by Greg Valliere, AGF Management Ltd.
IT’S GETTING DIFFICULT TO KEEP TRACK of the stunning amount of stimulus proposed by the Biden Administration, which on Friday called for a 16% — $118 billion — spending increase from Donald Trump’s last budget. This would be in addition to Biden’s pending infrastructure proposal.
THIS SO-CALLED “SKINNY BUDGET” is a prelude to a complete fiscal 2022 spending proposal later this spring that will include Social Security and Medicare outlays. There are no spending caps and no offsets to pay for these increases.
THE PROPOSED HIKES would include vastly more money for the Department of Education (up 41% from last year); the Department of Commerce (+28%); the Department of Health and Human Services (+23%); the Environmental Protection Agency (+21%); the National Science Foundation (+20%).
CONGRESS MAY TRIM BACK SOME OF THIS, but there may be a slight increase for the Pentagon, which got barely the level of inflation. Congress may add a few billion dollars; members are always eager to support jobs back home.
THIS $118 BILLION PROPOSAL is small potatoes compared to the $1.9 trillion Covid aid bill and the pending $2.25 trillion infrastructure package — but it reinforces a theme that the sky’s the limit on spending. Biden is encountering fierce resistance from Republicans, who are likely to fail in efforts to enact a compromise.
NUMEROUS TALKING HEADS on the Sunday news shows agreed that Biden is fully prepared to plow ahead on spending without support from even one Republican. He will cite the sizable backing from GOP voters for his spending, thus making his goals bipartisan, he will assert in today’s meeting with members of both parties at the White House.
THIS SURGE OF STIMULUS — much of it not even spent yet — is accompanied by extraordinary monetary accommodation. Fed Chairman Jerome Powell told CBS in a “60 Minutes” interview last night that the economy is at an “inflection point,” with “much stronger” economic growth imminent. Yet he has no plans to tighten policy any time soon.
BOTTOM LINE: We’ve written since winter that inflation, mammoth deficits and an over-heated economy are coming, and that now seems inevitable. Red-hot housing prices are the proverbial canary in the coal mine.
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ISRAEL STIRS THE POT: We suspect officials at the State Department and the Pentagon are angry that Israel apparently has thrown a monkey wrench into talks between Washington and Tehran, which were showing signs of progress last week. Israel almost certainly was behind yesterday’s sabotage of Iran’s nuclear enrichment facility at Natanz.
THIS ATTACK WAS SO DEVASTATING that the furious Iranians will have to respond, probably with rocket attacks against their enemies in the Persian Gulf and cyber warfare with Israel. The U.S.-Iranian talks now may languish for several months, and tension in the region is likely to ratchet up.
WHAT THIS MEANS FOR U.S.-ISRAEL RELATIONS IS UNCLEAR. The Natanz sabotage came as U.S. Defense Secretary Lloyd Austin was meeting with Israeli officials in Jerusalem. Was Austin blindsided? That would send relations into a deep freeze. Perhaps he knew in advance; in any event, Prime Minister Benjamin Netanyahu has said Israel will not be bound by any U.S. nuclear deal with Iran.
