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Peter Schiff: Divided Congress Will Produce Even Bigger Deficits

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Well, the midterm elections are finally over. The Republicans managed to hold on to the U.S. Senate, but the Democrats took control of the House. The “Blue Wave” was more like a “Blue Ripple.” To me, it smells a lot like gridlock, which is generally good news if you’re a person who favors smaller government. Gridlock means very little will actually get done in Washington D.C. The government not doing anything – well, that doesn’t sound so bad.

But in his most recent podcast, Peter Schiff brought up a potential problem with a divided government. We will likely end up with even higher budget deficits.

And that is bad, especially considering we’re already seeing huge deficits. The US government closed out fiscal 2018 with its largest budget deficit since 2012. Uncle Sam ended 2018 $779 billion in the red, adding to the ballooning national debt. Although the economy is supposedly enjoying a boom, US government borrowing looks more like we’re in the midst of a deep recession. Long-term US debt sales have risen to a level not seen since the height of the financial crisis.

We’ve written extensively on the rising levels of debt along with increasing interest rates. The current situation simply isn’t sustainable. But the new Congress almost certainly won’t do anything about it and will likely make things worse.

The dollar dropped in the wake of the election results. Peter said he thinks that’s because most people don’t think a divided Congress will pass any more substantive tax relief. Given that conventional wisdom is that Republican policies, especially the tax cuts, have boosted the economy, the prospect of Democratic-controlled House will temper the economic “boom.”

I think for that reason, people are maybe less optimistic on US economic growth going forward, and therefore they want to sell the dollar, they want to invest abroad.”

Peter said the sloppy results of the most recent 30-year Treasury auction indicate a waning interest in the US dollar.

So, how will things play out?

Peter thinks Trump will actually work with House Democrats to pass some kind of economic stimulus in 2019 and the economy begins to slow down.

I think the next fiscal stimulus is going to be more of a spending stimulus — an infrastructure plan. Just more money spent to kind of prime the pump Keynesian-style.”

This wouldn’t be out of character for the president. Remember, he talked about an infrastructure plan during his campaign. He certainly wouldn’t have much trouble convincing Democrats that this is a good idea. The Republican-controlled Senate might be a little tougher sell, but Trump likely raised his stock among Republicans with the elections and will probably have even more pull than he did during his first two years.

I think Trump is going to try to position himself as a guy that can cross the aisle and work with the other side, especially going into the 2020 elections … so were probably going to get big increases in government spending.”

Peter said we may even get some targeted tax cuts to benefit certain groups – say the middle class – but they won’t be broad-based and won’t likely impact the broader economy.

In other words, these tax cuts won’t even create the appearance of growing the economy. They’re simply going to grow the debt and lead to higher inflation. It is going to feed the stagflationary fire that will be burning. This is going to be negative for the dollar. This is going to be positive for gold. This is going to be very positive for investments outside the United States.”

Peter went on to break down some of the latest economic news – specifically some more bad news in the housing market and the latest consumer debt numbers. He also offers some analysis of the president’s contentious post-election press conference.

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