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David Kruse

Is the economy real?

February 8, 2019
By David Kruse - Columnist , Farm News

Is the economy real? The president describes it in historical terms as the greatest economy that the country has ever experienced and then takes the credit of course. There are good numbers on the employment front, both high employment and growing wages. The tax cut is a windfall to those making money. Sure wish that we (farmers) could put it to better use.

Where did the surge in economic performance come from? It was the Fed that got things moving again from the depth of the Great Recession. The U.S. Central Bank joined other global central banks with monetary stimulus the likes those living have never seen before with zero and even subzero interest rates and quantitative easing, which was essentially printing money. It worked to bring growth back to the US and global economies. Not every sector or region felt the recovery evenly and those that didn't elected Trump president.

Republicans had been resistant to fiscal stimulus except in the form of tax cuts and the Trump tax cuts were a dose of fiscal stimulus added to an already recovering business cycle. They did not create an economic recovery...they goosed the one that we had going, making it bigger and better. The response of the economy to fiscal stimulus is not surprising. No one has ever injected huge fiscal stimulus into the backend of the business cycle recovery like this before. Will it extend the recovery significantly or just be the shooting star that gives it a showy climax?

The ankle bone is connected to the knee bone and so on...tariffs are connected to rising prices which are connected to higher interest rates. Tariffs are taxes which are passed on to consumers goosing inflation. The primary mandate of the Fed is stable prices. The Fed will respond to inflation with higher interest rates that will slow economic growth. That is why Trump is ragging on Fed Chairman Jerome Powell about higher interest rates and vowing to appoint doves to the board.

The primary problem moving forward is that the tax cuts will not pay for themselves. They starve the government of revenue while there is no appetite to reduce government spending which would also slow growth. The result is a $1 trillion annual increase in the federal debt which is unsustainable. That means the country's fiscal management is on a path to eventual destruction with no mandate to get off of it. The public wants their cake and to eat it too, told by Trump that they can have it. Trump is letting them do both while taking credit for the sugar high he has created. He is giving Americans a free ice cream cone to go along with their free meal.

The Federal debt surged under Obama as part of the cost from the safety net of social services kicking in as unemployment had soared on top of the cost of foreign wars. The impact of servicing this debt accumulation was softened in budgets by the Fed dropping interest rates as they did. The cost of servicing the Federal debt did not increase appreciably despite the increase in principal in federal debt during Obama's terms because as principal went up the interest rate fell significantly. The net was a flat cost of federal debt service for the recovery years.

The federal debt is continuing to grow again as a result of the tax cuts enlarging and sustained federal deficit. The change is that lower interest rates are no longer softening the impact on debt service as trillions more in debt is added. Both the principal and interest rates are rising and the cost of debt service will very shortly become every uncomfortable to budget-masters in the very near future. Increasingly high national debt and increasing cost of debt service will combine to become a factor supporting still higher interest rates. Who wants to borrow money to an unsustainable economy? They will want a higher interest rate to cover the risk.

Currently, the cost of defense and government health care programs are higher than the cost of interest to service the national debt. 2019 is the cross-over year when the cost paid in interest exceeds the cost of Medicaid. By 2020 the cost of servicing the federal debt will equal the $700 billon that we pay for defense. By 2022 the cost of interest paid to service the national debt rises to over $900 billon as the largest line item expense in the federal budget. This economic boom claimed by Trump doesn't have a happy ending. It is like having a party paid for by MasterCard with no credit limit. It is the equivalent of eating a hamburger today with a promise to pay tomorrow. This is an illusion of an economic boom that the U.S. public has bought into.

Taken in context with a slowing global economy, the world has a problem. When our President touts the crisis at the southern border being a national emergency, what would you call the fiscal mismanagement that will eventually eat this country's budget alive on the path that it is on...a fiscal path that Trump has put it on.

Where in the world did all the fiscal conservatives go? Americans do have a sense that it is all going awry with 63% saying they believe the country is on the wrong track. Only 28 percent think the country is on the right track and I am pretty sure they either got most of the benefit of the tax cut, speak Russian as a second language or have no clue the train on their track heading toward them means that they are supposed to get off. Good luck with that.

P.S. I predict Trump will not be around in office to fix the mess he leaves us.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

 
 

 

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