|Government Spending Gone Wild!|
Sadly, this writer had a difficult time getting spending details even after an extensive search of the news and recent articles about what is planned. It appears everyone came together and simply agreed on, "I will support your spending if you support mine!" The fact remains that while both the republicans and the democrats mumble about being dissatisfied over the deficit, this pork packed bill will rapidly be signed into law. Calling this a "bipartisan agreement" helps spread the blame around and masks just how dysfunctional Washington has become. Of course, those we have sent to Washington can fall back on the stand that it was all done in order to avert another shutdown that would damage the economy. The real bonus is it will allow all the players involved to take their victory laps and claim democracy works.
Digging around you will find the massive $738 billion defense spending bill passed with a vote of 86-8 in the Senate after clearing the House last week. This bill includes a high-profile deal that grants federal employees 12 weeks of paid parental leave in exchange for creating Trump’s "Space Force." which will be granted a measly 40 million dollars. The administration said it expects the newly established Space Force to burn through $8 billion over the next 5 years. A second package of bills which the White House indicated Trump will sign is expected to zip through Congress before the Senate leaves for the holiday.
|The Ugly Reality click to enlarge|
A close look at the economy reveals it is only this massive and unsustainable deficit spending that continues driving our economy forward. The 2017 tax cuts have not panned out the way Republicans promised when they slashed corporate and income taxes. While we were told tax reform would mark a major shift in companies causing them to bring jobs back to America that may not happen. The structural issues that haunt America's competitiveness far outweigh the benefits brought forth from Trump's tax bill and lower taxes. The ugly truth is American companies have little reason to bring jobs home and the budget deficit is set to widen significantly in the next few years even with healthy economic growth. According to projections from the nonpartisan Congressional Budget Office. This means the national debt which now tops $23 trillion will soar to more than $33 trillion in 2028.
We are looking at a trillion-dollar deficit. This translates into America spending $3,333 more than it takes in for every man, woman, and child in the country. To clarify, this is each year and every year but also fails to include State and local deficits as well as a slew of "off-book" promises and spending that are also being made. This spells big problems going forward if we do not begin to face up to reality and get in front of our problems we will soon find ourselves solidly behind the eight-ball.
It would be wise not to accept America's recent GDP as verification the economy is hitting on all cylinders. In 1962 Kuznets, the father of the GDP formula emphasized that we must keep in mind the difference between quantity and the quality of growth. While economic growth appears robust and a solid GDP number can result in a feel-good moment building consumer confidence it can also mask growing weakness in various parts of the economy. Quantity simply does not make up for poor quality, we are talking about two different animals. The false narrative that simply growing the size of an economy by adding more people into the mix or using deficit spending undercuts the importance of a solid economic and the long-term stability of the financial system.
History shows government spending is a poor substitute for the free market when it comes to allocating capital to where it is most effective instead it creates a false economy by borrowing from the future. Deficit spending is not a silver bullet without consequences. The President's fixation on the stock market and not the real economy represented by Main Street does a great disservice to Americans. While Trump may have been correct in pinpointing many of America's economic ills his prescriptions for a cure leave much to be desired. How we react to money and the economy is often rooted in our past and Trump has never shown himself to be shy about taking on debt to propel himself forward. This is why when the stock market started to wobble President Trump increasingly ratcheted up his attacks on Fed Chairman Jerome Powell for"ruining the party."
Corporate investment decisions are based upon the cost of capital and the prospective equity returns that new investment can generate, not how much capital is available and in our current cheap and easy money, environment capital is basically free. The problem is not funding new investments, but finding endeavors in which to deploy this capital. The economists who largely control the major central banks in the industrialized nations may be able to manipulate markets and cancel excessive debt through open market operations, but they cannot manufacture attractive investments. This is why stock buybacks have become a corporate priority joining other investments that are not productive.
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Indirectly this deficit spending by our government also fuels our trade deficit; This is not only evident by our massive trade deficit with Asia but the United States huge trade deficit with Mexico which becomes even more disturbing when you begin to understand even that money quickly passes through Mexico and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route. The idea we will reach a quick fix to the trade problems facing America and is a myth and oversimplifies the problems before us in achieving a sustainable trade balance. Reaching a reasonable solution posses a major difficulty in that China is so entrenched in its ideology it most likely will refuse any change that will throttle back its plans of domination.
The bottom-line is that Washington has become a hostile and unfriendly environment for those interested in good governance. In June a balanced budget plan put forward by Sen. Rand Paul (R-Ky.) failed in the Senate by a vote of 69-22. This means only 22 of the 53 Republicans voted in favor of the national debt-addressing measure. For the first two months of the fiscal year, which began Oct. 1, the deficit grew to $343 billion. The national debt clock showed the U.S. owed more than $23 trillion as of Thursday. The crux of this post is to point out deficit spending is not a silver bullet, it has real consequences and with each step forward we get closer to the end of the road. While those embracing Modern Monetary Theory may argue otherwise Econ 101 teaches that such actions always lead to a very bad place.