Don’t be fooled by the recent recovery in the stock market. Congress and President Trump just gave the kiss of death to the US government’s fledgling finances, the US economy and the stock market.
They did it by passing a budget deal that creates a massive $1.15 trillion budget deficit for the next fiscal year – which starts in October 2018. That’s a staggering $500 billion jump from previous projections by the Congressional Budget Office (CBO).
That’ll drive the budget deficit above 5% of gross domestic product (GDP). To put that in perspective, this is the worst budget deficit relative to GDP outside periods surrounding wars and recessions.
It also puts the US government on an unsustainable financial path.
That’s because this deficit will need to be financed by issuing even more debt. The US government’s gross debt already stands at a staggering $20.6 trillion. To put that in perspective, that’s about 106% of GDP.
Excessive government debt is bad for the economy because it crowds out private enterprise from capital markets. It also lowers economic growth in the long run. Moreover, the accompanying rise in government spending spurs higher inflation.
We already see early confirmation of this. Recent economic reports show inflation has risen beyond the Federal Reserve’s (Fed) 2% inflation target.
Indeed, the US economy ran into a similar situation when President Reagan cut corporate taxes and blew out the deficit in 1981. Inflation soared, the Federal Reserve reacted by jacking up interest rates and a lengthy 16-month recession ensued. We’re headed down the same path now as the …