Don't Like Thinking About Deficits? Then Better Be Sure You Win The PowerBall Or Mega Millions.

Let's concede that deficits are not a choice subject of conversation or discussion for too many Americans. They'd almost rather reach for their Instagram and look at the latest flicks of kitties punching each other than delve into any economic topic, especially deficits.   But with the latest planned shitstorm by the GOP - passing a new round of tax cuts they ought to be paying more attention.

In a WSJ report on Friday we learned just how reckless the GOP and Trump bunch has been in pumping up spending (via tax cuts) to record levels, even as the likes of 'Bitch' McConnell talk about "having to cut entitlements" - namely Social Security, Medicare and Medicaid. Why pray tell?  Well, because the tax cuts passed last year didn't "pay for themselves" as the Repuke hucksters had promised. Indeed, the Treasury Department reported that the federal government's budget deficit grew to $779 billion for the year ending Sept. 30th.  This was up 17 percent from the year before and came as a result of last year's sweeping tax cut.

That tax cut drastically reduced tax revenues as a share of gross domestic product .  At the same time, according to the WSJ report '(Federal Deficit Has Widened') government spending rose 3 percent to $4.1 trillion.  Meanwhile rising interest rates and the amount of total debt outstanding drove up federal interest costs 14 percent last year, by $65 billion".  (Imagine paying $65 b  just in interest on your credit card)  Trump complained that this was because of the Fed raising interest rates, but of course he was talking out of his fat ass.

The interest rates being leveraged by the Fed are most directly concerned with too rapidly rising wages and prices. However, it is true that the national debt does increase if  the federal interest rates increase.  Higher short and long term Treasury rates mean the federal government's borrowing costs also rise, so generating significant consequences for the budget and national debt.   This is why generating revenue - especially in an environment already replete with aggregate demand (because of the exceptionally low unemployment rate) - is more important than reducing revenue via tax cuts for an unnecessary stimulus.

But that is why we need circumspect leaders and political parties who are courageous enough to add revenue - via higher taxes - when needed, instead of tying to score political points.  Every manjack in the country - especially students with massive loan debt and ordinary folks tapped out on their credit cards- knows that interest on their debt can eat them alive if they're not careful. That is why credit card companies insist you pay back only a minimum amount each month - hoping to keep the interest $$$ flowing into their bank coffers.

But this is now the situation with the U.S. government which is spending way more than it takes in.  And instead of increasing our income to accommodate our spending - like you or I would -it insists on spending even more while reducing revenue!  Can anyone say madness?

But lo and behold there's a method to the madness.   Thus, earlier last week Sen. Mitch McConnell responded to the growing deficit by blaming "entitlement" programs like Medicare, Social Security and Medicaid.  Indeed, he and the putative next House GOP chair (if the Reeps win everything again) have promised the 'big three' will be the first things they will go after for cutting.

Trump himself has called for massive cuts - trillions of dollars worth - to food stamps, disability benefits, welfare and student loans.  (Not cutting interest on them, but cutting the loans altogether).

Nancy Pelosi, say what you will about her, was at least honest in her assessment of the situation, quoted in the WSJ report:

"Republicans have exposed their true agenda in budget after budget: add trillions to the deficits to justify slashing the Medicare, Medicaid, and Social Security that seniors and families rely on."

But, of course, we knew this from the time the odious "stimulus" tax bill was passed, when no stimulus was needed, see e.g.
http://brane-space.blogspot.com/2017/12/paul-munster-ryan-admits-he-wants-to.html

The shortfall in government expenditures will rise above $1 trillion next year. Deficit spending makes sense during a recession. But what Trump is doing now is essentially allowing the rich to siphon the cream off the top, providing the middle class with some skim milk, and leaving the sour dregs for everyone else.  The stimulus where none is needed also makes it much more probable the Fed will have to continue raising interest rates to cool off an overheated economy. Fed chief Jerome Powell has already indicated that if things keep going as they are several more interest rate hikes may be coming next year - not good news for those who have mortgages, or plan on buying a home. (Already as reported in the weekend  WSJ and FT, home sales are receding - as interest rates now approach 5 %.)

Then there’s corporate debt which is now set to be on rocket power given the corporate tax cuts.  Companies have taken advantage of low interest rates to borrow like crazy. This summer, corporate debt hit a new high of $6.3 trillion. Worse, the cash-to-debt ratio, which was 14 percent in 2008, has dropped to 12 percent: that’s $1 in cash for every $8 of debt.  Nor are companies doing much with that tax cut money other than share buybacks, further fueling excess valuations, higher P/E ratios in the asset bubble, overheated stock market.  It's no wonder now the volatility is spiking again.

Here's another alarm bell for those (mainly investors) who might need one. For several years the term premium (the additional yield investors demand for the risk of lending over long periods) on the 10-year Treasury has been negative.  This is a rarity that is tied - in part- to supply constraints and bond buying by the Fed and other central banks.  But this month the term premium became less negative, rising to -0.32 from -0.45 percentage point (at the end of last month)

In the months ahead the term premium could get even less negative and possibly even turn positive. Also, supply constraints on the bond market are likely to shift as the Fed continues to reduce its balance sheet, i.e. the trillions of bonds purchased via quantitative easing after the financial crisis.  The more imminent danger point then will arrive as other central banks also rein in their bond-buying programs and the U.S. government issues more debt in order to cover its growing budget deficit.

Buckle your seat belts and pay attention, because ultimately - unless you're independently wealthy - what happens with the deficits and tax cuts will affect you!

Why Interest Rates Need To Be Increased- Contrary To Dotard's Idiocy ('The Fed's Losing It's Mind')

"WAAAAAH! The Fed has lost its mind with their interest rate hikes! They're messing up my stock market!"

It seems Baby Doturd loves the stock market when it's soaring so he can brag he's behind it. But when it tanked last week he disowned it,  blaming the nearly 1400 point loss  on the Fed as opposed to his (and the GOP's) own stupid policies. The orange -hued ignoramus erupted last week Wednesday, belching :

“I think the Fed has gone crazy.  The Fed is going wild. I don’t know what their problem is. They are raising interest rates and it’s ridiculous.”

No, what's ridiculous is you butting your butt brain into issues about which you have no clue. Just like you did with your jackass stupid trade war with China, and sputtering bilge such as "Trade wars are easy to win!"  No, fool, they are not and the impact always smacks citizens.  This asshole actually also had the nerve to blurt out:

“ I think I know more about it than they do.”

 No you don't, Dotard,  but you're too too damned dumb and self-absorbed to figure it out. Likely a victim of the  Dunning -Kruger Effect because of your pronounced cognitive incapacity and narcissism.  To remind readers, the Dunning-Kruger effect is defined as “a cognitive bias whereby unskilled individuals suffer from illusory superiority, mistakenly rating their ability much higher than is accurate.” Wikipedia adds that “This bias is attributed to a metacognitive inability of the unskilled to recognize their ineptitude.” 

Or, as psychologist David Dunning (the discoverer) once explained to Errol Morris, writing in an essay series, “The Anosognosic’s Dilemma: Something’s Wrong but You’ll Never Know What It Is,” for the New York Times:

 “If you’re incompetent, you can’t know you’re incompetent … [T]he skills you need to produce a right answer are exactly the skills you need to recognize what a right answer is.”  

In the case of Trump, aka Dotard, he is fundamentally ignorant and  mega unskilled, as well as incompetent regarding just about every imaginable thing from tax policy, to tariffs, to immigration and its positive contributions, to interest rates.   The imbecile arguably doesn't even know that interest rates are "far below historic definitions of normal" according to a WSJ piece from last Friday.

In addition,  Doh- Turd seems not to process he's a victim of his own "success" (sic)  in jazzing up an economy that didn't need it - actually overheating it.  The demented dolt seems to have forgotten that his (and the GOP's) tax cuts juiced corporate earnings and led them to use the extra $$$ for stock buybacks - which sent valuations of  corporate equities hurtling beyond anything sustainable.

 This is part of  what is prompting the Fed to raise interest rates and drawing Donnie Dotard's ire. Why? Because he has to have some entity to blame other than himself. He loves to embrace the market when it's soaring but after it crapped out last week he want to distance himself knowing the midterms are around the corner and fearing voter-investors might take it out of his hide.

The other aspect not grasped by this imbecile brat and pretend president, is that when bond yields rise stocks tend to sink.   The yield on 10-year United States Treasury bonds reached a seven-year high last week of 3.25 percent (it receded some on Wednesday as stocks dropped), up from 2.82 percent in August. The 10-year rate was below 1.4 percent as recently as July 2016. What this did is stoke volatility across asset classes, igniting a single-minded search for protection.    This was largely reflected in buying up bonds (bonds have lower prices when their yields go up as the 10-year Treasury did last week).

Basically what happened is that stock investors - seeing high bond yields - sold off equities and bought Treasurys in a flight from risk .  But the real problem lay in the future i.e. when stocks sell off amid falling bond yields which tends to precede recession. Last week, then, was just a warning shot over the bow of irrationally exuberant investors too enamored of overpriced stocks.

Another less discussed aspect is the purchase of options. Not only did investors grab up bonds (including risky corporate bonds) but also options that pay out if the S&P 500 takes a drastic fall. Why would they do that? Well, because they are convinced a drastic fall is coming - if not now then later.  But what their frenzied buying of options has done is to drive up the cost of hedging stock portfolios to the highest in months.

In other words, investors (especially of the 'momentum' species) are bracing for even greater turmoil across markets, increasing hedges on their stock positions. The concern is with this behavior in addition to bond purchases as yields go up on the long term (e.g. 10-year) Treasurys.

Here's the skinny:The behavior of stock, bond and commodity markets last week showed investors' main concerns were that higher oil prices (now approaching $100 a barrel) will fuel inflation and trigger the Fed into raising interest rates even more rapidly.  This according to Charles Himmelberg chief market economist at Goldman -Sachs.  Himmelberg also said (in the same Friday WSJ piece) he saw more evidence investors are retreating from risk and worrying about economic growth.

Retreat from risk will especially be rife if the 10-year  Treasury yield should approach 3.5 % - a level some analysts believe would be a major threat to stock valuations.

Let's seek even more perspective here:  For much of the last couple of years, short-term interest rates, which the Fed controls directly, have risen much faster than longer-term rates, which are set based on global supply and demand for bonds. The Fed was plowing ahead with rate increases, while investors were evidently skeptical that growth would be persistent enough to justify higher long-term rates. (After all the Reeps passed tax cuts that promised both to stimulate the economy but also expand the supply of government debt to now an estimated $1.5 trillion)

In late August, the rate on 10-year Treasury  bonds was only 0.18 percent higher than for two-year government bonds, a phenomenon known as a flat yield curve. (When that number turns negative, it’s considered an “inverted yield curve” and is often a measure of looming recession.)

Since then, longer-term rates have risen faster than shorter-term ones. Still the yield curve remains flat by historical standards and the gap between 10-year and two-year bonds was up to only 0.33 percent in recent days.

The yields of inflation-protected bonds have moved mostly in lock step with traditional bonds in recent weeks, suggesting that traders haven’t become more worried about inflation.  The rise in longer-term interest rates is driven mainly not by a rise in inflation expectations, but rather by a rise in investors’ expectations for what the Fed will do and for how much compensation bond investors are demanding in lending over long time horizons.

Leaders of the Fed have indicated that they expect to keep raising their target interest rate to around 3.4 percent by the end of 2020, up from the current level of just above 2 percent.  This is very reasonable, contrary to Baby Dotard's histrionics,  given higher interest rates will provide more leverage if and when the next recession does occur.  To keep interest rates too low puts an artificial strait jacket on the Fed's responses, which a real president would grasp - but evidently the splenetic infant Trump can't.

Recall Trump criticized the Fed when it raised interest rates in July, and again when it raised interest rates in September. But his attacks have sharply intensified in recent days, in tandem with the drop in the stock market.

What we need is for this forlorn loser brat to grow up and admit that Fed Chief  Jerome Powell

knows a hell of a lot more about finance and economics than he does.  (Especially as we now know the mutt made all his money from common grifting and tax fraud - with Daddy Fred's help)

 And after all- if Dotard  needed surgery, say for removal of his appendix - he'd not want a trained monkey doing it but a competent human surgeon.  In like manner we can't have an orange Orangutan like Trump trying to manage the economy or dictate interest rates.  It needs to be left to the "big boys".

See also:

The Market Weighs in on Trump’s Economic Policies

Exceprt:

"In truth, the whole of Trump’s economic policy has been a massive injection of debt into an already healthy economy. His tax cuts for corporations and deficit spending for military expansion have added more than $2 trillion to the national debt in just two years. It’s like injecting adrenaline into an already healthy runner in the middle of a marathon.

Let’s be clear. Any moron with a handful of credit cards charged off to the next generation can gin up the illusion of prosperity. That’s all the Trump economy is: borrowing trillions of dollars from the future, spending it today, and pretending to be a genius. But the market has figured it out."