Washington Surrenders — the New Indifference Toward Deficits
Author: Greg Valliere
March 1, 2019
WHO CARES ABOUT DEFICITS? Virtually no one in Washington, as a remarkable pendulum shift is now clear: the new mantra is that deficits don’t matter, as insatiable demand for Treasury paper keeps interest rates low.
HOW CONVENIENT!! The new indifference toward deficits comes at a most opportune time for the Trump administration, which faces red ink of over $900 billion this fiscal year — with deficits above $1 trillion annually likely for years to come. Among Donald Trump’s economic advisers, Larry Kudlow never cared much about deficits, and Budget Director Mick Mulvaney — once a prominent deficit hawk — is a convert to the new thinking.
MOST DEMOCRATS HAVE THROWN IN THE TOWEL: A few favor spending cuts for the Pentagon but most cringe at the prospect of being portrayed as soft on defense. And while Democrats favor tax hikes on the wealthy, they would use the extra revenue for new spending, not deficit reduction. The next generation of Democrats has huge spending goals.
DEFICIT CUTTING SIMPLY ISN’T POPULAR ON CAPITOL HILL: Talk with members in each party and you’ll hear their off-the-record rationale — the markets don’t seem to care about deficits, so why should we? Besides, there’s a widespread fear of taking a meat-ax to spending; how can anyone get re-elected if they support cuts in entitlement spending?
TRUMP WANTS TO SLASH SPENDING for all of the Cabinet-level budgets by 5% across-the board, but that has very little support in Congress. The biggest battle is over defense outlays, which probably will surge again this year, to something close to $740 billion, as part of a deal that also raises domestic outlays well above spending caps, which are routinely ignored.
THE NEXT BIG FIGHT — RAISING THE DEBT CEILING: You thought the government shutdown fight in January was bitter? Wait until early fall. The debt ceiling was hit today but the Treasury Department can keep the government running for another six months. Three dozen Republican deficit hawks in the House will refuse to vote to raise the debt ceiling, which will force Trump to seek votes from Nancy Pelosi’s troops — and her price for cooperation will be more spending on domestic programs (and no money for a border wall).
BOTTOM LINE: This year’s deficit will approach 5% of GDP — in a full employment economy!! Yet there’s very little discipline to cut spending; the more likely path is for significant spending hikes. If there’s an infrastructure bill (maybe a 40% chance) we’d bet that it won’t be paid for.
THE BOND MARKET has seemingly ignored deficits, but as we enter a new decade there will be a rising concern about debt servicing costs, which could crowd out virtually all spending — education, infrastructure, etc. If this leads to Japan-style mediocre economic growth and low inflation, it ironically could be a plus for the bond market, keeping rates low.
THERE’S STILL TIME TO CURTAIL SPENDING AND RAISE SOME TAXES, but the Kudlow fantasy that we can grow our way out of deficits is ridiculous. At best, deficits could level off at a little less than $1 trillion per year — if there’s 3%-plus GDP growth, but that doesn’t seem sustainable. So the answer may be to simply sit back and learn to live with the red ink; fiscal policy will stay stimulative — the spending and tax cuts will keep the economy humming for a while longer.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2020 AGF Management Limited. All rights reserved.