Showing that economist Arthur Laffer’s “Trickle-Down-Economics” still gets the same results, 73-year-old President Donald Trump got bad news with the federal budget deficit soaring to $984 billion. When former President Barack Obama left office Jan. 20, 2017, the federal budget deficit stood a $587 billion on a $2.99 trillion budget or 3.2% of GDP. Today’s deficit of $984 billion is 5.1 % of U.S. GDP, causing real concerns in financial markets. J.P. Morgan Chase & Co. CEO Jamie Dimon warned Oct. 18 about current money market reserves affecting the repp [repurchase] market affecting short term banking transactions. Back in 2008, the repo market ran out of cash forcing the Federal Reserve Board to ad trillions into the Fed’s M1 and M2 money supplies, currently running out of reserves. Rising budget deficits force the government to increase the debt ceiling, causing interest rates to rise.
Trump’s Dec. 22, 2017 Tax Reform cut corporate tax rates from 35% to 21%, reducing government receipts, leading to the current growing budget deficit. Trump cites President Ronald Reagan has his fiscal hero, slashing interest rates in 1981 10% across all income brackets. Reagan listened to his chief economist Arthur Laffer, whose “Laffer Curve” showed that the economy would boom, cutting the $60 billion deficit left by former President Jimmy Carter. By the time Reagan left office in 1989, the deficit was .$155 billion, after a Social Security surplus paired $38 billion off the deficit. Without that, the 1988 deficit would have been $194 billion. Today’s growing budget deficits threaten to stall-out a 9-year economic expansion started in 2010. Trump’s economic theory expected historic low unemployment to translate into more consumer spending, something that hasn’t happened.
Deficits matter when they become larger fractions of U.S. GDP, something that could eventually downgrade the U.S. credit rating and currency. With Europe and Asia facing economic downturns, the U.S. has escaped the damage so far, leaving Wall Street more volatile. Treasury Secretary Stephen Mnuchin dismissed the deficits, expecting them to shrink in the future as consumer spending picks up. Minuchin doesn’t say how that’s going to happen, especially because it hasn’t happened with record low interest rates. Mnuchin promised “to cut wasteful and irresponsible spending,” something that hasn’t happened in modern history. Trump’s 2017 $1.5 trillion tax cut makes it more difficult to reduce federal budget deficits or, for that matter, to avoid increasing the debt ceiling now standing at $21 trillion. Spending increased 8% in 2019, while revenue only increased 4%.
Trump can’t have it both ways: Cutting $1.5 trillion in taxes and expecting to shrink mushrooming federal budget deficits. Trump increased military spending in 2018 $54 billion to $639 billion, an 8% increase. In 2019, military spending increased $77 billion to $716, a 12% increase causing federal budget deficits to skyrocket. Looming battles in the debt ceiling could shut down the government again as Trump realizes he’s entering an election year with rising deficits. Mnuchin’s kidding himself thinking that he’s going to cut more waste, fraud and mismanagement from the federal budget. Trump’s big mistake was offering a 14% cut in corporate tax rates, leaving government revenues shrinking. Democrats running for 2020 have promised to reverse Trump’s 2017 tax cuts, reinstating the 35% corporate rate. Candidates like Sen. Bernie Sanders (I-Vt.) and Sen. Elizabeth Warren (D-Mass.) promised a wealth tax.
When you consider the amount of multimillionaires and billionaires in the U.S., taxing them at higher rates only makes sense. No economy can sustain budget deficits without consequences, including depleting the Fed’s M1 and M2 money supplies. If Dimon is correct about dire shortages in the repo market, it’s a matter of time before the Fed will have to intervene with a new round of quantitative easing. Slashing interest rates at this point isn’t enough stimulus for more economic growth. Today’s historic low unemployment rate doesn’t account for part-time workers, unable to find full-time employment with all the employer-based benefits, especially health care. When you ad to average consumers skyrocketing rental and health care rates, there’s just nothing left at the end of the month to spend into the consumer economy. Growing deficits threaten the U.S. credit rating and currency.
Watching federal budget deficits rise 26% from $779 billion in 2018 to $984 billion in 2019 indicates that Trump’s fiscal policy doesn’t raise enough revenue without going into the red. No one wants their budgets slashed but unless there’s some spending restraint or cutbacks, deficits could explode in 2020, causing voters to revolt when they go to the polls. Trump walks in a lot of minefields heading into 2020 with the economy teetering on slowdown, possible recession, if deficit and government spending doesn’t get controlled. Trump’s 2017 corporate and individual tax cuts have not created the spending boom he hoped with GDP up to 4%. Slowing to under 2%, GDP could flat-line in 2020 if financial markets don’t get reassurance on deficits and the debt ceiling. Another government shutdown would have harsh consequences on the U.S. economy, no doubt pushing the economy into recession.
