Biden May Matter Less To Asia Than The Federal Reserve

As intrigued as Asia is by what a Joe Biden White House portends, this region could have even more riding on Fed Chairman Jerome Powell.

Outgoing U.S. President Donald Trump’s tenure has been about as event rich as Asia can handle. His tariffs, penchant for ending trade deals, assaults on supply chains and Twitter tirades have most in this region relieved that voters chose Biden.

Yet through it all there was Powell mopping up Trump’s economic messes—and limiting the fallout.

The Fed is often, for better or worse, the glue holding Asia’s emerging markets together. When the region’s markets collapsed in 1997, the Fed helped create what then-Chairman Alan Greenspan called an “oasis of prosperity.” In 2008, its aggressive easing helped stave off another Great Depression.

It works both ways, of course. In 2013, hints the Fed might reduce bond purchases precipitated a “taper tantrum” in markets from Bangkok to Johannesburg. Now, there’s talk of another kind of tantrum that could quake markets, this one involving Trump’s anger over losing to Biden.

The cause: outgoing Treasury Secretary Steve Mnuchin working to hobble the Fed’s ability to stabilize a slowing economy. He’s refusing to extend programs Powell’s team uses to channel credit to shaky companies and municipalities amid cratering growth.

Mnuchin claims he’s not sabotaging the economy the Biden administration will inherit come Jan. 20. The most immediate failure that will distract Biden is a Covid-19 epidemic Trump is ignoring on the way out the door.

But Mnuchin ignoring signs of renewed stress in the real economy is negligence of another kind. When an economy representing more than $21 trillion of world output sputters, it’s a problem for everyone. That’s particularly true of export-reliant Asia, a region that holds a disproportionate amount of U.S. Treasury securities.

Powell argues, correctly, that now is the worst time to end these emergency lending facilities. It’s akin to taking an ICU patient off life support just as the next seizure begins. It fits with a White House that appears set on making the first 100 days of the Biden presidency as difficult as possible. And for Asia, creating ever more uncertainty for the first half of 2021.

As the coronavirus ravaged the economy, sending U.S. growth to depths unseen since the 1930s, Powell’s Fed stepped into the breach. With Congressional and White House support via the “Cares Act,” the Fed pumped untold hundreds of billions of liquidity into the financial system.

Progressives are right to label parts of the effort “corporate welfare.” Given how the Republican-led Senate dragged its feet on additional stimulus, the Fed felt it had no other choice. Especially when you consider how much of the rescue funding Congress did approve was squandered by Trumpian incompetence and opacity.

Yet the spillover effects from Fed largess helped Asia stay somewhat afloat in recent months. Powell & Co.’s handiwork overcame fears of dollar shortages throughout Asia.

That bought time for officials in Seoul, Jakarta, Manila and elsewhere to contain panic—and to expand their budgets. For many, that removed the need to consider seeking support from the International Monetary Fund. The odds of another 1997 Asian crisis are low. But 24 months of negative growth would make many governments desperate.

The Fed really is the glue holding our dollar-centric global financial system together. Not firmly, of course. With the U.S. suffering a leadership void for the next 51 days and Covid-19 infections exploding toward 14 million, who knows what might befall the biggest economy in the January-March quarter and beyond.

The odds are not great that a Biden White House will suddenly find willing collaborators in the Senate, which will likely be in Republican control. That will almost certainly limit stimulus options and slow the post-Covid recovery process. Any new pandemic-related lockdowns could keep U.S. growth in the red well into the new year.

That’s why Asia could have far more riding on what Powell’s Fed does—or doesn’t do—than Biden’s early policies.

The only explanation for stocks from New York to Tokyo to be racing higher is central bank liquidity. Any hint the Fed might roll back support could cause big corrections in Asian bourses.

Should Mnuchin succeed in tying any of the Fed’s limbs behind policymakers’ backs, Asia could pay an additional price. Not only because dollars will go scarce, but because officials from Seoul to Singapore to Wellington could have reason to doubt the functioning of currency-swap arrangements soothing Asian markets.

Temporary repurchase agreements involving Treasury securities on which Asia relies could go wobbly. So could, in turn, Asia’s faith in the dollar if the Trump White House wrecks any chance of a recovery as it leaves the building.

The U.S. government may dominate the global economy, but Asia holds the mortgage. The 10 biggest Asian holders of U.S. debt are sitting on about $3.5 trillion of Washington’s debt. Central banks in Japan and China alone are on the hook for $2.3 trillion.

Here, it might be a comfort that Biden, unlike Trump, doesn’t have a history of hinting at default. Or to devalue the dollar.

But the next month and 21 days offers plenty of opportunities for Team Trump to lose Washington’s AAA credit rating, and ruin Asia’s 2021 in the process.