Washington Is Creating a Perfect Economic Storm

Washington Economic Storm

I grew up in a conservative political household.

My parents met as members of an early ‘60s organization called Young Americans for Freedom. They went on to have careers in politics and government service.

The high point of their political lives was the Reagan administration of the 1980s … the culmination of decades of effort to put a “true” conservative in the White House.

The core beliefs that defined their version of conservatism included anti-Communism, right to life for the unborn and a limited role for government.

Those were long-term goals. The issue that dominated their day-to-day political activities — and our dinner-table discussions, as I recall — was the federal government’s fiscal policy … above all, debt.

Given the behavior of congressional Republicans in recent months, it’s clear that my parents’ brand of conservatism has disappeared. The combination of unfunded tax cuts and last week’s deficit-busting budget deal worries them greatly.

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It should worry you too … in fact, our irresponsible representatives in Washington are creating a perfect economic storm.

Just When Things Were Looking Better

Thanks to our representatives in Washington, we face a future of higher interest rates, a falling dollar and falling stock prices.

Over the last six weeks, Congress has added trillions of dollars to future federal budget deficits.

The Tax Cuts and Jobs Act passed at the end of December added an estimated $1.5 trillion to 10-year deficit projections. Last week, Congress and President Donald Trump added another $300 billion to that figure with a budget deal lasting until 2019.

The nonpartisan Committee for a Responsible Federal Budget forecasts that the federal deficit could hit $1.2 trillion next year.

The Congressional Budget Office forecasts a doubling of federal deficits as a percentage of gross domestic product (GDP) in the next few years, reaching as high as 7% to 8% in some estimates.

Long-term data suggests a 1% increase in the debt-to-GDP ratio corresponds to a 3 to 5 basis point rise in the 10-year Treasury yield.

Washington Economic Storm

Washington Economic Storm

How can we be so sure of this? After all, the government has run deficits over the last decade, and we haven’t seen a rise in bond yields, right? What’s different now?

The answer is something the central bank mandarins blithely call “extraordinary monetary policy.”

In the wake of the 2008 financial collapse, the world’s major central banks stepped in to purchase U.S. Treasurys and other government debt as part of a deliberate strategy to keep interest rates low. The Federal Reserve, the Bank of Japan and the European Central Bank now hold more than $14 trillion of securities in their portfolios.

But the Fed has largely stopped buying those securities. Starting late last year, it initiated a so-called “orderly wind-down” of its Treasury position.

So, unless another source of demand for Treasurys emerges, the influx of fresh supplies of Treasury bills to finance rising deficits will create a buyer’s market. That will drive down the prices of Treasurys and drive up yields.

Projections suggest the Treasury Department will sell more than $1 trillion of debt in 2018 alone.

Th-Th-That’s Not All, Folks

Washington’s fiscal irresponsibility will work through the economy in other ways, too.

The president continually reminds us that the U.S. economy is in growth mode. Employment is rising and so are wages.

In that context, a massive economic stimulus in the form of deficit spending — larger even than the emergency stimulus package of 2009 — will rapidly turn growth into inflation. Inflation will lead to higher bond yields as buyers of Treasurys factor it into their future returns.

Those higher interest rates will force the government to funnel more of its funds into ever-growing interest payments. That will leave the economy with a smaller share of federal spending, depressing growth.

Complicating matters is a weakening dollar. The dollar has weakened sharply, shedding about 10% of its value in 2017.

The combination of a weaker dollar and higher U.S. deficits will lure overseas investors looking to add to their stockpile of Treasurys. Those buyers will want bigger yields to compensate for inflation and the risk of higher U.S. debt. That will further drive down bond prices … raising U.S. government interest payments even more.

Finally, rising bond yields and inflation will lower the future value of anticipated corporate earnings and stock dividends. Lower future income streams mean lower prices for stocks. In that way, U.S. government deficits will deflate the U.S. stock market.

Give Me That Old-Time Conservatism

Vice President Dick Cheney famously said that the Reagan presidency proved that “deficits don’t matter.”

But he was talking about politics — voters of the day simply didn’t punish the Republicans for running up deficits.

The U.S. government deficits of the Reagan era were the largest since World War II, save for the immediate aftermath of the 2008 crisis.

But the current crop of Republicans who claim to venerate Reagan are on track to create the biggest deficits this country has ever seen. In the eight years since they won control of the House, the national debt has skyrocketed from $13.5 trillion to $20.4 trillion today.

Here’s the future they’re creating: rising inflation. A declining stock market. Oh, and one other thing … your taxes will inevitably have to go up to pay for it.

President Trump calls himself the “king of debt.” His courtiers in Congress certainly seem to agree.

Kind regards,

Ted Bauman
Editor, The Bauman Letter

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  • Crusty

    The avarice (and power-hunger) of the politicians is what always ends up destroying great civilizations.

  • Mike

    Boy, are you way off. America has always done better when led by Liberal Progressives. Most recently the period from 1932-1982 was the greatest period of Economic and Manufactering Developement, the grestest increase in the Middle Class and the Greatest increase in the living standards for the average American in our history. And those periods was a period of mostly Liberal Progressive Administrations and Liberal Progressive Congressional majorities.

    Since 1982, all of the above indicators have fallen under mostly Conservative Presidents and Conservative Majorty Congresses. It should be noted that Every Stock Market Crash and Financial Panic since America was born, has been at the hands of Conservative Presidents and Conservative Majority Congresses after long periods of Conservative **********. Most recently, those were 1929 under Hoover and 2007 under Cheney/bush….. And every Crash bottom and period of economic rebuilding was bought after Progressive Liberals were elected. Most recently, those were FDR in 1932 and Obama in 2009.

  • Tom Shaver

    Mike, you are correct. Our standard of living reached its’ peak before Reagan. Laws were changed to enrich the 1% at the expense of the working class. Under the new world order things are falling apart.

  • bobinnash12

    Since the CBO doesn’t take into account the additional potential huge revenues that will be generated under the recent new tax policies, Bauman’s article is potentially BOGUS! Good god almighty! Is Bauman another ‘Never Trumper’ like squirrel David Stockman’??? If so, come clean sir. Have the guts at least to come on here and let us know! Waiting…

  • Jake

    Wow Mike not sure where you received your observations but I probably don’t agree with them. Typically, conservatives follow a progressive who over spent in order to falsely give the impression of a robust economy and used overreaching government regulations as a government control of YOUR LIFE which ultimately quashed the economy. This would lead to the proletariat electing a conservative libertarian to restore some sort of growth by repealing the onerous regulations. Unfortunately, they would be left holding the baggage of the last administrations policies and would need to continue to spend due to our three pronged government standard, which is a whole new conversation.

    In any event, here is Clinton from the 1990’s when he pressured banks to make banks reduce lending standards through the CRA Community Reinvestment Act and home ownership went from a static 63% to almost 70%. https://www.youtube.com/watch?v=WTZIB6Sika4
    Yes the economy flourished due to houses being constructed for those that could not afford them but in the end we had a bubble that ran another 10 years….

    Bush didn’t help at all since he had a majority controlled congress and senate during his term. (NOT A FAN) In fact, I believe Obama suffered from the firestorm Clinton created in housing because Bush kicked the can down the road. Obama had his hands full coming into office and NEEDED to spend his way out.

    I believe the real problem is Congress and the Senate and the individuals as congressmen and senators that will spend until they get terminated…..they have no conscious at all. its all about them

  • John Marshek

    Agree with you–Bauman must be getting free rent at Obama’s Washington Mansion to think that we would believe such trash!–Baggy

  • Twinkle

    Is it better to be the King of Debt or the Emperor with No Clothes or are they both just more of the same ?

  • DieselBoatMan

    Add to your analysis the potential for a diminished use/recognition of the petro-dollar by our global trading partners.

    Recognition of historical trends and patterns is a good basis for analyzing future possibilities, but living in the past, and using it as a perfect metric for predicting future economic activities is folly at best.

    The world is moving at breakneck speed nowadays, and it will only move faster going forward. Communication of all forms is moving at light speed, as are market changes, and global reactions to nearly everything. As a result, prediction of almost anything is nearly impossible, never mind all the bad actors out there that love to see everything spin out of control.

  • Reece Stratton

    The tax implication is, in my opinion THE bottom line to the article- the RESULT of the behavior described. I’m doing Roth because I firmly believe in that conclusion and that I would be better being taxed now and letting my money grow tax-free than to get tax-free money now that would grow and be taxed at what I believe like Bauman will have to be a higher rate in the future. Great article!

  • jrj90620

    You’re blaming the politicians.If voters wanted an honest govt they would vote for it.Most Americans don’t care about deficits,whether they get paid or much of anything else.They just want favors from govt and someone else to pay for them.The days of honest citizens have gone away.You don’t get many votes,promising lower spending on programs or higher taxes.

  • jrj90620

    At least you are honest enough to admit that you are under the rule of govt.Most socialists don’t admit that they actually support fascism.

  • Eric_of_Florida

    Conservatives claim to want a Smaller Government, but their embracing lower taxes and deficits will surely bring bigger government to correct the excesses being created. Keynesian Economics which has been the best overall economic theory states that when times are good taxes should be raised. The current administration apparently desires to increase inflation which hides the real economic picture from the average American. We see our wages rise, our prices rise, and our bank accounts increase with many dollars of decreasing value. Ted, I hope enough Conservatives listen to you. They surely don’t listen to us liberals. Having been burned severely in the 2008 Depression I can only say:
    Fasten your seat belts the ride is going to get a little bumpy.

  • George Christy

    Because of the massive debt, annual GDP will probably never exceed 3%! The Donald’s next bankruptcy will massively eclipse the combined total of his previous six!

  • Mike

    You need to do some of your own homework and not believe the rubbish coming from the RNC Black sites. That Act was brought by the Democratic Senator from Bostom and had an Inner City restriction. The Republican Majority Congress at the urging of the American Bankers (Huge RNC donors) removed that restriction which allowed the “Liar Loans” to go nationwide, until they blew up the real estate market. For your information, the majority of those loans that did not go into foreclosure are within the Inner Cities. It originally was a good idea in that it was believed that inner city blight woul be reduced if those people owned their own homes.

  • Mike

    Hopefully, Dump will either be impeachd or will not be reelected. Why the Russians are aiding onservative sites and candidates baffles me. But then again, perhaps they have studied Keynesian Economics and see the Republicans as a way to destroy America without them firing a shot!

  • Mike

    That description fits the current ( Russian loving) President….. 🙁

  • Mike

    Let us not forget that this Debt Bomb began with Reagan who gave massive tax cuts to his election donores, the wealthiest 3%, while never failing to cut spending…. And now we have another Republican doing just the same thing. Will they ever learn? I’m betting they will not. We will be lucky if he doesn’t not cause another 1929-1932 or 2007-2009. Hopefuy the coming elections will move the Majority back to Liberal Progressives which will stop him….

  • Jake

    First off I have knowledge that I sent to you in a link that Clinton enacted the “affordable home act”. I lived it. I remember the lying cheating Hilliary trying to get universal health care enacted. I remember Bill Clinton being impeached.
    Soooo you admit that Clinton got the ball rolling…. I told you I was not a fan of Bush and the liar loans were conceived long after the CRA expansion under Clinton. No doubt that things went out of control under Bush to the extent you and I know with liar loans no money down … Goldman Sachs was one of the biggest abusers of these loans along with Lehman.