A 30 Year Mess in the Making

“We have assembled a best-in-class team of policy advisors to drive President Trump’s bold plan for job creation and economic growth.” Gary Cohn, Chief Economic Advisor to President Trump

Promises of Slop

The art and science of spending other people’s money is not an occupation suited to just anyone.  Rather, it’s a skill reserved for the professional world-improver.  To be successful, one must act with a zealous devotion to uplifting the down and out, no matter the cost.

Lawyers, bankers, economists, and government philosophers with fancy resumes, whom attended fancy schools.  These are the devoted fellows who comprise President Trump’s team of economic policy advisors.  Moreover, these are the chosen associates who are charged with bringing Trump’s economic vision to fruition.  Are they up to the task?

Only time will tell.  But, already, it’s quite evident that Trump’s economic policy advisors have their work cut out for them.  During Trumps speech to Congress on Tuesday night, he called for more jobs, more education, more military, and more affordable health insurance.

By all accounts the speech sounded delightful.  Promises were made to spread the government’s slop far and wide.  Trump pledged offerings that just about anyone and everyone – with the exception of grumpy face Bernie Sanders – could standup behind and applaud.

Indeed, articulating these plans is one thing.  Using the force of government to execute them is another.  This is where the advisors come in.

From Icarus to Humpty Dumpty

According to Wall Street, President Trump said all the right things.  On Wednesday the DOW jumped up over 300 points to over 21,100.  And despite yesterday’s pullback, the DOW ended the day above 21,000.  What’s going on?

New York Fed President William Dudley says the market’s “animal spirits have been unleashed.”  He also says “the case for monetary policy tightening has become a lot more compelling.”  The case being, as noted by Dudley, “sturdy” jobs gains, inflation increases, and rising optimism for both consumers and business owners.

Hence, Dudley and the Fed may increase the price of credit at the next FOMC meeting later this month.  In fact, as of yesterday, CME Group puts the odds of a pending Fed rate hike at over 75 percent.  Bloomberg puts the odds at 90 percent.  In other words, unless the stock market crashes before March 15, it’s highly likely the Fed will raise the federal funds rate.

Maybe the market will crash before March 15.  Maybe it will crash after.  Maybe it won’t crash at all.  Who knows?

One analyst at Bank of America, with a creative metaphorical mind, has somehow penciled out a market path leading to a great fall in the second half of 2017.  But first, says Michael Hartnett, investors must finish climbing the “wall of worry.”  At that point, his “Icarus Trade” will turn into the “Humpty Dumpty Trade.”  Thus, the great fall.

A 30 Year Mess in the Making

No doubt, Trump’s economic advisors are facing a tall order.  Stocks are extremely overvalued.  The Fed’s unwittingly jawboned itself into a March rate increase.  Yet GDP, as reported for the fourth quarter 2016, slouches along at just 1.9 percent.

At the same time, it’s projected the government will hit the debt ceiling on March 16.  After that, Treasury Secretary Steve Mnuchin will have to take “extraordinary measures” – shuffle money around – to keep the lights on.  By October, if Congress doesn’t raise the debt limit, the lights fade to black.

Somehow Trump’s advisors have to figure out how to boost the economy without boosting spending.  So far their plan only accounts for half of the equation.  That is, to boost the economy by pumping money into defense and infrastructure.  But if spending isn’t going to also increase, where’s the money going to come from?

Earlier this week it was reported that Trump wants to increase military spending by $54 billion without increasing the deficit.  The $54 billion increase would be offset by cuts to other government departments and agencies.  While this proposal doesn’t increase the $500 billion deficit, it doesn’t decrease it either.  In short, a half trillion dollars will still be added to the debt.

In the meantime, in just under two weeks there will be an abundance of excitement emanating from Washington DC.  Specifically, a rousing Congressional debt ceiling standoff will commence.  Reagan era Budget Director, David Stockman’s calling it a fiscal bloodbath:

“I think we are likely to have more of a fiscal bloodbath rather than fiscal stimulus.  Unfortunately for Donald Trump, not only did the public vote the establishment out, they left on his doorstep the inheritance of 30 years of debt build-up and a fiscal policy that’s been really reckless in the extreme.

“People would like to think he’s the second coming of Ronald Reagan and we are going to have morning in America.  Unfortunately, I don’t think it looks that promising because Trump is inheriting a mess that pales into insignificance what we had to deal with in January of 1981 when I joined the Reagan White House as Budget Director.”

Sincerely,

MN Gordon
for Economic Prism

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