Trump Deficits Will Be Huge
SummaryDeficits are projected to explode.
Gold trends with deficits.
And so does the dollar.
There is much we don't know about how the Trump presidency will play out. Will the Wall get built? Who will pay for it? Will it have at least some fencing? Will repeal and replace happen at exactly the same time? Will Trump throw a ceremonial switch? Will there be a Trump National Golf Course in Sochi? It's anyone's guess.
But of one thing we can be fairly certain. President Trump is very likely to preside over the largest expansion of Federal budget deficits in our history. Trump has built his companies with debt and I'm sure he thinks he can do the same with the country. His annual budget deficits are likely going to be huge. This development will make a greater impact on the investment landscape than most on Wall Street can imagine.
In the past half-century, Republican presidents have been the going-away winners at the deficit derby, a fact that should make any true conservative blush. The sad truth is that annual deficits exploded under Ronald Reagan and George W. Bush, and generally contracted under Bill Clinton and Barack Obama. Some of the explanation is just luck of the draw, some walked into office in the midst of recessions they didn't create.
Democrats want to raise spending and taxes. Republicans want to cut spending and taxes. But whereas Democrats have generally succeeded on both of their missions, Republicans have just succeeded in one. (Actual spending cuts require politically difficult choices that are much harder to vote for than perennially popular tax cuts).
Like prior Republicans, Trump has promised to cut taxes, on both corporations and individual taxpayers… even the wealthy. But unlike prior Republicans, he has not paid a word of lip service to spending cuts. He has promised to spend now, and spend big. Trump just doesn't do the austerity thing. It's for losers.
In addition to fronting the cost of building the 2,000 mile Wall (accounts receivable has a reliable address in Mexico),
Trump plans big increases in military spending, both on active military and on our veterans. His reboot of Obamacare has yet to be presented, but as he has promised that no one will lose coverage, not even those with pre-existing conditions, we can be sure that Trumpcare won't be cheap.
But his big project will likely be his promised $1 trillion plus infrastructure spending plan. Most importantly, he diverges from most Republicans by promising no structural changes in Social Security and Medicare, the entitlement leviathans that are the sources of the vast majority of Federal red ink.Even if none of Trump's taxing and spending plans come to fruition, the United States would still be on the threshold of a sobering era of debt expansion. The age of trillion dollar plus annual deficits began in 2009 when the financial crisis tripled a very large $458 billion deficit in 2008 into a record-smashing $1.4 trillion in 2009.Three more trillion-dollar deficits followed. But since 2009, excluding a small increase from 2010 to 2011, the deficits have declined steadily. By 2015, they had decreased to $438 billion, slightly below where they were before the crisis began.
Over the past century we have seen a recession, on average, every 60 months (based on data from National Bureau of Economic Research and Bureau of Labor Statistics). According to current figures, the economy has been in expansion for 92 consecutive months. This means that the current expansion is already 50% longer than average. The Great Recession caused the deficit to triple. The next recession I expect to work similar magic. But, in addition to being blind to recessions, the CBO was also blind to Donald Trump.As mentioned previously, Trump has virtually promised to do both in the first year of his presidency. If he is successful, we could return to trillion-dollar deficits much sooner than the CBO thinks. A recession could push the red ink well into record territory.
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