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According to economists at Natixis, it will be important to monitor in the United States the wage policy, with possible repercussions for inflation and interest rates, tax policy and competition policy, with possible repercussions for the attractiveness of US equities, and therefore for share prices and the dollar’s exchange rate, and the fiscal deficit, with the risk of the US’ savings shortfall becoming further entrenched at a time when European and emerging countries will retain their savings instead of lending them to the US. In contrast, it is not clear that one should expect to see major changes to US trade or energy policy.

Key quotes

“If the US moved to a wage policy that entailed the correction of the skewing of its income distribution and an actual increase in low wages, then there would be a return to quite high inflation in the United States, forcing the Federal Reserve to raise its interest rates and driving up expected inflation and long-term interest rates. Even if the Federal Reserve has switched to average inflation targeting, it may accept inflation that is slightly higher than 2% (2.5% or 2.75%) but not much higher than its average inflation target.”

“Large non-resident purchases of US equities are boosting the stock market, especially technology stocks, and helping finance the US external deficit. They are therefore propping up the dollar. A tax reform that sharply hiked taxes on capital in the US and a competition policy that broke up monopoly rents (those enjoyed by the GAFAM tech giants in particular) would deter purchases of US equities and result in a negative effect on stock market indices and the dollar.”

“An increase in the US fiscal deficit would worsen the current account balance. This would create a financing problem for the US. In fact, only two regions remain buyers of Treasuries: emerging countries (excluding China and oil producers) and the eurozone. A larger fiscal deficit in the US could result from the desire to improve social welfare without a corresponding hike in taxes or to finance the energy transition. A financing problem for the US would lead to a steepening of the yield curve and to a depreciation of the dollar.”

“In reality, there is no major difference between Republicans and Democrats in the US when it comes to trade policy as there is a consensus to try to rebalance US foreign trade with Europe and China and energy policy, with the determination not to weaken the oil and natural gas industry given its weight in the economy.”