Gasoline Spikes, Interest Rate Hikes, Consumer Debt Overload; What Could Go Wrong?

Oil and gasoline are spiking because of Trump’s erratic Middle East policies, interest rates are rising because Trump is adding $1 trillion dollars a YEAR to the national debt, any minor tax benefits to middle America is exceeded by rising prices, the top 20 vehicles sold in the last two years don’t include a single automobile, much less a fuel efficient one, they’re all trucks and SUVs, and 1/3 of them are on sub-prime loans or leases which means the consumer is losing money—fast. And that’s just the tip of the iceberg. Americans never learn. Bush and Trump ruin the economy, Obama and Clinton try to save it, the GOP fools Americans into thinking they’re “winning”.

The Congressional Budget Office warned earlier this month that the U.S. will start running $1 trillion annual deficits, [spending greater than tax revenue] starting this year, and that the national debt will be as large as the entire U.S. economy in less than a decade. A new report from the Tax Policy Center says that that as grim as those projections from the CBO may be, they may understate the case.

TPC’s Alan Auerbach, William Gale and Aaron Krupkin argue that in several instances, the CBO’s economic and political assumptions are overly optimistic, mostly based on newly instituted directives from President Trump and the GOP Congress in how they must calculate the rate of inflation, [and indexing] and that more realistic scenarios produce even larger deficit projections. A more negative outlook emerges once the authors make adjustments for:

  • Recession risk: The CBO assumes the economy will be at full employment on average for the next 10 years. A more realistic outlook would include the likelihood of a recession at some point, which would significantly reduce federal revenues and increase expenses, producing a larger deficit.

The reason for the recession assumption has deep roots in history. For instance, although nothing has substantially changed in oil inventories, crude and refined oil products like gasoline, prices have jumped dramatically (which more than completely wipes out any pittance of a reduction in taxes that went to the middle class in deference to wealthy from that $1.5 trillion tax giveaway). This jump comes despite approval of the Keystone pipeline, approved drilling off of the coasts of the U.S., surging domestic oil output and approval of arctic drilling which bought the vote from Alaska’s Senator Lisa Murkowski for the GOP $1.5 trillion giveaway to the wealthy.

  • Permanent tax cuts: The CBO assumes that the temporary individual tax cuts will be allowed to expire after 2025, but there’s a good chance that Congress will extend them, largely for political reasons. If lawmakers do extend the cuts, the debt-to-GDP ratio will reach 106.5% in 2028, well above the CBO’s current projection of 96%.
  • The long term: The CBO analysis stops at 2028, but the fiscal outlook gets much worse beyond the 10-year window. As the deficits grow larger, the spending cuts required to bring them back to the current level relative to GDP grow exponentially larger too. “The longer policy makers wait to institute changes, the larger those adjustments would have to be to hit a given debt target in a given year,” the authors write. “Moreover, over a longer horizon, the required annual adjustments are much larger, because the projected fiscal trajectory under current policy continues to deteriorate.”
  • The American consumer is loading up on debt.

Total household debt rose to an all-time high of $13.15 trillion at year-end 2017, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data. This includes all the people stretched with sub-prime auto-loans and leases.

The report said it was the fifth consecutive year of annual household debt growth with increases in the mortgage, student, auto and credit card categories.

Oh, and by the way, interest rates are rising…and will continue to do so.

Mortgage debt balances rose the most in the December quarter rising by $139 billion to $8.88 trillion from the previous quarter. Credit card debt had the second largest increase of $26 billion to a total of $834 billion.

The reason this matters to the U.S. is because world debt is rising nearly three times as fast as total global wealth. If the U.S. were using our increase in debt to actually stimulate the economy then that would at least create a 50-50 chance of the U.S. economy not only surviving a global downturn but to take advantage of it. Unfortunately, we have a president who neither understands global economics, including the difference between business or household debt vs governmental debt, but has always used debt to his advantage, albeit unscrupulously. And the GOP’s big corporate tax cut was used almost entirely by them to buy back their own stock [thus propping prices up in spite of falling profits]. Supply and demand has disappeared while the U.S. is operating on the GOP’s near-unanimously debunked supply-side economics. The bubble being created by corporate and governmental borrowing dwarfs the mortgage-related bubble that preceded the 2007 meltdown by a scale of 50:1…meaning the next meltdown will be 50 times as bad.

 So let’s break this down to a simple questions and answers.

Why does the U.S. owe so much?
Apart from a four-year stretch during the economic boom of the late 1990s, the federal government has run a budget deficit every year since 1970. In 2017, the shortfall was $666 billion, which had been decreasing since year two of the Obama administration. But the Trump administration, despite minor boom-times, has increased the one-year spending over revenue by $1 trillion. The only two places that can even approach getting close to cutting expenditures enough to prevent this same rate going forward is defense and Social Security/Medicare. Guess which one the GOP will choose to cut? Outgoing Federal Reserve Chair Janet Yellen has warned that the country’s growing debt load could eventually become unsustainable. “It’s the type of thing that should keep people awake at night,” she told Congress in November.

Why is it a problem now as opposed to before?
Governments still must pay interest on its debt. For much of the past decade that hasn’t been a major problem, because of historically low interest rates on account of the Bush major recession. Net interest payments on the debt represented 6.8% of the federal budget in 2017, or $276.2 billion, compared with more than 15% in the mid-1990s. But with the Fed unwinding its post-recession stimulus campaign, interest rates are expected to rise steadily in the coming years. As a result, the CBO estimates, the cost of servicing the national debt is expected to nearly triple by 2027 — leaving the government paying more on interest payments than on national defense.

Is everyone worried?
No. Economists point out that debt can be used to fund important investments, such as stimulating the economy during a recession or fighting unavoidable wars. The GOP and Trump, however, increased the debt dramatically despite a growing economy and low unemployment. The nation’s debt is also wildly different from a household’s budget, because the government can print its own money and has a theoretically infinite life span to pay off its obligations. One emerging school of thought, known as Modern Monetary Theory, argues that inflation is the only obstacle standing in the way of the government creating and spending as much money as it wants. “The national debt is not a national crisis,” says economist Stephanie Kelton, a former adviser to Sen. Bernie Sanders. “The fact that 21% of all children in the United States live in poverty — that’s a crisis.”

Who owns the debt?
About three-quarters is held by investors in the form of Treasury securities sold by the government to raise money. The rest is intragovernmental debt that comes from Washington borrowing against government trust funds, such as Social Security and Medicare. Americans own most of the public debt, which means they benefit from the interest paid on it. Foreign investors own about 30 percent of the nation’s total debt, or about $6.3 trillion. America’s biggest foreign creditor vacillates between Japan and China. They hold about 10 percent of the total debt together. This could become a problem if the U.S. ever damaged its credit rating, but for now American debt is still considered one of the world’s safest assets.

Has the U.S. always been in debt?
President Andrew Jackson briefly paid off the national debt in 1835, partly with proceeds from lands seized from Native American tribes. Hebert Hoover tried to pay down the debt too quickly and caused The Great Depression. Otherwise, the U.S. has been in hock for nearly every year of its existence, beginning with the bill for the Revolutionary War. The debt peaked after World War II, swelling to around 120% the size of the GDP in 1946, but it quickly contracted during the postwar economic boom. But it was after the Bush Great Recession in 2007 that the debt really began to explode. Tax revenues cratered while the government spent heavily [anyone besides me remember the two $300 per taxpayer checks in the mail from Bush?] trying to stave off economic collapse, including George W. Bush’s $700 billion bank bailout, known as TARP, and Barack Obama’s $787 billion economic stimulus package. But like I said earlier, the credit bubble being created now dwarfs the mortgage-backed bubble.

Conclusion

There’s a good chance stocks will continue to slowly gravitate upward through this year, albeit eratically, as the Trump tax cuts prop up corporate profits. But the subsequent decline could be abrupt, just like 2007. According to Scott Minerd, chairman of Guggenheim Investments, “Once we peak, our work shows that we should expect maybe a 40% decline in equities from their peak.” He went on, “I’m talking about a [severe] recession, possibly in early 2020. Stocks tend to do well two years before a recession. But in this rally, it’s the opportunity to sell.”

The current bull-market rally began in 2009, making it one of the longest in history. The tax cuts President Trump signed in 2017 could prop up markets a bit longer. But the “real” investors gathered at the Milken Conference also emphasize that conditions gathering now will trigger the next downturn.

The most direct cause of the recession that began in 2007, and the financial crash of 2008, was excessive consumer debt, mostly in the housing sector. Next time, it will be different, Minerd says. “In this downturn, it’s the corporate sector,” Minerd says. “Corporate debt to GDP is at record levels. And when you look at what CEOs are saying, they’re going to use the benefits of the tax cut to repurchase stock. No one’s really talking about reducing indebtedness.”

The GOP tax cuts, will add exponentially to US government debt. And while the Federal Reserve is gradually raising interest rates, they may still not be high enough to allow for aggressive monetary policy by the time a recession hits and the Fed needs to cut the rates for the right reasons-stimulative. “We’re in grave danger of having a collision between monetary policy and fiscal policy,” Minerd says.

I say, guard your 401(k)s and cash. The next recession will make 2007 look like a hiccup.

Harvey Gold