The chart shows how until 2016 US politicians applied fiscal policy in a counter-cyclical fashion.
When unemployment rate (blue) was low like in 2006-2007, they proceeded with a conservative fiscal stance (orange) and reduced deficits.
Instead when a big crisis hit like in 2008 and the unemployment rate moved higher, they tried to support the economy with more fiscal deficits.
This is a textbook counter-cyclical application of fiscal policy: support the economy by injecting fresh money when it needs, and withdraw support when it’s running hot by itself.
But in 2016 something changed.
Trump became the new US president, and despite unemployment rates dipping below 5% the US budget deficit started expanding anyway.
A bit like crocodile jaws opening, for the first time in decades fiscal stimulus was not used to support a weak economy but instead ON TOP of an economy which was already strenghtening.
As a result, in 2017-2018 the US economy was quite hot – the Fed raised rates, the stock market puked, and in 2019 Powell had to pivot.
But as Biden got in office, he recently showed he learnt the same trick too!
In the 2023 fiscal year, Biden rapidly expanded fiscal deficits despite a tight job market – hence the crocodile jaws were opened again.
The result?
A prolonged cycle for the US economy, with inflation which perhaps took a bit longer than expected to start slowing down.
As Trump is gaining ground in his race to become the next US president, I wonder whether he’s going to continue with this new crocodile jaw paradigm – and my hunch is that he will.
US politicians are becoming familiar with the power of fiscal stimulus (but not with the dangers of its excessive use). And by 2028 the majority of voters isn’t going to be Boomers & Co anymore, but instead Millennials and Gen-Z looking for a change in wealth distribution.
Macro will dominate everything over the next decade, and plenty of opportunities will arise.
(Ref: Mr. Alf, Bloomberg)