The trias politica, the separation of powers (legislative, executive, judicial), was theorized in a complete form by Montesquieu in the Esprit des Lois of 1748. The Founding Fathers made it the basis of the American Constitution of 1787, seven articles in all, of four of which dedicated precisely to the separation of powers and three to the relations between the federation and the states.
The principle of checks and balances had actually already been applied in America for more than a century. It was part of the Calvinist tradition and had already been adopted in the reformed Geneva of the 1628th century. Calvinists brought it to the early New England colonies as early as 1791 along with the two-party model. Europe got there much later. France adopted it in the constitution of 1793, but already in XNUMX the Jacobins returned to the model of the absolute state effectively controlled no longer by the monarch but by a single party.
As is known, the president of the United States is elected every four years, Congress is partially renewed every two years, while the justices of the Supreme Court are appointed for life. This has meant, historically, that the three powers have often been controlled, at a given moment, not by a single party but in a regime of cohabitation between Democrats and Republicans.
Cohabitation has generally worked quite well and has prevented or mitigated the excesses that often occur when one party finds itself in control of all institutions. The conflicts between the powers were on the whole physiological and forcing was rare. The most serious was in the second half of the XNUMXs, when the Democrat Roosevelt came close to overthrowing by authority the Republican majority of the Supreme Court which systematically blocked the legislation of the New Deal.
In recent decades, cohabitation has been more the rule than the exception and has been particularly appreciated by the financial markets also (and above all) because the cross-veto power between the executive and Congress has guaranteed the semi-paralysis of the legislative process and the consequent safeguarding of the status quo. The exception was Obama's first term, when Democrats found themselves controlling both houses of Congress as well. Strengthened by this almost absolute power, sometimes held back only by the Supreme Court, the Democrats have managed to pass Obamacare (which deliberately represented a strong redistribution of income) despite the tenacious opposition of the Republicans, the middle classes and small businesses.
In the second term, Obama first lost the support of the Senate and then that of the House, regained by the Republicans. Cohabitation has produced significant results in terms of budgetary policy. The markets liked it.
To compensate for the loss of Congress, however, Obama has implemented two obvious forcings with respect to the consolidated institutional practice. On the one hand he has enormously widened the scope of presidential decrees (executive orders), on the other he has politicized the agencies to the max, in particular the one for environmental protection, encouraging them to broaden their scope as much as possible skills. Congress has emerged visibly weakened, perhaps forever, but the executive power has nonetheless continued to find a limit in the Supreme Court, which has not hesitated to quash or moderate Obama's more aggressive initiatives.
In imagining the scenarios following the November 8 elections, the markets have fully embraced the hypothesis of an extension of the current cohabitation, with Clinton replacing Obama. The expected passage of the Senate to the Democrats would not change the balance too much since the Republicans who now control the Senate are almost more similar to the Democrats of the center than to the radical Republicans of the chamber.
The tail scenario, so far, has been represented by Trump, who as an unknown factor deserves the risk premium that the markets automatically assign to news (it also happened to Reagan, who was initially greeted by a drop in the stock market) plus a supplement due to his peculiar personality.
The markets, however, are not pricing in another tail risk, that of a Democratic en plein that includes the White House, the Senate, the lower chamber and the Supreme Court. The civil war underway between the Republicans is in fact putting the stronghold of the chamber at risk even as the Supreme Court finds itself with a vacant position and with three judges between the ages of 77 and 96 who could retire at any moment and who Hillary Clinton could replace her with thirtysomethings capable of influencing the course of American history in the next half century.
It is therefore possible that America is on the verge not of a lazy continuation of the status quo, but of an acceleration of change.
It is legitimate to hypothesize a much more social democratic and European America than the one we are used to knowing. Those who believe that Hillary Clinton will follow the pro-market orientation of Bill Clinton of the XNUMXs forget that Hillary is not Bill, a brilliant reincarnation of the classic southern centrist Democrat, but a liberal who in recent times, pressed by Sanders, has also rediscovered progressive nuances.
One can imagine, if you wish, a 2017 in which Senator Warren fulfills her dream of breaking up the banks of Wall Street, the pharmaceutical industry is placed under strict surveillance while the oil sector is boycotted in every possible way. One can hypothesize an increase in public spending financed by taxes that return to the very high rates of the XNUMXs and a climate of international tension with Russia which leads to a new cold war.
Just as, on the other hand, it can be noted that Hillary Clinton has maintained constructive relations with the Republicans both as a senator and as secretary of state, that she would make use of Brainard, Yellen, Summers and the tried and tested Clintonian historical group in economics and that some anti-business initiatives may be more facade than substance.
Politicians are often flexible and are therefore unpredictable. Nixon passed for a warmonger at the time he was elected and ended up withdrawn from Vietnam and opened up to China. Reagan in the electoral campaign passed for incompetent and paranoid but he put an end to the cold war and today airports and aircraft carriers are named after him. Bush senior was elected with the promise not to raise taxes but he raised them and was never re-elected as a punishment. Bush Jr. was elected as a quiet man and found himself waging wars in Iraq and Afghanistan. Obama was elected as America's unifier and concludes his mandate with the most divided America in a century.
What Hillary Clinton will do, therefore, we cannot know, but precisely for this reason we think that the markets should not assume that nothing will change even in the (for now still probable) case that the House remains Republican. For this, a certain risk premium should also be awarded to Hillary Clinton. And for this we continue to think that it makes sense to continue accumulating cash when the opportunity presents itself, as in this moment on the dollar.
