Monday, October 22, 2018

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

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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.

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!

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