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Stockman: US Fiscal Path Will Rattle the Rafters of the Casino

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As we’ve reported, the US government is spending money like a drunken sailor. But nobody really seems to care.

Since Nov. 8, the US national debt has risen $1 trillion. Meanwhile, the Russell 2000 (a small-cap stock market index) has risen by 30%. Former Reagan budget director David Stockman said this makes no sense in a rational world, and he thinks the FY 2019 is going to sink the casino.

In a rational world operating with honest financial markets those two results would not be found in even remotely the same zip code; and especially not in month #102 of a tired economic expansion and at the inception of an epochal pivot by the Fed to QT (quantitative tightening) on a scale never before imagined.”

Stockman is referring to economic tightening recently launched by the Federal Reserve. It’s not only the increasing interest rates.  By next April the Fed will be shrinking its balance sheet at an annual rate of $360 billion and by $600 billion per year as of next October. By the end of 2020, the Fed will have dumped $2 trillion of bonds from its books. Stockman puts this into perspective.

So the net of it is this: The Fed will sell more bonds in the next 3-4 years than had been accumulated by all of the central banks of the world in all of recorded history as of 1995!”

Now pause for just a moment and think about this. The GOP just passed a tax plan that will add another $1.5 trillion to the deficit. And word is Trump’s next big push will be to pass an infrastructure bill – even more spending and debt. Meanwhile, during a time of rising debt, the Fed will be flooding the market with bonds. And what do governments have to do to finance debt? That’s right. They sell bonds.

There is literally a fiscal red ink eruption heading straight at the Fed’s balance sheet shrinkage campaign that will rattle the rafters in the casino … Uncle Sam’s borrowing requirements are likely to hit $1.25 trillion or more than 6% of GDP in FY 2019 owing to the fact that the tax bill is so heavily front-loaded and the GOP’s wild spending spree for defense, disasters and much else.”

Stockman goes on to detail the massive amount of spending coming down the pike. He points out that nearly of half of the $133 billion of disaster aid will hit in FY 2019 at the exact time that the GOP’s front-loaded tax cut ($280 billion) will also arrive with full force. Trump also signed a defense authorization bill that will raise baseline outlays from $625 billion to $700 billion.

In all, then, we expect FY 2019 outlays to rise by upwards of $200 billion from CBO’s most recent baseline projection. That would include $75 billion for defense, $65 billion for disaster aid, $25 billion for increased of domestic appropriations above the sequester cap, $20 billion for the ObamaCare subsidies and another $15 billion for interest on higher spending and lower revenues.Those kinds of spending increases are now virtually certain, and will take total FY 2019 outlays to around $4.575 trillion. That happens to be nearly 20% more than the $3.85 trillion spent during FY 2016 during the run-up to the presidential election—-when the GOP politicians loudly denounced the runaway spending of the Obama Administration.”

And this doesn’t even factor in the impact of the tax bill.

All in all, given the CBO’s estimate of $20.7 trillion in nominal GDP in fiscal year 2019, the US Treasury’s total borrowing requirement will come in somewhere in the neighborhood of 6.1% of GDP. This coming during months #111-125 of a business expansion. As Stockman notes, the US economy has never been there before. The longest previous expansion came in at 118 months.

And that is to say nothing of the fact that this purported record business expansion would be occurring at a time ultra-late in the cycle when the Fed is shrinking its balance sheet by an unprecedented rate of $600 billion per year. In a word, something’s going to give. We’d bet a fair amount that one of those “somethings” will be a casino so delirious with momo madness that it is valuing the RUT main street businesses of America at 107 times peak earnings.”

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