Updated: Dec 8, 2020
G'day, and welcome to edition 17 of Mundo.
This week I analyse how Florida's election politics influences Trump's Venezuela strategy, and Trump's latest nominee to the Federal Reserve's Board of Governors.
Approximate reading time: 4 minutes.
Photo credit: Alan Diaz/AP
You say Venezuela, Trump thinks Florida
The Covid Crisis has only worsened Venezuela's already dire economic situation, as the virus proliferates and demand for oil - the regime's main source of foreign income - crawls at a fraction of normal levels. More recently, the Trump Administration clamped down further on the ships that carry Venezuela's oil exports, putting pressure on firms that certify oil vessels as seaworthy, and the insurers that cover them.
There are many factors that drive the U.S.-Venezuela dynamic - from Venezuela's economic situation, local factional politics, global oil prices - and U.S. electoral politics. The November election incentivises Trump to continue tightening the screws on the Maduro regime. Florida will be a crucial "battleground" state. Home to large Cuban and Venezuelan communities hostile to the regimes many of them fled from, Trump has promoted his "tough on Maduro" stance in Florida recently, where polls showed deteriorating popularity amongst the state's Latino voters.
This is a space to watch in the coming months. Venezuela's economy is hurting badly from the pandemic and Trump's sanctions, despite the regimes efforts to evade them. Don't discount the small possibility of Trump brokering a high profile meeting with Maduro for maximum theatrical value, as he's done with North Korea's Kim Jong-un and China's Xi Jinping.
However, the pull of election politics is far stronger with Venezuela, and doing so could backfire against a constituent aghast from Trump's reported tiring of opposition leader Juan Guaidó, and Trump's admiration for Maduro's political longevity. In almost any scenario of the six key battleground states of Michigan, Wisconsin, Pennsylvania, Arizona, North Carolina and Florida, Trump needs a win in Florida. Prying a fraction of this constituent from Joe Biden could tip the state in his favour in November.
The Fed's getting a gold bug
The U.S. Federal Reserve, the country's central bank, has been a crucial factor in driving an enormous turn around in capital markets since the extreme sell-offs in March. After Fed Chair Jay Powell committed to buy securities "for as long as it takes", slashed interest rates, and played an essential roll in Congress' stimulus policies, equities surged and record bond issuances followed.
Yet for as long as the pandemic grows in the United States, economic uncertainty will persist. Continued monetary and fiscal support during this time will be crucial.
Trump's latest push to appoint Judy Shelton to join the Fed's Board of Governors (pending confirmation by the Republican-controlled Senate) would add uncertainty into the Fed's culture of consensus. Shelton's views are controversial, and include calls to return to the gold standard, and for less bank independence and closer (ie. politicised) ties with the White House. Such views are dismissed by conventional political economists, and it provoked significant hesitation with Republicans on the Senate Banking Committee before they relented this week.
Shelton is just one vote amongst seven on the Board of Governors, and twelve in the rate setting Federal Open Market Committee (FOMC). Decisions without general consensus are rare, and while Shelton's alternate views wouldn't derail Fed decision making, it would be disruptive, and wouldn't "add value" to a room full of otherwise conventional-minded economists.
In a note last month, famed investor Howard Marks saw the market rally resting on fragile foundations of an improving virus load (no longer the case), and the market's faith in the Fed's commitment to support these markets. If Shelton is appointed, the latter assumption should be viewed more cautiously.
Trump's persistent attacks on Fed Reserve Chair Jerome Powell since his 2018 appointment raises the possibility that Powell won't be reappointed when his current term concludes in 2022. He did so in 2018, removing Janet Yellen, appointed by the Obama Administration. This has some worried that Shelton - a former economic advisor for Trump's 2016 campaign - could be tapped for the role if Trump wins a second term. This would be a big deal - while the Fed Chair doesn't officially have greater power within the FOMC than other members, a rate decision without the Chair's support hasn't occurred since the 1930s.
Analysing Fed policy and sentiment can be dry. Yet the Fed's actions as the country and world's "lender of last resort" is the anchor point for the entire international banking system. When this anchor point moves, economic ripples radiate globally. In times of market crisis, such as March this year and 2007/08, its interventions averted complete meltdown.
Trump's sustained criticism of Jay Powell's actions and removal of Janet Yellen has already eroded market perception of the Fed's independence. Appointing Judy Shelton would only be a further step in that direction, as the U.S. economy teeters on a knife's edge.
Something to read
A lot of attention is turning to Lebanon's collapsing economy, under severe pressure from the Covid Crisis. With memories of a bitter civil war that ended in 1990 still fresh, economic collapse and rising sectarian pressures make for a bleak outlook. The Washington Post reports on it here, summarised by Marginal Revolution.
Fears abound of a looming debt and social crisis in Latin America. The region is particularly vulnerable to the pressures of implementing strict lockdowns to protect weak health care systems while supporting the large proportion of people barely surviving in the informal economy.
Please feel free to send through your own thoughts and articles to me. Forward this along to others who might find this an interesting read. Stay calm, think of others, stay healthy. Mitch