Exploding Deficits — A Major Component of Donald Trump’s Re-election Strategy
Author: Greg Valliere
July 23, 2019
IT’S ALL PART OF THE PLAN: The Budget Control Act is on life support, spending is about to explode, entitlements are a problem for the next decade, and deficits will far exceed $1 trillion annually for years to come — all part of President Trump’s strategy to turbo-charge U.S. economic policy ahead of the next election.
THIS ISN’T A RANT ABOUT DEFICITS: A dwindling band of scolds has been warning that disaster looms if red ink continues to soar, but no one cares because the impact of deficits has been modest. The public is enjoying easy financing, with the Treasury ten year bond yield just over 2%, and the politicians agreed yesterday to spend with abandon. The real beneficiary is Trump.
AS WE WROTE ON JULY 10, Trump will leave no stone unturned in his drive to goose the economy ahead of the 2020 election. He’s looking like a Keynesian (or a Modern Monetary Theory proponent) as he agrees to enormous new spending, confirming that neither he nor Larry Kudlow ever cared about deficits. In private, they dismiss concern about red ink — and why not? There’s an insatiable demand for Treasuries.
RISING DEFICITS ARE JUST PART OF THE PLAN: Trump also wants super-stimulative monetary policy, so he must have been pleased yesterday to hear Judy Shelton, in line to join the Fed, call for a 50 basis point cut in the federal funds rate. In fact, she told The Washington Post that she would have slashed rates by that amount at the previous meeting, when the FOMC stood pat.
IF THE FED DOESN’T COOPERATE with more stimulus, Trump will probably seek Jerome Powell’s ouster. We’re on record as predicting Powell’s demotion to a mere governor this winter, because there’s no way Powell will ever satisfy Trump, who wants interest rates at European levels.
STILL ANOTHER TRUMP GOAL ahead of the election is a weaker dollar, which he believes will reduce the U.S. trade deficit. Could Steve Mnuchin, an architect of the spending splurge, be persuaded to intervene in currency markets? Anything’s possible in this administration.
ALSO POSSIBLE NEXT YEAR: Calls by Trump for still another tax cut. If the economy looks soggy this winter — despite the spending binge and low interest rates — we think Trump will call for a middle class tax cut. Passage in the House is unlikely, but tax cuts are like catnip in an election year; all he has to do is promise one and then blame Democrats for favoring higher taxes.
TRUMP CONTROLS THE NEWS CYCLE: He could advocate for a tax cut or Powell’s dismissal daily in 2020 because the cable networks — even CNN — are now giving him unlimited exposure as he banters daily with the press. Trump has become his own press secretary, and undoubtedly will control the spin on the China trade war, either hanging tough or, more likely, agreeing to a deal when he most needs one, at some time this winter.
ANOTHER MAJOR TRANSFORMATION: The GOP no longer is the party of geopolitical intervention. Trump is an isolationist, opposed to nation building and foreign adventures — still another stance that should help his re-election campaign. His blue collar base has borne a disproportionate cost in endless Mideast wars, as Trump knows.
BOTTOM LINE: Trump will do anything to get the economy growing by 3% or more ahead of the campaign; it’s almost as if he’s begging for a whiff of inflation. (so is the Fed, ironically). Could there be a hangover in the next decade? Probably, but no one seems to care — the deficit scolds have been routed.
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