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What Should Trump Do?
Thoughts from the Frontline
by John Mauldin
11/20/2016
Excerpt:
.................................................. ....
No matter who won the presidency, the economic way forward was not going to be easy. The Republican team understands they must “stand and deliver.” But as we will see in today’s letter, that is not going to be easy. I’m going to depart from the normal format of my letters, where I talk about the economic realities we face and how we should invest, and instead offer my view of what I think the Trump administration and the GOP-led Congress should do.
Please note, this is not necessarily what they will do. In complete candor, what I’m proposing will be remarkably difficult for certain members of the Republican and Democratic Congress to countenance. It requires accepting some significant philosophical heresies that are anathema to all politicians (different heresies/anathemas for different politicians, according to their philosophical bent), but I see it as the only way forward if we want to dodge a deep recession and/or a greater crisis in the future.
I know for a fact that many of the people you have seen listed on the Trump economic transition team will be reading this. That is one reason I’ve been taking so long to put these thoughts to paper. And some of the ideas I’ll share are quite frankly things I have come around to in just the last week. I will readily admit to having already mentally written my post-election letter based on the assumption that Hillary Clinton was going to win; and on Wednesday morning I had to throw out everything I had thought about and start all over. And it’s not just you and I who had to shift gears quickly: I know that quite a few people on the transition team had speaking engagements and other projects arranged for later that week, and they had to scramble to redo their schedules.
I’ve done a lot of talking with a lot of people and listening and reading in the last 10 days. This letter is where I currently come out. What I’m going to propose is something that I think is politically possible (in terms of gaining bipartisan support, which will be necessary for certain portions of what I’m suggesting). I also think it has the potential to solve the deficit/debt problem and provide the funding needed for healthcare, Social Security, and the other necessary categories of government spending. It would also be a massive stimulus to the economy – boosting jobs, new business creation, and entrepreneurial activity.
Up front we must face the fact that the American people want several incompatible things at once: They want lots of expensive healthcare provisions for everyone; they want tax cuts; and they want a balanced budget. As we will see below, we can have relatively universal healthcare (no matter how it’s funded and delivered), tax cuts, or a balanced budget; but we can have only two of the three. Most Americans want all three and don’t see why they shouldn’t have them. There are some exceptions – there are, for example, some economists who don’t care about tax cuts or a balanced budget. They are working from an economic theory that says deficits and debt don’t matter; but in practice, in the observable, empirical world, they do matter. Greatly. Maybe not this year, but sooner or later the piper has to be paid.
Setting the Stage
Let’s look briefly at where we are now – at the constraining facts that any economic proposal must take into consideration.
The US federal government debt will be slightly north of $20 trillion before Obama leaves office in January. Add in local and state debt of another $3 trillion (plus), for a total of more than $23 trillion of government debt. The US economy will be a few hundred billion dollars under $19 trillion at the end of this year. That is a debt-to-GDP ratio of somewhat over 121%. For the record, when you are trying to determine the effects of total government debt on the economy, not to include state and local debt is disingenuous. The debt must all be paid by the same general taxpayers at one level or another. (Please note: I am rounding out the numbers in this letter because when you’re talking about trillions and hundreds of billions, anything to the right of the decimal point is kind of meaningless.)
That debt has risen roughly $10 trillion under Obama, in just eight years. Last year the debt rose $1.3 trillion, even though we were told that the budget deficit was only around $600 billion. Lots of off-budget debt gets added every year. It greatly annoys me when spin doctors don’t include total debt when they are talking about the deficit (and they do it on both sides of the aisle). I wish I could get my banker to adopt the same enlightened view.
I know that Krugman and others call me a debt scold (scornfully, as if I am some kind of troglodyte coming out of my cave to issue unnecessary warnings), but there are 160 historical instances of major countries having to renegotiate their bonds because they had too much debt, and in the recent century some countries that did so ended up in serious financial crises. I don’t for a minute think that the US will not pay every dollar of its debt; but getting those dollars, whether through taxation or printing, will impact the economy significantly. And if we wait too long, the ensuing crisis could be ruinous to many.
I start with the premise that to get the deficit and debt under control is an a priori condition for avoiding a future crisis. Avoiding that crisis – even if it is 10 years out – is important. The solution doesn’t have to be implemented all at once, but there has to be a clear trajectory along the lines of the Clinton/Gingrich budget compromises that gave us balanced budgets and even deficit reduction.
Standard Republican thought is that we have to engender enough growth to overcome the deficit. The Reagan tax cuts certainly increased the deficit, but when they were combined with the Clinton/Gingrich budget controls, we were soon paying down the debt and growing much faster. The debt became far less of a problem, at least in terms of GDP. It was when Bush II and the aggressively enabling Republican Congress basically abandoned budgetary controls (we could have used a deficit hawk like Gingrich as Speaker of the House to control the spending urges), combining tax cuts with large spending programs, that the deficit and debt once again began to get out of hand. Then along came the recession, triggered by the housing bubble brought on by interest rates held too low for too long by the Federal Reserve; and seemingly all of a sudden the deficit exploded – $10 billion in just eight years.
Sidebar: Everyone focuses on the size of the federal budget as if that is the government. The US federal spending budget is $3.88 trillion as of this year. State and local outlays are $3.3 trillion, bringing us close to $7 trillion of total government spending. Very few people realize that state and local spending is almost the same size as total federal spending.
Total US debt, including private and business debt, is $67 trillion, or just under 400% of GDP. We have 95 million people not in the labor force, 15 million of whom are not employed (twice the number officially unemployed). We have almost 2 million prison inmates, 43 million living in poverty, 43 million receiving food stamps, 57 million Medicare enrollees, and 73 million Medicaid recipients. And 31 million still remain without health insurance. (You’ll find a treasure trove of information like this at the US Debt Clock.
This US debt total does not even take into account the over $100 trillion of unfunded liabilities at local, state, and federal levels, which are going to have to be paid for out of current revenues at some point (see more below).
I bring up the size of the debt because unproductive debt is a limiting factor on growth. 10 years ago it wasn’t that big a deal. Today it is. The more we increase our debt, the more difficult it is going to be to grow our way out of our problem with the debt. That’s just an empirical fact. Both Europe and Japan have much larger debt ratios than we do, and both have much slower growth rates. Note also that the velocity of money in both those regions is much lower than ours, and the velocity of money in every developing portion of the world continues to drop. ......
.................................................. ...........................
View the complete article, including images and links, at:
http://ggc-mauldin-images.s3.amazona...61120_TFTF.pdf
Thoughts from the Frontline
by John Mauldin
11/20/2016
Excerpt:
.................................................. ....
No matter who won the presidency, the economic way forward was not going to be easy. The Republican team understands they must “stand and deliver.” But as we will see in today’s letter, that is not going to be easy. I’m going to depart from the normal format of my letters, where I talk about the economic realities we face and how we should invest, and instead offer my view of what I think the Trump administration and the GOP-led Congress should do.
Please note, this is not necessarily what they will do. In complete candor, what I’m proposing will be remarkably difficult for certain members of the Republican and Democratic Congress to countenance. It requires accepting some significant philosophical heresies that are anathema to all politicians (different heresies/anathemas for different politicians, according to their philosophical bent), but I see it as the only way forward if we want to dodge a deep recession and/or a greater crisis in the future.
I know for a fact that many of the people you have seen listed on the Trump economic transition team will be reading this. That is one reason I’ve been taking so long to put these thoughts to paper. And some of the ideas I’ll share are quite frankly things I have come around to in just the last week. I will readily admit to having already mentally written my post-election letter based on the assumption that Hillary Clinton was going to win; and on Wednesday morning I had to throw out everything I had thought about and start all over. And it’s not just you and I who had to shift gears quickly: I know that quite a few people on the transition team had speaking engagements and other projects arranged for later that week, and they had to scramble to redo their schedules.
I’ve done a lot of talking with a lot of people and listening and reading in the last 10 days. This letter is where I currently come out. What I’m going to propose is something that I think is politically possible (in terms of gaining bipartisan support, which will be necessary for certain portions of what I’m suggesting). I also think it has the potential to solve the deficit/debt problem and provide the funding needed for healthcare, Social Security, and the other necessary categories of government spending. It would also be a massive stimulus to the economy – boosting jobs, new business creation, and entrepreneurial activity.
Up front we must face the fact that the American people want several incompatible things at once: They want lots of expensive healthcare provisions for everyone; they want tax cuts; and they want a balanced budget. As we will see below, we can have relatively universal healthcare (no matter how it’s funded and delivered), tax cuts, or a balanced budget; but we can have only two of the three. Most Americans want all three and don’t see why they shouldn’t have them. There are some exceptions – there are, for example, some economists who don’t care about tax cuts or a balanced budget. They are working from an economic theory that says deficits and debt don’t matter; but in practice, in the observable, empirical world, they do matter. Greatly. Maybe not this year, but sooner or later the piper has to be paid.
Setting the Stage
Let’s look briefly at where we are now – at the constraining facts that any economic proposal must take into consideration.
The US federal government debt will be slightly north of $20 trillion before Obama leaves office in January. Add in local and state debt of another $3 trillion (plus), for a total of more than $23 trillion of government debt. The US economy will be a few hundred billion dollars under $19 trillion at the end of this year. That is a debt-to-GDP ratio of somewhat over 121%. For the record, when you are trying to determine the effects of total government debt on the economy, not to include state and local debt is disingenuous. The debt must all be paid by the same general taxpayers at one level or another. (Please note: I am rounding out the numbers in this letter because when you’re talking about trillions and hundreds of billions, anything to the right of the decimal point is kind of meaningless.)
That debt has risen roughly $10 trillion under Obama, in just eight years. Last year the debt rose $1.3 trillion, even though we were told that the budget deficit was only around $600 billion. Lots of off-budget debt gets added every year. It greatly annoys me when spin doctors don’t include total debt when they are talking about the deficit (and they do it on both sides of the aisle). I wish I could get my banker to adopt the same enlightened view.
I know that Krugman and others call me a debt scold (scornfully, as if I am some kind of troglodyte coming out of my cave to issue unnecessary warnings), but there are 160 historical instances of major countries having to renegotiate their bonds because they had too much debt, and in the recent century some countries that did so ended up in serious financial crises. I don’t for a minute think that the US will not pay every dollar of its debt; but getting those dollars, whether through taxation or printing, will impact the economy significantly. And if we wait too long, the ensuing crisis could be ruinous to many.
I start with the premise that to get the deficit and debt under control is an a priori condition for avoiding a future crisis. Avoiding that crisis – even if it is 10 years out – is important. The solution doesn’t have to be implemented all at once, but there has to be a clear trajectory along the lines of the Clinton/Gingrich budget compromises that gave us balanced budgets and even deficit reduction.
Standard Republican thought is that we have to engender enough growth to overcome the deficit. The Reagan tax cuts certainly increased the deficit, but when they were combined with the Clinton/Gingrich budget controls, we were soon paying down the debt and growing much faster. The debt became far less of a problem, at least in terms of GDP. It was when Bush II and the aggressively enabling Republican Congress basically abandoned budgetary controls (we could have used a deficit hawk like Gingrich as Speaker of the House to control the spending urges), combining tax cuts with large spending programs, that the deficit and debt once again began to get out of hand. Then along came the recession, triggered by the housing bubble brought on by interest rates held too low for too long by the Federal Reserve; and seemingly all of a sudden the deficit exploded – $10 billion in just eight years.
Sidebar: Everyone focuses on the size of the federal budget as if that is the government. The US federal spending budget is $3.88 trillion as of this year. State and local outlays are $3.3 trillion, bringing us close to $7 trillion of total government spending. Very few people realize that state and local spending is almost the same size as total federal spending.
Total US debt, including private and business debt, is $67 trillion, or just under 400% of GDP. We have 95 million people not in the labor force, 15 million of whom are not employed (twice the number officially unemployed). We have almost 2 million prison inmates, 43 million living in poverty, 43 million receiving food stamps, 57 million Medicare enrollees, and 73 million Medicaid recipients. And 31 million still remain without health insurance. (You’ll find a treasure trove of information like this at the US Debt Clock.
This US debt total does not even take into account the over $100 trillion of unfunded liabilities at local, state, and federal levels, which are going to have to be paid for out of current revenues at some point (see more below).
I bring up the size of the debt because unproductive debt is a limiting factor on growth. 10 years ago it wasn’t that big a deal. Today it is. The more we increase our debt, the more difficult it is going to be to grow our way out of our problem with the debt. That’s just an empirical fact. Both Europe and Japan have much larger debt ratios than we do, and both have much slower growth rates. Note also that the velocity of money in both those regions is much lower than ours, and the velocity of money in every developing portion of the world continues to drop. ......
.................................................. ...........................
View the complete article, including images and links, at:
http://ggc-mauldin-images.s3.amazona...61120_TFTF.pdf