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April 19, 2018

Fiscal Irresponsibility On A Grand Scale


In private business, Trump's strategy was to borrow as much as he could from banks. Then when he got in trouble, the banks, wanting to get paid back, would do all they could to help him out. Even so, he filed for bankruptcy six times.

Paul Ryan started out very differently. From a Politico article:

...the affable Wisconsin kid who moved to Washington a quarter-century ago, eager to make his mark on fiscal policy, the harsh reality is that he might be remembered more for accommodating the impulses of the 45th president than for crafting a generational overhaul of the tax code....The GOP has largely fallen in line since Trump's nomination and election. And that means when historians ask the obvious questions - How did the party of fiscal sanity become the party of the biggest spending increase in modern history?

In what follows, data from the latest report from the Congressional Budget Office is used to highlight the fiscal recklessness of Trump and Ryan and where it is likely to lead.

What Ryan and Trump Have Done

The fiscal recklessness stems from recently enacted legis­lation that Trump supported and Ryan was instrumental in getting through Congress: the 2017 Tax Act, the Bipartisan Budget Act and the Consolidated Appropriations Act. In total, these legislative changes will reduce revenues over the 2018 - 2027 period by $1.7 tril­lion (4%) and increase projected outlays by $1.0 trillion (2%). As a result, Federal deficits will grow and debt will be on a steadily rising trajectory throughout the coming decade.

Federal debt as a percent of GDP has doubled in the last 10 years. The CBO projects that Federal debt held by the public will approach 100% of GDP by 2028. That is far greater than the debt in any year since just after World War II. Moreover, if lawmakers changed current law to maintain certain current policies - preventing a significant increase in individual income taxes in 2026 and drops in funding for defense and nondefense discretionary programs in 2020 - the result would be even larger increases in debt.

Table 1 below provides projections of the Federal deficits and debt through 2028.

Source: Congressional Budget Office

So what will the impact be?

Deficit Finance at Full Employment

Most economists agree that at times of high unemployment, increasing government deficits makes sense. That is because increasing government expenditures and/or cutting taxes will increase aggregate demand and reduce employment. But the US is now at full employment. So what happens when you increase demand where there is very little scope for increased production? Two things usually happen: prices rise and imports increase. Both of these mean a weaker dollar.

Table 2 provides the CBO's projections of US imports, exports and the resulting trade deficit. It portrays a steadily growing US trade deficit that could grow by even more as a result of the stimulatory impact of the budget changes.

Table 2. - Projected US Trade (bil. US$)

Source: Congressional Budget Office

The International Impact

Table 3 lists the largest holders of US Treasuries. The US bank collapse in 2008 caused all countries to rush for safety into what at that time was considered the safest investments US debt (dollars and Treasuries). More recently, countries have been selling off their US Treasury holdings.

One wonders what foreigners, watching the growing US deficits and debt, are thinking. Will they buy more US debt? Probably not unless there is a substantial hike in interest rates paid on new Treasuries or a weaker dollar. There is quite likely to be some of both.

Table 3. - Largest Holders of US Federal Debt (bil. US$)

Source: US Treasury

Summary and Investment Implications

The US, once viewed as the safest country in the world for investments, no longer has that image. And the reckless actions of Trump and Ryan will exacerbate the situation. As I have written earlier, this is a time to get out of dollars and invest in China.

Courtesy of Elliott Morss, Moss Global Finance via Econintersect.com

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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