Well Done With A Side Of Ketchup: What’s The Worst That Could Happen To The U.S. Fiscal Position?

Listen, Donald Trump is a man who knows a lot about a lot of things, ok?

He knows how to bankrupt casinos, for example (only not in that good kind of way where you learn to count cards and clean the place out, but rather in that bad kind of way where you literally drive a casino off a cliff into bankruptcy court).

He also knows how to swindle prospective students out of millions of dollars in tuition fees paid to a “university” that wasn’t really a university on the premise that a cardboard cutout of himself would teach those students how to drive casinos off cliffs into bankruptcy court.

Additionally, he knows how to deep-six an entire professional sports league on the way to blaming a bunch of other people for his own stupidity and suing those people for $1.7 billion only to get $3.76 (an amount which included trebled damages and interest).

Let’s see, what else? Oh, yeah, he knows how to go bust sending you Trump-branded Sharper Image frozen steaks in the mail and then years later suggest that the defunct mail order steak business isn’t in fact defunct by trying to pass off someone else’s not-frozen steaks as his steaks.

And look, I could go on. But do I really have to? The point is: this a President who has done it all and been successful at absolutely none all of it, which is why no one should be concerned about him running the economy and putting America on a fiscal path that, when graphed against the unemployment rate, shows that Trump’s economics are just as anomalous as his hair:

Here’s Goldman’s straightforward assessment:

The US fiscal outlook is not good. We project the federal deficit will increase from $825bn (4.1% of GDP) to $1,250bn (5.5% of GDP) by 2021. By 2028, we expect it to rise to $2.05 trillion (7.0% of GDP) in our baseline scenario, which assumes that expiring tax provisions will be extended and that discretionary spending, which was recently increased, will increase only slightly further in nominal terms. These assumptions would leave federal debt at 105% of GDP in ten years, 9pp higher than CBO’s latest projections.

That’s obviously bad, but you might be asking yourself the following: is there any scenario under which the deficit doesn’t widen and debt-to-GDP doesn’t balloon going forward?

The answer, at least according to Goldman’s simulations, is “no”.

Ok, but is this all Trump’s fault? Well, of course not.

But some of it is, and remember, it probably wasn’t all Trump’s fault that when it comes to Trump Steaks, “the net result was we literally sold almost no steaks,” to quote Jerry Levin, one time CEO of the Sharper Image (and man who knows a thing or two about failing Sharper Image products).

You might note in the charts above that things get really messy around the time Trump’s first (and hopefully last) term ends under a scenario where the U.S. falls into recession. Here’s Goldman on that:

A recession: While we believe the odds of a recession are low over the next couple of years, this scenario assumes a hypothetical recession starting in 2020. We start by assuming the output gap follows the average path of the last three recessions. The estimated cyclical component of the budget deficit–CBO refers to this as “automatic stabilizers”–follows the output gap closely, with a one percentage point widening in the output gap associated with an widening of 0.4pp in the federal budget deficit. A similar relationship exists with the unemployment rate. In our scenario, we assume an output gap of 2.75% of potential GDP in 2020, widening to 4% in 2021 and then gradually shrinking over the next several years. This is associated with a widening of the deficit of up to 1.6% of GDP. In addition, we assume that the deficit widens by another 1.5-2% of GDP further due to a combination of countercyclical fiscal policy and other factors that are not explicitly captured by the standard estimates of the cyclical effects, like a decline in capital gains tax receipts, for example. Both assumptions are based on the deficit response during the last three recessions. Partly offsetting these deficit-widening influences, we assume that interest rates decline temporarily in response to easier monetary policy during and after the recession. This results in a slightly smaller deficit in the post-recession period than under our baseline, as the lagged effect of lower interest rates reduces the deficit, though the debt level at the end of the projection period is still well above our baseline due to the earlier deficits.

For one thing, it isn’t at all safe to assume that interest rates would decline in that scenario because if the Fed cuts rates against a “deplorable” (pardon the political pun) fiscal backdrop, they’d likely undercut the dollar, leading to questions about who would want to sponsor the U.S. long end with a ballooning deficit and a flagging currency.

But that aside, they also note at the outset there that “the odds of a recession are low over the next couple of years.” BNP doesn’t necessarily agree, although their take isn’t couched in overtly dire terms. Consider this from a recent outlook piece:

Slowdown in sight: The late-cycle fiscal push should help growth for the rest of this year, but it looks softer than we had expected and unlikely to last. We see a downturn already in H2 2019.

Faster 2018 GDP: We expect the bulk of the effects of the Tax Cuts and Jobs Act to be front-loaded and take place this year. We have already seen a boost to individual incomes, as well as a rebound in consumption spending after a softer-than-expected Q1. Investment spending has been robust, and the rise in oil prices should add to the momentum. Slower 2019 GDP: With most of the tax savings for both individuals and corporates realised or incorporated this year, we expect a drop-off in spending and investment growth next year. Additionally, monetary policy will be substantially less accommodative, both in terms of rates and the balance sheet, and should lead to more neutral financial conditions.

So I don’t know. What’s interesting, though, is that if you go by the simulations and the likely time tables on a prospective downturn, things would look the worst just as Trump’s first term ends.

That’s either really bad when it comes to the optics around reelection or else evidence to support the contention that he is indeed fulfilling his promise to run America like he runs his businesses: drive it into the ground and then summarily bid it adieu.