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Struggling with recovery and stimulus

US President Joe Biden is still struggling to get agreement from his argumentative party to his large package of spending increases and tax rises.

| 4 min read

Frustration at the lack of progress in reaching a compromise agreement on Joe Biden’s spending and tax plans spilled out into the press last week – with Bernie Sanders, Chairman of the Budget Committee, writing an article for a West Virginia newspaper urging Senator Joseph Manchin to drop his objections to the magnitude of the package.

The Senator objected strongly to the clumsy attempt to appeal over his head to his own local electors, and robustly defended his view that the extra spending is too great and would exacerbate signs of overheating, shortages and inflation in the US economy. Senator Sanders is a self-styled independent socialist, but he works with the Democrats. He is the main advocate of spending on a wide range of new and extended welfare and education programmes, whilst the Democrats still have a theoretical majority in both Houses of Congress to do so.

The Democrat package has, in Senator Sanders view, been slimmed down from an original wish list of $6 trillion. It includes two free years of college education, two free years of pre-school education, continued higher child-tax credits, substantial green investment, cheaper medicines and an extension of Medicare to cover dentistry and eye services. Senator Manchin, probably supported by Senator Kyrsten Lea Sinema from Arizona, who wants a package of less than half the proposed level of spending.

They are also keen to see the bipartisan infrastructure package passed soon. This has been delayed as most Democrats want both packages and wish to see them enacted together. Meanwhile, the shortages, supply interruptions and difficulties in recruiting labour in various areas is adding to pressure on the Fed to throttle back its support on the grounds that the economy has an inflation problem.

From the G20 to COP 26

The G20 Finance Ministers and Heads of the Central Banks met last week in the run up to the G20 leaders’ summit in Rome on 30 October. In their long communique, it was stated that they wished to continue to provide assistance for the recovery avoiding any premature withdrawal of support. The central bankers added language that allowed them freedom to adjust their monetary policies in response to any inflation they think is other than temporary. They reaffirmed their agreement on a minimum corporate tax rate of 15% and other actions against avoidance. There are now fifteen pieces of advice or recommended actions for governments to ensure corporations pay a decent amount of tax, tackling so called base erosion and profit shifting.

Attention now shifts to the G20 as a platform taking place on the eve of COP 26. The aim is to raise $100bn in annual cash to lower income countries to help them with their green transitions, and to point to these large transfers going forward in future years. There are still several G20 countries which have not tabled new ambitious plans to cut their own carbon emissions who will come under more pressure to do so, at the same time as seeking their help to send more cash to the emerging world.

Agreement was reached by the Finance Ministers to encourage sharing of recently awarded Special Drawing Rights from the IMF with the lower income countries without specifying how much of the richer countries’ allocations will be passed on.

China slows

The slowing of Chinese industrial output and the general growth rate of the economy in the third quarter of 2021 was as expected. The Evergrande property troubles compounded with the impact of the energy shortage to reduce annual growth to 4.9%. As feared the world economy now faces monetary tightening by various central banks to control inflation on top of energy and supply shortages. This is a difficult background for bonds. Various companies and sectors can still prosper despite the headwinds of less favourable general economic growth rates from here and a bit more inflation.

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Struggling with recovery and stimulus

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