by Greg Valliere, AGF Management Ltd.
A DRAMATIC SHIFT IN WASHINGTON: Rarely have we seen such a sea-change from the public and the politicians — the budget deficit simply isn’t a top priority; no one has any credible program (or the desire) to address the staggering rise of red ink.
TOTAL U.S. DEBT WILL EASILY EXCEED $30 TRILLION by the middle of this decade, thanks to deficits of more than $3 trillion in this fiscal year, which ends in two weeks, and another $2 trillion in fiscal 2021.
ANNUAL DEFICITS OF OVER $1 TRILLION WERE CERTAIN even before the Pandemic hit, as both political parties embraced higher spending and rejected any significant budget cuts. The path of least resistance has always been to spend more, and now there’s the Modern Monetary Theory, which argues that deficits aren’t important when interest rates are at rock-bottom lows — and demand for Treasury paper seemingly has no limit.
IN A LITTLE-NOTICED ANNOUNCEMENT recently, the Treasury Department said that net borrowing costs will fall this year and next, thanks to low interest rates. As long as the Federal Reserve keeps rates close to zero for the the next two or three years, debt servicing costs will be tolerable.
ONLY A HANDFUL OF POLITICIANS, mostly all conservative Republicans, are calling for deficit reduction. They decry the red ink but their prescriptions are politically radioactive — significant deficit reduction would require deep spending cuts, tax hikes and reducing the growth of Social Security and Medicare, all of which have little political appeal.
WHOEVER WINS THE ELECTION will want to spend more. Trump, seemingly unconcerned by deficits, will seek to increase outlays for space-based defense, a wall with Mexico, and infrastructure. His proposed spending cuts would be dead on arrival in Congress, and he will seek to make his tax cuts permanent.
JOE BIDEN would dramatically increase spending on health care, student loan relief, alternative energy, infrastructure, etc. Biden would seek higher taxes — not to
reduce deficits, but to pay for ambitious new government programs.
HOW LONG CAN THIS CONTINUE? Huge deficits will persist until the bond market rebels, but Jerome Powell and the Fed have made it clear that they will keep rates near zero for years to come. And they favor more spending to cope with the virus, which Powell undoubtedly will emphasize in his press conference tomorrow.
THIS WILLINGNESS TO SPEND far in excess of incoming revenues eventually will end badly, but that day of reckoning isn’t imminent.
IN THE MEANTIME, the biggest beneficiary should
be residential real estate, which will continue to enjoy astonishingly low interest rates. Could the economy eventually face bubbles? Of course — but why fight the Fed, which faces no resistance as it accommodates the surging the debt?
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This post was first published at the AGF Perspectives Blog.
