Implications of the next recession.


Whether Donald Trump or Hillary Clinton is elected, the next president will very likely face a recession during their first term. Frankly, I’m surprised it didn’t happen this year. The impact of the next recession on the federal budget and our burgeoning debt will be dramatic. As debt grows and grows, even small changes in interest rates, tax revenue, etc, can have significant effects on the deficit.

The deficit is already projected to be $738 billion by 2019. If our next president wants to change that horrify amount, there are only three ways to do it: cut spending, raise taxes, or authorize the Federal Reserve to monetize the debt (which, of course, just moves it from one ledger to another). We have now reached debt levels where political promises to rid the federal government of fraud and waste will have very little effect. Of course, I want fraud and waste rooted out as much as the next taxpayer, but the amounts are rounding errors in our debt structure. Presidents since McKinley in the 1890s have been talking about cutting waste and fraud. If Trump or Clinton managed to identify $100 billion in waste and fraud the budget will still be a long way from balanced.

[Source: Start Moving Some Dirt, by John Mauldin]

The CBO has made the assumption that we will not have a recession in the next 10 years and that GDP growth will increase. [From the Mauldn article] Let’s contemplate what a budget might look like if we have a recession. I asked my associate Patrick Watson to look at past recessions and determine what level of revenue losses occurred because of them and then to assume the same average percentage revenue loss for the next recession. We more or less randomly decided that we would hypothesize our next recession to occur in 2018. If it happens in 2017 or 2019 instead, the relative numbers are the same, and so is the outcome: it would blow out the budget. Here’s a chart of what a recession in 2018 would do. Entitlement spending, defense, and interest would greatly exceed revenue.

161002-04

The deficit would balloon to a minimum of $1.3 trillion, and if the recovery occurs along the lines of our last (ongoing) recovery, then unless we reduce spending or raise revenues, we will not see deficits below $1 trillion over the ensuing 10 years. The deficit will climb to $1.5 trillion just as the president dives into the thick of a second campaign in 2020. Not exactly a great campaign platform. And that is the known budget deficit. Off-budget additions to the national debt could be as much as one-half trillion dollars.

The next president will have a tough row to hoe. But, say you, Hillary will raise taxes (and, yes, I no longer think Mr. Trump can win). True, but the taxes she proposes will only serve to slow GDP growth even more and potentially deepen the looming recession.

God help the United States of America.

Roy Filly

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About Roy Filly

Please read my first blog in which I describe myself and my goals.
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