Washington DC

If You Thought Monetary Policy Was Crazy…

By David Stockman  |  April 8, 2019

The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.

– Thomas Jefferson, “Letter to John Taylor,” May 28, 1816

I’ve been “face first” with Washington D.C.’s endless capacity for fiscal profligacy for nearly five decades now, starting with my time in Congress right up through my experience running the Office and Management and Budget (OMB) for Ronald Reagan.

I used to think I wasn’t easily surprised. Then I looked at spending and revenue numbers for the first five months of fiscal 2019. And I marvel…

During the month of February alone, our federal government spent $398 billion and collected just $171 billion. That means we borrowed 57 cents of every dollar spend. You can suggest timing anomalies. You can point to the fact that February isn’t a big month for revenue collections. And, still… you can’t make this stuff up…

February was month No. 116 of the current recovery. We’re just three months from matching the all-time-record. That previous run, 119 months, happened during the far more benign environment of the 1990s technology boom.

Meanwhile, incoming data are weak. Longer-term trends in key sectors have been soft for a while. It’s increasingly clear we’re at the tippy top of the cycle. (You might call it “Peak Trump”… and we discuss it in the April issue of The Stockman Letter)

To our knowledge, there’s never been a textbook written – even by the most rabid Keynesian scribbler – that recommends borrowing such an ungodly share of outlays at this stage.

We are talking “ungodly” here.

Let’s remove the short-term anomalies in the February figures. Let’s pull back and look at the full fiscal year to date. From October, Uncle Sam spent $1.819 billion and collected just $1.282 billion. That’s $537 billion of red ink. That’s 30% of outlays.

And it embodies the lunatic fiscal policy adopted by the Trumpified GOP during the 22 months of Deep State distraction known as Russiagate.

Call it “The Four Horsemen of Fiscal Apocalypse”… a ballooning Welfare State… a booming Warfare State… soaring interest expense… rock-bottom revenue from a flat-lining economy. These four factors are ransacking the long-term U.S. fiscal equation – with more evidence piling up during the first five months of fiscal 2019.

In round terms, spending grew by 6% and revenue 0% compared to fiscal 2018. And last year wasn’t an aberrational low, given that it ended with a $779 billion deficit equal to 3.8% of gross domestic product (GDP).

The details underscore the true disaster. Social Security/Medicare outlays were up by 5%. Defense spending was up 9.5%. Veterans care was up 10%. And the interest cost on the public debt was up 10.5%.

On the other hand, individual income tax collections were down by $20 billion, or 3%, from last year. Corporate receipts dropped by $14 billion. That’s a whopping 19.2%. These plunges happened notwithstanding a 4.5% increase in wage and salary incomes and flat pre-tax corporate profits during this year’s first five months compared to last year.

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Spending is more out of control than ever. And the Donald’s and the GOP’s tax cuts aren’t paying for themselves, and it’s not even close.

That’s evident from the White House budget projection for fiscal 2019. Yes, it’s a “Rosy Scenario.” Its key assumption is a 5.2% gain in nominal GDP. That’s not remotely likely.

Even this “Rosy Scenario” predicts revenue growth of just 3.2% versus spending growth of 10.2%. The math doesn’t lie. Trump’s OMB projects a $1.1 trillion deficit for fiscal 2019. That’s 5.1% of GDP.

Another way of saying it is the guy who used to do my job is forecasts an off-the-charts borrowing requirement right at what all data suggest is the end of the recovery from the Global Financial Crisis/Great Recession.

Embracing spending program at 21% of GDP while boasting about a revenue policy of 16% of GDP – with credit-card financed tax cuts – is irresponsible at any point in the cycle.

Doing it while an old and weak recovery rolls over is madness.

An Offer of Sanity

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

To common sense,

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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR