By David Stockman as originally published on Contra Corner and reprinted here with permission
While the FBI was raiding the offices of Trump’s lawyer yesterday afternoon, the CBO published a blockbuster report evidencing the Donald’s own raiding party. To wit, in roughly 90 days of fiscal madness between December and February, Trump and his GOP allies piled $459 billion onto next year’s (FY 2019) deficit.
That eruption of red ink consisted of $285 billion for the tax bill and $174 billion of spending add-ons for defense ($56 billion), domestic programs ($105 billion) and additional debt service ($13 billion). For FY 2019 alone the added debt amounted to 2.3% of GDP, and turned an awful fiscal situation into an outright disaster.
Indeed, the real “watershed moment” yesterday was not that Mueller went after the keeper of Trump’s legal skeletons, but that CBO let the real monsters out of the fiscal closet, translating Trump-O-Nomics into the scariest budget numbers ever seen.
Namely, a public debt that reaches $33.85 trillion (130% of GDP) by 2028 and that’s not our projection; it’s right there on p.87 of the CBO’s official report.
Moreover, that’s the good news part of the report. But to believe that the public debt is only heading for 130% of GDP during the next 10 years, you have to believe in Rosy Scenario economics and be OK with the crooked book-keeping forced on CBO by our estimable legislators.
As we show below, grab some sober economics and honest fiscal book-keeping—and the public debt number 10-years out is actually $40 trillion and 150% of GDP. And there’s no conceivable way to dig out from under it because the tsunami of baby-boom retirements and the associated Welfare State fiscal costs are insuperable.
The CBO report lets some skeletons out of the closet on that point, too. Thus, combined social security and medicare costs will rise from $1.8 trillion in FY 2019 to $3.3 trillion by FY 2028 owing to the rolls rising from 60 million to 80 million beneficiaries, as well as cost of living adjustments and medical care inflation.
Needless to say, the remaining accounting “solvency” of the OASHDI (old age, survivors, hospital and disability) trust funds will quickly evaporate under this spending wave. In fact, the trust funds’ cash deficit in the coming year will total $108 billion, rise to $504 billion by 2028 and then head into the trillions shortly thereafter. And that’s per year!
In short, what’s coming is a monumental Welfare State crisis owing to the fact that the vaunted trust funds are rapidly going bust. Just in the FY 2019-2028 period they will be collecting nearly $2.8 trillion less in income from the payroll taxes than the benefit costs which the retired population will be entitled to under law.
At length, fiscal policy will become hostage to a moveable firestorm of political and generational conflict. The budget and debt ceiling battles of recent years will seem like a walk in the park by comparison.
Indeed, given the baked-in-the-cake demographics of the baby boom wave, the only rational course for fiscal policy in 2018 was to get prepared. That is, to begin to phase-in now the benefit retrenchments and/or revenue raising measures that will be needed to stem the fiscal hemorrhage just around the corner.
But the Trumpite/GOP was having nothing to do with prudence, rationality and the plain old fiscal facts of life. Instead, they took the inherited budget, where last June the CBO had already projected a $689 billion (3.5% of GDP) deficit for FY 2019, and plowed straight off the deep-end from there.
The tax and spending actions since then would raise the FY 2019 deficit by 67% to $1.148 trillion. Given what lies ahead, we’d rank that on par with Obama’s $800 billion “stimulus” bill and Bush’s $700 billion TARP bailout in the annals of fiscal irresponsibility.
Except that it’s worse because the red ink sprees of Barry and Dubya were one-time spendfests spread out over 2-4 years. By contrast, the Donald’s attack on future taxpayers is ongoing, and even by the lights of CBO’s funny money accounting will have a cumulative cost of $2.7 trillion over the coming decade.
Moreover, as we will demonstrate below, an honest 10-year reckoning of the GOP tax bill and the $143 billion appropriations increase for the current year easily exceeds $5 trillion of add-ons to the public debt or nearly double CBO’s conservative reckoning. No group of politicians has ever gone that crazy in practically one sitting.
Yet the truly mad part of the equation lies in the cyclical context and timing. To wit, no government in Washington has ever dreamed of raising the deficit by 67% to just under 6.0% of GDP in the 10th year of a business expansion.
That’s because we have never been there before!
The CBO report, in fact, makes clear that Imperial Washington is plunging straight into fiscal terra incognito.
Thus, by the end of FY 2019 the US economy would be in month #124 of the current so-called business expansion. That is more than double the average 61 month recovery cycle since 1950 and exceeds the 119 month record of the 1990s tech boom. Even then, Uncle Sam was running at 2.1% of GDP surplus , not a 6% of GDP deficit, when the cycle finally rolled-over in early 2001.
Furthermore, long-term fiscal projections at the time showed continuing surpluses as far as the eye could see and the virtual elimination of the public debt within the decade.
That was all a fantasy, of course, because the CBO didn’t see coming down the pike two unfinanced wars, two giant unfunded GOP tax cuts (in 2001 and 2003) and the housing bust and financial crisis of 2008-2009.
But what they also didn’t see is exactly the skunk in the woodpile contained in yesterday’s report. Namely, that recessions hadn’t been outlawed and that straight-line projections of full-employment forever are a dangerous excersize in wishful thinking.
Yet the new report goes right back there because CBOs Keynesian beer goggles have blocked out any recession through the end of October 2028. What is actually assumed, in fact, is 231 months of continuous business expansion—double the old record—-and a nominal GDP growth rate that is 33% higher than what has occurred during the last 10 years.
The salience of this point cannot be overstated. It just so happened that the end of FY 2017 (last September 30) marked the 10-year interval since the business cycle peaked back in the fall of 2007. During the interim, nominal GDP grew from $14.9 trillion to $19.2 trillion or at a 3.01% per annum rate.
By contrast, CBO’s Rosy Scenario assumes not only no recession at all during the coming decade, but that nominal GDP will actually grow at 4.1% per annum to $29.8 trillion by FY 2028.
We’d say, good luck with that. Unlike during the past decade during which the Fed’s balance sheet exploded from $700 billion to $4.5 trillion, we are now in the era of QT (quantitative tightening), which means sharply rising bond yields and a brake on growth, rather than a booster shot.
Likewise, during the last decade the Red Ponzi went berserk borrowing, digging, building and investing–stimulating economic growth everywhere on the planet.
But in the next decade it will not even remotely increase its debt from $4 trillion to $40 trillion, as it did between 2007 and 2017. To the contrary, it will either throw-on the credit brakes, as is already becoming evident; or the Red Ponzi will collapse in a smoldering heap of debt and malinvestment, and for our money the latter is the more likely.
The point, however, is that there will be headwinds and trades wars on the Red Ponzi front during the next decade, and those prospects will sharply raise the risk of a traumatic global recession—given that China has been the world’s “growth” engine of the last two decades.
Either that, or China will generate further deflationary waves as it attempts to stabilize a massively over-indebted and over-capacitated economy by dumping excess production on the world market wherever and whenever it can work around rising protectionism barriers. In that sense, at least, the Donald’s throwback to 17th century mercantilism is actually, unfortunately, the wave of the future.
In either event, just consider what happens with a replay of the 3.0% growth rate of the past decade. To wit, 10-year GDP is $20 trillion lower than yesterday’s CBO forecasts and the Federal deficit is $4 trillion bigger.
Throw some honest book-keeping into the mix and you end up with a real horror show. For instance, the recently based Horribus appropriations bill suspended the discretionary spending caps for two years (FY 2018 and FY 2019). This means that by FY 2019 discretionary defense spending will be up by $85 billion from FY 2017 actual levels and domestic appropriations will be $135 billion higher.
Yet the ancient budget control act passed way back at the time of the 2011 debt ceiling crisis is still on the statute books for the next fiscal year. So under Congressionally mandated CBO scoring conventions, baseline discreitonary spending was reduced by a whopping $133 billion in FY 2020.
Needless to say, the odds of the DOD budget being cut by $68 billion in FY 2020 from the Donald’s new MDWGA (make defense waste great again) spending level of $720 billion are somewhere between slim and none; and the same is true of the swamp-filled domestic appropriations bills, which under the CBO no-see-’em scoring convention is projected to fall by $53 billion in FY 2020.
Where that leads to is a veritable fiscal nightmare. Whereas the CBO report already forecasts cumulative deficits of $12.5 trillion during the next decade, you’d get $20 trillion of cumulative deficits if you set aside Rosy Scenario and remove the crooked accounting from the CBO baseline.
In a word, what was a $20 trillion national debt when the Donald arrived in the White House is no longer. Now it’s barreling toward $40 trillion within the next decade.
We have no ideas how much economic carnage that will cause, but we are quite sure it will not make America Great Again.
And we are also confident it will also not make owing the S&P 500 at the top of the greatest bubble yet safe again.