Why Are The US Mid-Terms Important?

Our Co-Founder Stuart Belcher spoke with Dr. Matthew Mills, from Harrison Spence last week regarding the mid-terms in USA and how they could be having an effect on funds that are invested there. Here’s what he had to say…

“I will admit that the politics of the United States is obscure to me. Like most people, I know who the President is, but I did not understand the obvious fuss over the mid-term elections. I do know that the United States is the most powerful economy in the World, and that a significant portion of our client funds are invested there. I therefore felt it was important to improve my understanding and wanted to share my research with you all.   

Twilights Last Gleaming

Prior to July 1776 the Americas were British colonies, not to mention subjects of The Crown. The war of independence changed all that. The colonials had become increasingly resentful of taxation from a remote legislature, itself subject to the divine right of an unelected head of state, and within which they had no voice. Calls for change were greeted as sedition, and a failure to reach compromise between the New World and the Old exploded into conflict. 

After eight years of bitter fighting the American colonies rested independence from England. The Founding Fathers promptly set about establishing a basis for government, enshrined in The Constitution. Principle amongst its precepts were that all men are created equal, thereby denying authority by divine right, and that government of the people should be by the people themselves. The United States of America as we know it today came into existence.  

The Government of The United States is delivered through an architecture specifically designed to apply balances and checks to the application of political will and power. The president is the most visible face of government, acting as a Chief Executive for the entire country. They cannot, however, just do as they please and their agenda must be agreed by the House of Representatives before it can pass into law. The House consists of the Senate, with two elected representatives from each State, and Congress, with a representative from each congressional district (not unlike the Boroughs that make up the Counties in the UK). While both the Senate and Congress must agree policies before they can pass into law, these must then be ratified by the Supreme Court to ensure there is no infringement on The Constitution. Democracy in action is necessarily a slow and deliberate process. 

The Constitution recognises that power in perpetuity is not in the interests of democracy. A president is elected every four years and (with one notable exception) may only serve two terms. Congressman and Senators are also elected every four years, midway through presidential terms of office. Congressmen serve for two years and up to six terms, while Senators can serve up to two terms of six years. The positioning of the mid-term elections is specifically designed to offer a plebiscite, or popularity test, on the incumbent President and further limiting their power. 

While the system of government may appear complex, United States party politics at least presents the appearance of overarching simplicity. There a basically only two parties; the Republicans and Democrats. Representatives will almost invariably be a member of one or other party, and themselves select a presidential candidate representing their agenda. Broadly speaking, the Republicans are associated with a conservative agenda, low taxation, and supportive of commercial interests, while the Democrats are historically left leaning, committed to higher public spending (and therefore tax), while supportive of greater State intervention through regulation. 

The movements of political power in the United States matter. They do so because they set the tone for the entire planet. The President provides oversight to the largest economy in the World, making up more than half of total capitalisation. This financial strength underpins much of global trade, most of which is conducted in Dollars. Pervasive national interests are then projected and protected by unrivalled military might. While sometimes remote and obscure, developments on Capitol Hill impact us and our investments in a very tangible way.

Recent news coverage has been replete with coverage of the latest mid-term elections. These are noteworthy because a Democrat President now faces a House of Representatives dominated by the opposition party. From a legislative perspective this effectively renders the Chief Executive powerless. It is unlikely Mr Biden will be able to press his agenda home at this point. From an economic point of view, a positive result for the Republicans is likely to be perceived by investors as supportive of business, through lower taxation and regulatory burdens, and therefore investment markets will tend to respond positively.

The longer-term impact of the mid-term elections is harder to predict. The ebb and flow of power in the House of Representatives in common mid-way through a presidential term. Regardless, Mr Biden retains a good chance of re-election, with 21 of 46 incumbents returned to office. If this is accompanied by a persistent Republican majority in The House however, his influence domestically and overseas may be seriously called into question. In fact, presidential second terms are characterised by conspicuous lack of success and legislative progress. The geopolitical implications are significant, with the potential shift of US foreign policy towards Ukraine being a case in point. Should the mid-terms ultimately present a platform for a serious Republican presidential candidate, the World may take a further unpredictable turn.

Of course, only time will tell, and markets will make their own mind up.”

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