The world cannot escape a US economy that has lost its anchor

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The stories that matter about money and politics in the race for the White House

Global stock markets have just had their strongest week since November as investors put aside their recession and yen exchange rate concerns from early August. Very little has changed substantially to drive the rally or, indeed, the crash earlier this month. Along with the weakness in summer markets, this demonstrates deep uncertainty about the post-pandemic global economy and the outlook for the future.

In both advanced and emerging economies, inflation has improved but remains somewhat too high, unemployment is generally low, growth rates are variable, and public finances are tight, even without the costs of geopolitical tensions and population aging. These conditions are not in place to ensure stability, with a known anchor setting the resting point for real interest rates that will stabilize inflation at full employment.

Over the first two decades of this century, financial markets have priced in increasingly low long-term real and nominal interest rates, needed to offset the Asian savings glut, the global financial crisis, low productivity and population growth, fiscal consolidation, and low inflation. Many of these underlying factors of the global economy persist, but they have been thwarted by fears of repeated shocks, fragile global supply chains, and occasional excess demand, leading to a potentially more inflationary world and high uncertainty.

A Goldman Sachs study shows that financial markets now expect that higher long-term interest rates will be needed to stabilize economies, but few can be convinced that this market assessment will last. The study’s second conclusion is more certain: countries could improve their own real long-term financing costs by pursuing effective economic stabilization policies. Maintaining low and stable inflation and improving current account deficits are one path to relative economic success.

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Although Goldman Sachs obtained these results by comparing countries’ long-term real interest rates to those of the United States, it is not a stretch to assume that what is good for others is also important for America and the rest of the global economy. Good American economic policy lowers global real borrowing costs, supports faster economic growth, and improves people’s lives. It is therefore difficult to overstate the importance of the American presidential election, both for the United States and for other countries.

As she prepares to accept the Democratic nomination this week, Kamala Harris has laid out her economic prospectus. She has given full support to the independence of the Federal Reserve to fulfill its dual mandate of full employment and price stability. She has also announced a welcome ambition to break down barriers to housing construction. This latest policy, however, is not what it seems. The promise to guarantee the construction of 3 million additional affordable middle-class homes over four years was disappointing. The United States has added 6 million homes since 2020 and currently has an annualized completion rate of 1.5 million homes per year.

Like Democratic candidates in every presidential election, Harris wants to tax the wealthy more, using the revenue to ease the burden on middle-class families, especially those with children. Whether that happens will depend on the balance of power in Congress.

More worrying is her choice to flirt with left-wing economic populism. Her vague talk of policies that would amount to price controls in grocery stores and rents represents a dangerous triumph of hope over a long history of failure. Her remarks can certainly be interpreted as a firm fight against anticompetitive practices with the tools of classical competition policy, but the fact that she has chosen to maintain the ambiguity should be concerning.

The risks of a Harris presidency pale in comparison to those of a Donald Trump re-election. The former president has made it clear that he wants a say in monetary policy decisions because they are based on his intuition and he has the guts to get them right. With Trump having consistently favored low interest rates while in office and no rate cuts before the November election, controlling U.S. inflation will definitely be on the agenda this fall.

Moreover, his economic populism extends to well-understood and disproven concepts, such as the fact that higher tariffs hurt American consumers and would drive up prices even higher. Last week, he called for 10 to 20 percent tariffs on foreign countries that have been ripping us off for years, which was dangerous for the American and global economies. With Republicans far more in favor of tax cuts than spending controls, no one should be sure that the United States will be economically stable under a Trump presidency, even if many of his instincts could be overruled by Congress.

When the choice is between a candidate who instinctively blames inflation on corporate excesses and exploitation within a market system and another who trusts his own instincts and pet theories backed by decades of experience, it is not surprising that financial markets are nervous.

The outcome of the election is highly uncertain, not only in terms of who will win, but also in terms of what the candidates will seek to implement and whether they have the legislative power to do so. There will certainly be more volatility in the months ahead. If you think none of this sounds reassuring, you are right.

chris.giles@ft.com

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