The Last, Dying Breath of Sound Finance

Daily Reckoning

By Brian Maher

This post The Last, Dying Breath of Sound Finance appeared first on Daily Reckoning.

We have it on highest authority:

Rising budget deficits are “a very dangerous idea.”

The president’s budget director, Mick Mulvaney, conceded the point this Sunday on Face the Nation.

But like a junkie long resigned to the needle and the alley, he could only lower his eyes… and shrug his shoulders:

“But it’s the world we live in.”

The administration released a $4.4 trillion 2019 budget proposal yesterday.

A through Z, it has it — defense increases, funding for the wall, infrastructure spending, veterans’ health care, money for opioid abuse.

And the recent tax cuts mean less money to fund it all.

The result?

“A very dangerous idea.”

If adopted, the proposal would add some $984 billion to the deficit next year… and $7 trillion over the next 10 years.

But even these projections may be… generous.

We might otherwise call them conservative.

But given the word’s association with the Republican Party… it would seem a cruel jest.

We call the projections generous, because the budget proposal doesn’t include spending already agreed to in last week’s bipartisan spending deal.

The resolution unleashes $300 billion of federal spending over the next two years.

Put the new budget proposal to one side for the moment.

With its combination of new spending and tax cuts, last week’s agreement already plays the devil with existing Congressional Budget Office (CBO) deficit projections.

Fortune:

Deficits will probably reach $1 trillion in the current or next fiscal year, almost double what the Congressional Budget Office had projected less than a year ago for 2018. And U.S. debt is now on track to reach $30 trillion over the next decade. That’s over 100% of projected GDP, well into the danger zone where investors demand higher rates to buy government debt.

“Never in modern times,” says analyst Sven Henrich, “have we seen tax cuts being implemented and spending increased with debt to GDP north of 100%.”

But let us draw another cloud across the sky…

CBO projections for the next decade fail to include a possible recession.

Meantime, the current “expansion” is already the third longest in U.S. history, dating to 1854.

By next July — if the gods are kind — it will become the longest-ever expansion.

Can the economy peg along another decade without a recession?

Or even half so long?

It would seem unlikely.

In the likely event of recession somewhere en route, authorities will flood the economy with money borrowed from the future — deficit spending.

“We get a recession,” claims the aforesaid Henrich, “and you are looking at $2–3 trillion [annual] deficits.”

For context:

These numbers don’t represent a slight increase; they represent a deficit explosion… At the current rate, we’ll be hitting $24 trillion by the next presidential election.

What are the implications for markets?

We’ve argued that stocks sold off last week — at least in part — because yields on the 10-year Treasury approached 3%.

At that threshold, the cost of debt begins to drag.

If markets are jittered with 10-year yields nudging 3%, how will they react if deficits soar… and yields spike?

The historical average …read more

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