Thursday, October 1, 2020

Pre Election Analysis - A Deeper Dive

Readers here understand that the purpose of this blog is not to promote any particular political agenda. The view here is that readers are very capable of making their own political decisions and that there are legions of sites already available to them that do focus on trying to influence political views.

Here, the goal is to try and analyze information that may be important and useful to readers in making their own personal financial decisions. What happens with our financial and monetary system is the primary focus, but we cannot ignore what happens in the political arena. So this article will attempt to do a deeper dive into the upcoming US election so that readers are as informed as possible about the various possible outcomes. We will list the various possible outcome scenarios below and attempt to assess their potential impact on the current financial and monetary system.


Scenario #1 - President Trump is re-elected and joined by a fully Republican Congress

In this scenario, we can expect that President Trump will simply just carry on the same policies he has implemented during his first term and would have a more supportive Congress to do so. Most people already know what his policies are so no need to explain those here. The "Resistance" against President Trump would continue. but would have less political power available to it.

Potential impact on the system - Unless something external happened to force major changes, we would expect very little change to the present system to be proposed by a Trump Administration and a fully Republican Congress. 

Scenario #2 - President Trump is re-elected and faces a Congress fully or partially controlled by the Democrats

This is pretty easy to analyze. Simply more of what we have seen over the last two years with very little consensus on most issues and constant continued fighting between the President and the "Resistance" to the President.

Potential impact on the system - Again, unless some external force arose to provide impetus for major changes, we would expect not much major change to the present system. It is possible the ongoing political warfare might add to systemic risk for stability of the system if markets believed that the US political system was highly dysfunctional.

Scenario #3 - VP Biden is elected and joined by a fully Democratic Congress

In this scenario, we surely will see major fiscal policy changes. Higher wealth and net income individuals along with corporations will no doubt see significant tax increases and the stated national policy would likely shift so that income and wealth redistribution became a national priority backed up by legislation. These are the stated policy objectives from the Democratic Party and there is no reason to think they would not be implemented. A resistance movement similar to that currently faced by President Trump would surely be ramped up, but would have less political power available to it.

Potential impact on the system - Unless some kind of focus on major changes to the present monetary system emerged that is not currently being proposed, it is not likely we would see major changes to the monetary system (a change away from a US dollar based system with the Federal Reserve in charge of all monetary policy). It is more possible that the fiscal policy changes proposed by the Democratic Party could lead to disruption in the financial system and markets. If markets perceive that the government will become more intrusive and involved, they may react with greater volatility. If the reaction were severe, it could impact systemic stability. Anything that increases systemic instability can lead to a situation where major changes come in to play for the system. We would probably know within 6 months if this kind of market reaction was in play or not. It is difficult to project this at this time.

Scenario #4 - VP Biden is elected and faces a Congress fully or partially controlled by the Republicans

This scenario is pretty similar to Scenario #2 above, just in reverse. Continued deadlock likely prevails with a President Biden now facing the ongoing "Resistance" movement currently faced by President Trump. It is likely most issues would die in Congress without legislation to make major changes being passed.

Potential impact on the system - Basically the same as Scenario #2 above. It would take an external force to create conditions leading to major systemic changes. It is not likely to arise from policy initiatives from within the system itself.

Scenario #5 - No one is able to be certified as President by the electoral college because the election results are in question and no clear winner can be declared

This scenario is more likely this year than it has been for a long time. We already have major disputes over mail in ballots and hundreds of lawyers lined up on both sides to challenge election results. Unless one side or the other can establish such a landslide that the challenged votes can't change the outcome, this scenario is actually quite possible.

In an effort to provide a public service, we will delve into how this is resolved in the US under its Constitution. We will focus on the procedure to declare someone as President. 

A contingent election means no one gets enough electoral college votes to be declared President. Here is what happens in that event:

"A contingent election for the president is decided by a vote of the United States House of Representatives, and the contingent election for the vice president is decided by a vote of the United States Senate."

. . . .

"Pursuant to the 12th Amendment, the House of Representatives is required to go into session immediately after the counting of the electoral votes to vote for president if no candidate for the office receives a majority of the electoral votes. In this event, the House is limited to choosing from among the three candidates who received the most electoral votes. Each state delegation votes en bloc, with each state having a single vote. A candidate is required to receive an absolute majority of state delegation votes (currently 26 votes) in order for that candidate to become the president-elect. The District of Columbia, which is not a state, does not receive a vote. The House continues balloting until it elects a president."

If this situation were to arise, it is logical to ask which political party is likely to control the 26 state votes needed to elect a President (who would have to be either President Trump or VP Joe Biden). I did a fairly deep dive analysis into this to try and answer that question. Here are the facts. 

- Currently, the Republicans control the majority of state delegations in the US House as they have more Congressional seats in 26 states. The Democrats control 23 states and Michigan is tied with 7 seats each.

-The newly elected House of Representatives is the one who chooses the President, so we have to attempt to project the outcome of the November elections to see which party is more likely to control a majority of the states after the election results in November.

-There is a chance that enough Congressional races would be in doubt (due to mail in voting etc) that it also might not be possible to determine which political party controls enough state delegations to have the required majority to elect the President. If this happens, it gets even more complicated and it is even possible that no one can be elected President for some period of time, but we will not go that far into the analysis here. We will assume that enough Congressional races can be called to establish that one party has a majority of the state delegations. I looked at the 25-30 seats most likely to be tightly contested and it appears that most of these seats are in states where the outcome would not matter in determining which party controlled that state's delegation.

With these facts established, I tried to look at what the most likely outcome might be based on the number and state location of the Congressional races that are considered as "in play" or "too close to call". Here is what I discovered doing that analysis:

The Republicans appear to have an advantage even though the Democrats currently have a majority in the House of Representatives and could continue to have that after the November elections. This is because the states where Republicans are in control have almost no Congressional seats viewed as "in play" heading into the election. The one exception is in Florida where the Republicans have a slim one seat advantage (14-13). If the Democrats were to flip one seat in Florida and gain control, they could pick up one state. Since Michigan is currently tied with 7 seats each, the Democrats could reach the needed total of 26 by picking up a seat in Michigan along with Florida. So that is the path forward for the Democrats.

Republicans are seemingly in a little better position There are several states with seats in play that are currently held by Democrats (Iowa, Pennsylvania, and Minnesota are examples) where a change of one or two seats can flip the state from Democratic to Republican control for the purpose of electing a President under these rules. In total, I count at least six states where there is a possibility of a flip from Democrat to Republican control (or a tie). In many of these seats, President Trump won the district by 5% or more in 2016, but the Democrats captured the seats in 2018 when President Trump was not on the ballot. So, there appear to be multiple opportunities for Republicans to flip control of that state compared to just two for the Democrats. If the Republicans simply hold on to the current status quo, they already have 26 states in control. So my overall conclusion is that the Republicans are more likely to emerge with 26 states after the November elections based on the available information I can find at this time. It also makes sense Republicans would want to fill the open seat on the Supreme Court given the above analysis.

Potential impact on the system - I think it probably goes without saying that if we get into Scenario #5, we have great potential for market disruption due to uncertainty which markets hate. We have great potential for high market volatility. We have a higher increased risk for systemic instability, etc. This is pretty easy to project. Until a winner is declared and more certainty returned, we would remain in these conditions.

Overall Observations:

In three of our five listed scenarios above, we see little potential for any kind of major changes to our present monetary system to emerge from legislative changes within the system. Either deadlock or lack of political will to make any major changes is more likely to prevail. In one scenario (#3), there is more potential for some major changes. This is because of the certain major fiscal policy changes that would take place and the unknown impact of those changes on markets and eventually financial stability. Under Scenario #5, we have the greatest potential for significant market disruption which could then lead to systemic instability if uncertainty prevailed for an extended period of time. Under all five scenarios, external forces (overhanging debt, banking system insolvencies, derivatives issues, central bank monetary expansion, loss of public trust in institutions, etc.) remain as ongoing potential risks to systemic stability we have long noted here.

Looking at this overall analysis, I will leave it to readers to decide how best to make their own personal financial decisions in this environment. Personally, I want to have a plan based on continued extension of the present system for some time into the future along with a backup insurance plan in case something goes off the rails along the way. This seems prudent.

Added notes: The recent new vacancy on the Supreme Court just adds more uncertainty. It sets up the potential for a 4-4 tie in the Supreme Court if key legal challenges to the election end up in the Supreme Court. It also ramps up even more the intensity of both sides to win with the future of the Supreme Court more clearly in voters minds as they vote. Nothing happening in the US indicates the country will heal from its enormous political divide any time soon no matter how this election turns out. It does not appear the first debate will have any significant impact on the result and mostly just illustrated how bitterly divided the US is politically.  Also, it appears both sides have figured out this could end up in Scenario #5 above per this recent news article.

Added note update 12-14-20: Republicans did retain control of more state delegations in the 2020 elections, so they would have the opportunity to elect the next President in the event of Scenario #5 (Contingent Election). Republicans actually increased the number of state delegations they control. Also, the Supreme Court vacancy has of course been filled so any rulings should not result in a tie vote now.

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