The legacy

Donald Trump must be longing to be inaugurated on Friday, hoping that all those claims of his presidency’s illegitimacy and the other items of criticism will finally fade away. Well, let’s get over that hump and see what happens then. In any case, the real work for the new administration will commence next week, and the cabinet seems to have it cut out for themselves.

Apart from insurmountable challenges on the foreign policy front Trump will want to get his so-called economic program going as soon as possible. As promised during the campaign, the focus will be on spending and tax cuts – both actions that are easier said than done, as they have to be passed through Congress and cost money, lots of money. And there, the outgoing administration may have put a cuckoo’s egg into the White House nest.

Carving out the big plans that are to make America great again you would assume that Trump’s transition team had carefully siphoned through December’s Monthly Treasury Statement released late last week. It reported a budget deficit for the month of -27.5 billion dollars, pushing the calendar year deficit to -580.1 billion, a more than 20% increase from -478 billion in 2015.

Long gone are the celebrated days of budget receipts exceeding budget outlays in the period from 1998 through just after 9/11 in 2001, when the US economy slipped into a recession. Another acceleration of receipts between 2004 and 2007 due to the credit bubble never caught up to similarly increasing outlays, and the financial crisis then made a dog’s breakfast out of it.

The receipt/outlay divergence in 2008/09 was historic, as we well know producing massive budget deficits, but 2010 through 2015 saw another attempt at receipts rallying despite the prevailing lacklustre growth, and a narrowing of sorts with outlays. However, just at the point when central bankers and politicians are about to declare the lean years over and more blossoming economic times to come, we have started to observe a divergence again.

To be fair, monthly deficit data are fickle and happen to be very volatile, which is why it is worthwhile to look at 12 month rolling numbers to make out developing trends. And there, you will observe a steady decline in receipts from March of last year, the first of its kind since 2008 and one that has not been corresponding with the GDP numbers within the same period.

Something doesn’t seem to be quite right with receipts recently, particularly against the background of their previous ascent on the basis of a higher top income tax rate since 2013. If I was Mick Mulvaney, the incoming OMB director, I would raise an eyebrow or two. If there was a trend in the making into 2017, how on earth would he be able to justify significant tax cuts.

It already kind of reminds of David Stockman’s fate in the early 1980s, who as a young congressman and debate sparring partner during Ronald Reagan’s campaign for his first term raised attention to himself and eventually got tapped as Reagan’s OMB director, only to be overrun by the military spending spree of cabinet heavyweights such as defence secretary Caspar Weinberger. Stockman’s era ended in tears.

This time, headaches will not be confined to the inevitable budgetary problems. Last calendar year’s deficit of -580 billion dollars sadly is just half the truth. In 2016, America’s central government debt grew by 1.055 trillion dollars, to now 19.95 trillion or 105% of GDP. Crisis years or not, Barack Obama and his administration have left the legacy of 9.33 trillion of new debt at the end of their two terms.

One, we have to understand that this is almost as much debt as all other presidents combined have left the American people with in the entire US history. Against this background, to celebrate oneself as the saviour of the American economy from the financial crisis is presumptuous to say the least. And if anyone steered the world away from the abyss, it was one Ben Bernanke.

Two, it is obvious that deficit and debt increases aren’t exactly moving in sync, but the vast difference in the 2016 numbers is staggering. I don’t profess to be a fiscal affairs expert, so I am not entirely sure how this came about, but equally a clarfication doesn’t seem to transpire when scanning the release. Maybe someone can humble me with an explanation and/or is luckier to find the reason in the Monthly Treasury Statement.

In any case, good luck to Mick Mulvaney! He’ll need it. When President Trump is ready to build infrastructure and slash taxes at the same time, he will in all likelihood have to elevate the debt ceiling by yet another margin. Let’s get the popcorn and beers out and ready ourselves to watch what kind of infighting between Democrats, Republicans and Trumpians this will trigger…