Investors all over the world are concerned about the economic effects of the upcoming presidential election. So are we. Interestingly, it may not be the presidential election that has investors worried most. At this point, the stock market is anticipating a Clinton victory, which, if it happens, will come as no surprise. A last-minute Trump win would be a huge shock for an enterprise like the market that hates surprises, and short-term turmoil would likely ensue. Indeed, many are looking beyond the presidential election to see what might happen in the House and Senate. Assuming a Clinton victory, if at least one of the Congressional chambers stays Republican, it will force compromise on many of the controversial issues in Hillary’s platform, particularly when it comes to increased taxes. Investors will view that outcome with relief.
We’ll be talking about this on December 5, 2016, at the upcoming SOCMA Annual Dinner in New York, and by then, we’ll know the election results. What might the different effects on the economy be under a Clinton or Trump presidency? One effect seems pretty well baked in: higher deficits. Most economic studies that have scored both Republican and Democratic plans suggest that none of the presidential economic plans will be revenue neutral. Most of the forecasts made by each side are overly optimistic on the revenue side, and understate the cost of their programs. A friend of mine once told me that the most important lesson he learned at Harvard Business School was that for any projection you come upon, halve the projected revenues and double the projected expenses for a more realistic assessment of what is likely to happen. Good advice. It applies to campaign forecasts as well.
While we’re talking about things to worry about, I want to share with you my deep concern about a hidden effect of rising interest rates. The Fed is likely to raise rates at the December meeting, after the election. This might be the start of a rise back to normalized interest rates. In fact, inflation is showing signs of bubbling to the surface, starting with signs of rising wages. What are normalized interest rates? We calculated that the average rate paid on Treasury securities over the past 25 years was about 5 percent. If we get back to those levels, and we might, the effect of the interest cost on our national debt will be nothing short of staggering. Here’s just one take: a 5 percent interest rate on Treasuries held by the public would mean that over half of all personal income taxes collected by the IRS would go to paying debt service alone. Frightening, isn’t it?
We’ll talk about this and more in New York at the SOCMA event on December 5. I look forward to seeing you all there! And I look forward to hearing your views on business and the economy as well.
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Editor's Note: Peter J. Tanous is one of four speakers who will participate in our Educational Speaker Showcase at SOCMA's 95th Annual Dinner on December 5 in New York.