Markets have not begun to price the risk of this constitutional nitroglycerine. They operate within a narrow bandwidth. They are not good at anticipating outlandish developments. Investors, famously, failed to price the rising danger during the hiatus between the assassination of Archduke Franz Ferdinand in late June 1914 and the outbreak of the First World War five weeks later. The big banks and brokerage houses understood that two heavily-armed alliances were on a collision course, but there had been episodes of sabre-rattling for several years, defused each time by diplomacy.
Opinion had been influenced by Norman Angell’s bestseller, The Great Illusion, arguing that war had become impossible because global trade and capital flows were too closely interlinked. What they did not understand was that the circumstances of mid-1914 were unique. For the Berlin war faction, Sarajevo was a “gift from Mars”, to use the term later discovered by historian Fritz Fischer in the archives of the German high command. A Balkan war locked Germany’s fickle ally Austria-Hungary into the greater fight against Russia, and opened the way for activation of the German Schlieffen Plan on winnable terms. Something had changed. Without wishing to push this parallel too far, I am surprised by how little discussion there has been in financial circles over the risk – or more accurately, near certainty – that Trump will refuse to concede the election unless crushed by an overwhelming landslide. Nor has there been much debate about the constitutional mechanics once such a situation arises.
People are hard-wired to assume that long-standing convention will be upheld. They would be well-advised to read Will He Go?: Trump and the looming Election Meltdown in 2020 by Amherst law professor Lawrence Douglas. There are inherent design flaws in the constitutional architecture of the Twelfth Amendment and in the Electoral Count Act of 1887 that are about to collide with the aberrant “psychopathology” of this president.
“Our Constitution does not secure the peaceful transition of power, but rather presupposes it,” he says. The democratic succession depends on a shared code of civic virtue.
Many readers might be surprised to learn that the states do not have to abide by the outcome of their own popular vote when they cast their ballots in the electoral college for the president. They may constitutionally appoint their electors “in such Manner as the Legislature thereof may direct”. It is therefore crucial who controls the state legislature and state supreme court, and how they choose to behave.
Will Donald Trump’s Election Day Operations (EDO) units succeed in throwing enough doubt on the legitimacy of the ballot to pressure the Republican Party to invoke this disused power in the battleground states of Florida, Texas, Georgia, Pennsylvania, and Wisconsin?
If Biden’s lead tightens to four or five points, the nightmare comes into play. It is hard to see equity markets shrugging off the consequences of that scenario for long.
The core vulnerability is the “blue shift” syndrome. The pattern of recent elections is that the reds (Republicans) do well in the early count, but then slip as the delayed postal ballots come in for the blues. This has led to the spectacle of apparent Republican leaders on election night later seeing their victory snatched away. The problem will be an order of magnitude greater this year because COVID-19 will cause a huge jump in ballot voting.
Trump has pre-emptively sought to discredit voting by ballot as fraudulent, and he has been assisted by Russian cyber-manipulation spreading conspiracy theories on social media. He intends to fight court battles to invalidate any postal vote with the slightest technical irregularity. His core has been urged to vote in person. This has the makings of a volcanic dispute. Barton Gellman’s forensic dive in The Atlantic , entitled The Election That Could Break America cites chapter and verse how this campaign is being organised, with interviews and leaked tapes from Mr Trump’s state level operations. The details leave no doubt that the Trump campaign a) expects to lose to Joe Biden, and b) intends to portray the result as an enormous fraud committed against the American people, opening the way for a paralysed Interregnum in which anything could happen.
“There will be a count on Election Night, that count will shift over time, and the results when the final count is given will be challenged as being inaccurate, fraudulent – pick your word,” one Trump strategist told Mr Gellman with ruthless candour.
Given that the EDO strategy is to suppress turnout among the Democrat ethnic base with quasi-militia tactics – and stir up street conflict in the process – the conditions are ripe for the sort of havoc that would allow the activation of powers not used since the 1870s. These bare-knuckled methods have become much easier since the end of a long-established consent decree, which used to prevent “ballot security” squads engaging in borderline intimidation. A federal judge allowed it to lapse in 2018. Party ballot militia have been unshackled. I use the term “militia” advisedly because I got to know America’s semi-underground movements fairly well in an earlier journalistic incarnation. They have since evolved into an ideological shock force for the Trump machine. They are not yet the Freikorps of early Weimar years, but they could become so in the hands of a true cynic, and if the “cancel culture” fringes of the Democratic Party and hard-Left Antifa squads continue their anarchist rampage.
For markets there is a minefield to cross over the 11-week Interregnum. The so-called “safe harbour” deadline for the electoral college votes comes on December 8. The new Congress takes its seat on January 3. The combined chambers count the vote on January 6. Each is pregnant with political and financial risk if the result is disputed.
There are no precedents for this grim saga, though Herbert Hoover’s behaviour in 1932 has some resonance. While he conceded defeat to Roosevelt he did so with bad grace and engaged in sabotage through the long Interregnum (then four months), obstructing at every pass, denouncing the New Deal as a “march on Moscow”, and attempting to head off reflation policies by tightening the fetters of the Gold Standard.
Eric Rauchway’s Winter War describes how dangerous this became. The banking system ceased to operate in large parts of the country. It was the closest America came to social and political disintegration during the Great Depression. It also coincided with Hitler’s ascent to power in Germany, and the Japanese invasion of Han China. It is this geopolitical dimension that worries Richard Haass, president of the Council on Foreign Relations. He fears that Vladimir Putin and Xi Jinping may take advantage of Interregnum chaos to overturn the global chess board. “What we face now is much more serious than Watergate,” he says. A partial breakdown of US democracy would be the ultimate propaganda coup for the authoritarian axis. America’s soft power would drain away, marking the definitive end to the post-War era we sometimes call the Washington Consensus.
If Biden’s eight-point lead is sustained, the margin of victory would be too great to subvert, though I suspect that an embittered Trump would nevertheless try to rob his opponent of the consecrating ritual of concession. It is not a big market mover as such.
If Biden’s lead tightens to four or five points, the nightmare comes into play. It is hard to see equity markets shrugging off the consequences of that scenario for long. It comes down to what conclusion you have drawn about Trump’s character and the willingness of the Republican Party to indulge him. Mr Gellman quotes a Trump classic from the 2016 campaign, since repeated in various forms with the trademark Trumpian smile of menace. “I would like to promise and pledge to all of my voters and supporters, and to all the people of the United States, that I will totally accept the results of this great and historic presidential election… If… I… win!”
A joke, or a threat? Take your pick.