan budget Bill they plan for 2021-2 before the midterms. The rules limit just how wide-ranging the legislation can be, but anything that needs money for a new or expanded programme is likely to be advanced.
The few moderate Democrats who think the packages envisaged are already unaffordable will come under big party pressure to conform to the general view. There are also likely to be tax rises of the kind Democrats like on the rich and larger companies to partially offset the costs. It will also keep the Treasury pressure on the Fed to run hot, as Democrats will want to point to a very vigorous recovery by next year, even if that does come with a bit more inflation.
It also means that there will be more Republican and independent commentary that is critical of the President’s economic policy and domestic agenda, now there is a widespread dislike of his foreign policy. A large number of Democrats are critical of the overhasty withdrawal from Afghanistan and many of them do think the US has a role in the world to reform or encourage democratic government. This too could come to matter.
So far, the Fed and the Treasury have worked together to run hot and have presented a united front that it is the right thing to do. So far, on most days the markets have believed that inflation will be transitory and thought that the taper of monetary stimulus when it comes will be slow and benign. It is important they can maintain this aura of confidence.
The more the President’s poll ratings slip, the more that could undermine confidence in his economic policy as well. For the time being low rates and plenty of dollars wins through. The risks that it will come to an end have just got bigger with the President’s large misjudgement of a far-away land. Raising taxes on businesses and those rich enough to own shares will also be the first time the President has openly tried to do things that Wall Street dislikes.
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