The United States is facing a “fiscal bloodbath” that will lead to a major economic crisis. That’s the prognosis of a well-known American fiscal policy expert, David Stockman who directed the Office of Management and Budget for President Ronald Reagan.
Stockman’s thesis is a simple one; the United States has borrowed more than it can pay. He thinks President Trump’s spending proposals which include a $40 billion (€37.59 billion) border wall, $1 trillion (€940 billion) in infrastructure spending, big tax cuts and increases in defense spending are unsustainable. Instead Stockman is predicting massive spending increases and tax cuts.
David Stockman: No Trump Boom
“His fiscal program will cause a political and legislative conflagration owing to $1 trillion in annual deficits,” Stockman said of Trump’s plans on CNBC. “This won’t be the kind of giant accidental Keynesian stimulus that caused the mid-1980s Reagan boom.”
The US national debt is already close to $20 trillion (€18.85 trillion) and Stockman thinks Trump’s plans would push it up to $30 trillion (€28.27 trillion). He thinks that will lead to more taxes, and spending cuts. A similar conclusion was made by analysts at Goldman Sachs in January.
“As a result, eventually other taxes would have to be raised or government expenditures cut,” the investment bank predicted. “With federal debt held by the public over 75 percent of GDP and deficits projected to rise, the fiscal outlook is now less favorable than when taxes were cut in 1981 or 2001,” the latter year being when President George W. Bush cut taxes by more than $1 trillion (€940 billion).”
Government Shut Down Predicted
The US could be facing another government shutdown because of a budget deal made by former President Barack Obama and former Speaker of the House John Boehner (R-Ohio) in 2015.
“I think what people are missing is this date, March 15th 2017,” Stockman told the USA Watchdog blog. “That’s the day that this debt ceiling holiday that Obama and Boehner put together right before the last election in October of 2015. That holiday expires. The debt ceiling will freeze in at $20 trillion. It will then be law. It will be a hard stop.”
Stockman believes the federal government will run out of cash on that date because it will not be able to borrow money. That means the government would have to cease many operations until Congress appropriates more money.
“The Treasury will have roughly $200 billion (€188.47 billion) in cash,” Stockman predicted. “We are burning cash at a $75 billion (€70.68 billion) a month rate. By summer, they will be out of cash. Then we will be in the mother of all debt ceiling crises. Everything will grind to a halt. I think we will have a government shutdown. There will not be Obama Care repeal and replace. There will be no tax cut. There will be no infrastructure stimulus. There will be just one giant fiscal bloodbath over a debt ceiling that has to be increased and no one wants to vote for.”
The Real Danger
The problem with that prediction is that Congress can simply raise the debt ceiling anytime it wants too. Since President Trump is a Republican; and both houses of Congress are controlled by that party – that seems a likely outcome. Congress will simply raise the debt ceiling and put the fiscal crisis off to the future.
The real danger will come if Congress goes along with Trump’s spending plans, which is likely but fails to implement new taxes to pay for them. That will necessitate new borrowing and run up the national debt.
That might lead to some problems because the U.S. already owes a fantastic amount of money to other countries and investors. Commercial banks in the US already hold $2.4 trillion (€2.26 trillion) worth of government debt and the People’s Republic of China held $1.05 trillion (€990 billion) in Treasury bonds in November 2015.
One has to wonder if there will be a market for all that additional debt? The US might have to reform the way it issues bonds in order to pay for everything President Trump wants.
An American Fiscal Crisis is Probably Inevitable
Even though some of his claims are farfetched, Stockman is right about one thing. The United States will have to institute large tax increases or make massive cuts to government to avoid a fiscal crisis at some time in the future. If Uncle Sam fails to do that a fiscal crisis of some sort becomes inevitable.
Many people regard Stockman as something of prophet; because he was one of the few American pundits to predict a Trump victory in the 2016 Presidential election in his book Trumped!. Stockman blogs at Contra Corner where he is a predicting a stock market crash because the views American markets as overvalued.
Stockman served as a member of the U.S. House of Representatives from 1977 to 1981 and in the Reagan Administration from 1981 to 1985. He became something of a celebrity for recommending drastic budget cuts in the 1980s.
Even if Stockman is wrong we should pay attention to him, because the United States is facing a fiscal crisis. Current tax revenues simply do not cover proposed spending, spending cuts or tax increases are in America’s future whether politicians want them or not.