Submitted by Taps Coogan on the 20th of February 2018 to The Sounding Line.
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Based on the US federal government budget deal signed into law in early February, it has been widely forecast that the federal budget deficit will approach $1 trillion dollars by fiscal year 2019, nearly double the deficit in 2016. Unfortunately, such forecasts may be greatly underestimating the size of the deficits that will be experienced in coming years.
Since World War II, the US has experienced 11 recessions with the average economic expansion between recessions lasting roughly 58 months. The current economic expansion has lasted 103 months, the third longest in American history and nearly twice as long as the average. Based on that fact alone, it would be a historic first if the US did not experience a recession in the next two years.
When the next recession arrives, it is very likely that government tax revenues will decrease and that spending will increase. As a result of the economic contraction that followed the Dot-Com bubble, US federal government tax revenues fell by over $260 billion (roughly 20%) between 2000 and 2002. As a result of the 2007 housing bubble and financial crisis, federal government tax revenues fell by over $493 billion (nearly 30%) between 2007 and 2009. Meanwhile, government spending increased by over $660 brillion (22%) between 2008 and 2010 as government stimulus and welfare spending surged.
If one assumes that a recession is likely to arrive within the next two years, and that such a recession will reduce government revenues and increase spending by at least 20%, the federal deficit would easily exceed $2.5 trillion in fiscal year 2019 or 2020, not the $1 trillion currently being forecast.
The timing of such a enormous surge in deficit spending and debt could be disastrous. As we noted the day before the budget deal was signed into law:
“Current (federal debt) interest expenses are low despite the very large federal debt because interest rates have fallen to near all time lows. Today’s exceptionally low interest rates have shielded the federal budget from the enormous magnitude of the federal debt. The federal debt has only been higher for a brief period during World War II…
A significant rise in interest rates could greatly increase the interest expense of future federal government borrowing. When interest expenses were consuming over 25% of federal revenues in the 1980s, the debt-to-GDP was barely over 30%. Today the debt-to-GDP is 104%. The current pace of ever expanding deficit spending and borrowing becomes far more destructive in a rising interest rate environment with today’s debt loads…
There is increasing belief among investors that the long term trend of declining interest rates may have ended…
Because debt levels are already at historic highs, so called fiscal conservatives control both chambers of Congress, the economy is the healthiest it has been in years, and interest expenses are still manageable, there may never be a better time for Washington to balance its budget.”
Now is the time to take advantage of the relative strength of the US economy to bring the federal government’s fiscal house into order. Instead of doing so, Congress and the Whitehouse have chosen to greatly increase the federal deficit. As a result, if a recession arrives in the next couple of years, the government will be in a weak fiscal position to respond with stimulus. Even if a recession doesn’t arrive, the government is ensuring that an ever increasing percentage of tax revenues will go towards debt interest expenses and not actual government services and programs.
I fear that choosing this moment in time to greatly increase federal government deficit spending will prove to be a historic and avoidable mistake.
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