President Joe Biden planned to work better with allies, to conquer the virus, provide additional economic stimulus and commit the US to the net-zero cause. One year on, the United Nations (UN) is warning of a humanitarian catastrophe in Afghanistan after his hasty retreat, his slimmed down Build Back Better bill remains stalled by his own party in the Senate, the pandemic has gained new Omicron legs – and the President has, after a brief pause, renewed Trump policies to support domestic gas and oil activity.
It is true that the realities of power often modify or frustrate the best of intentions of new Presidents. The rapid and unfortunate retreat from Afghanistan has created difficulties in foreign affairs. Defining China and Russia as autocracies that require standing up to, the President finds both adversaries keen to press him further, sensing weakness on the back of events in Afghanistan.
Testing the president
Vladimir Putin has recently used the Collective Security Organisation, which Russia has shaped with five neighbours, to assist the President of Kazakhstan to assert his authority and purge his government, strengthening the Russian grip to the north.
Pakistan remains a difficult ally of the US. The Islamic Emirate of Afghanistan under Taliban control has witnessed a substantial flow of refugees out of the country to neighbouring states. The UN is asking for $5bn of aid to stave off “hunger, disease, malnutrition and ultimately death” for many Afghans. They are not great advocates of the results of the US withdrawal, a lingering conscience to the President who wants to move on from the Middle East.
This week sees the US administration responding to President Putin’s demands that NATO rules out offering Ukraine and Georgia membership, and withdraws troops from countries near the Russian Federation. Mr Biden wants talks but is not keen to show more weakness. He needs to calculate how likely it is that Mr Putin would move some of his massed troops into eastern Ukraine.
His problem is the US can accommodate ruptured trade with Russia, but the continental European allies depend on Russia for gas.
Mr Biden has ruled out a military response, requiring him to expand the threats of sanctions to find something big enough to be a deterrent. His problem is the US can accommodate ruptured trade with Russia, but the continental European allies depend on Russia for gas, limiting their appetite for tough, effective sanctions.
The weaker the US President appears to Mr Putin the more likely Russia will use an opportunity to infiltrate Eastern Ukraine and provoke a bigger move for secession of the Donbas. A full-blown army invasion by Russia still seems unlikely, but signs of more weakness from the President could change the calculations for Moscow.
Tough Moscow talks
Russia sees 14 new NATO members since 1997 pressing ever closer to Russian territory. Moscow wants NATO to reduce troop numbers to pre-1997 levels. They were increased following the Russian occupation of Crimea. We assume no overall invasion of the Ukraine as our base case, but continued tensions and Russian efforts to increase secession pressures in the east of that country.
Chart 1: US infection rates and daily deaths since the Inauguration
Over the last year the pandemic has continued to wage war on the US.
The US was very split over the seriousness of the Covid-19 virus and how to respond to it. President Biden wanted the Republican states to take it more seriously and has encouraged more mask wearing, and more controls on socialising. He has shared the Trump enthusiasm for new treatments and more vaccines.
Over the last year the pandemic has continued to wage war on the US, which has now experienced 861,000 deaths attributed to Covid-19, compared to 908,000 in the European Union (EU). With a smaller population, the US has had a higher death rate than the EU overall and higher than the individual western European countries. It is likely that Omicron will prove milder, or more muted by more vaccinations, but it has not been the easy win the Democrats hoped for from a change of tone and policy.
Chart 2: Build Back Better Act spending breakdown
Democrat budget delays
The President set out a bold Build Back Better budget and watched as it was pared back during the usual comings and goings in Congress as it moved through the approval process. The 2022 budget still awaits approval, with Democrat Senator Manchin still holding out against the latest version.
The President, who is meant to be good at smooth talking the Senate to a deal, has so far been unable to put through his plans for substantial extra spending and higher taxes because of actions from within his own party.
The Republicans will offer him a route to get through a budget they think is too high with too much borrowing and additional taxes. They think they win either way. If he cannot get it through, he is weak and, if he gets it through, some swing voters in the mid-terms may well dislike the tax rises and the scale of the borrowing.
President Biden told the world that the US was re-joining the Paris Climate Change Treaty process and promised tougher action by the US to get on the road to net zero at COP26, after his predecessor wanted more cheap-fossil-fuel energy to power industrial revival.
He has, nonetheless, authorised 3,091 new gas wells on public lands and put 80 million acres of the Gulf of Mexico up for auction for oil and gas exploration. He has promised to sell some oil stocks to try to keep oil and petrol prices down. He has recognised that throttling back on fossil fuels too soon and causing price spikes would not be popular, disappointing his green followers. He has also kept US gas prices well below European ones and assisted an important US industry.
Chart 3: Approval ratings and market performance since the Inauguration
The implications for markets
Presidential unpopularity is not all bad news for Wall Street. Delay or dilution in putting through the tax rises would be taken well by many in the markets, and loss of one or both Houses in the mid-terms would prevent more unhelpful government policies thereafter.
The future of the market will, for the time being, owe more to the Federal Reserve’s actions and success.
The President’s wish to keep out of wars is also no bad thing, unless it provokes adversaries to take liberties the President cannot ignore. The future of the market will, for the time being, owe more to the Federal Reserve’s actions and success in curbing inflation, without forcing a downturn through excessive monetary tightening.
We are still waiting to see who the President will appoint to the Fed Board and whether the new Board will panic about the past inflation misjudgements and overshoot. With or without a stimulus budget, the US will enjoy further growth and recovery and the virus should subside in the better weather to come. However, President Biden needs to get through this week without setting the conditions for a Russian invasion of Ukraine by the massed forces on its borders.
Chart 4: CPI rate and composition since the Inauguration
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