Deficits Damage as Trump Undermines the Dollar

My last blog covered the economic woes of the Great Recession, the 2017 budget busting Republican tax cut, the 2018 bipartisan spending binge, the rising interest rates, the low unemployment numbers, the strong economy and the ballooning federal deficits.

But wait!  High employment and a booming economy typically reduce deficits.  More people working means fewer claims on social safety net programs and higher household incomes and corporate profits that boost tax revenues.

Yes, well, based on current tax and spending laws, here are some recent facts and projections that are cause for concern:

  • The U.S. Treasury will borrow $1.3 trillion during 2018, the highest yearly borrowing since the depths of the Great Recession in 2010.
  • The federal government will spend more on interest on the national debt in 2020 than it spends on Medicaid — more in 2023 than it spends on national defense — and more in 2025 than it spends on all nondefense discretionary spending programs combined.  Estimated interest cost over the next decade will total almost $7 trillion.
  • The U.S. economy will begin slowing down in 2019, according to the Congressional Budget Office and numerous economists.  The global economy is already slowing.  Half of the economists in a recent WSJ survey predicted a recession before the 2020 elections.

Well, what if the economy goes south within the next two years?  A recession would significantly exacerbate the already enormous deficits, just as it did after 2008.  And I think it’s just a matter of time before it happens.

What Results from Huge Deficits?

Ahh — it depends on which economist ventures a guess.  And that’s about all it would be, a guess.  Perhaps the worst scenario would involve rapidly increasing inflation.  That would cause the Federal Reserve (Fed) to significantly increase interest rates, supercharging the cost of financing the national debt and making the cost of expanding a business and buying a new home prohibitive.  All of this would damage the economy.

Regardless, almost all economists agree that large deficits give policymakers less flexibility in dealing with a future crisis, like a recession or a war.  A tax cut can be used to jump start a stalled economy but that card has already been played. Stimulus spending to juice the economy or added borrowing to finance military actions become much more problematic when deficits are already huge.

But even if a recession or war doesn’t occur anytime soon, large deficits will likely prevent Congress from enacting a critically needed robust program to upgrade the nation’s infrastructure.  I believe the $1.5 trillion that Trump and the Republicans wasted on a tax cut would have been much better invested in roads, airports, bridges and much more, i.e., for our future economy.

How Can Deficits Be Lowered?

There’s no doubt, Republicans want to use the ballooning deficit problems to push for huge cuts to social safety net programs, including Medicare, Medicaid and even Social Security.  That has been their goal for decades.  But as they discovered with their Obamacare repeal and replace efforts in 2017, cutting health care benefits for the 80 percent while proposing tax cuts for the rich won’t fly.

President Bill Clinton produced budget surpluses for 1998 through 2001 with a combination of tax increases and spending cuts, including reductions in outlays for defense and social safety net programs.  I believe this two-pronged approach is the only way deficits can be significantly reduced.

Trump, however, has a different opinion.  Conservatives have convinced him — with their alternative reality thinking — that economic growth will solve all the deficit problems.  When confronted by his staff with a projection that deficits will become untenable by 2028, Trump reportedly said “Yeah, but I won’t be here.”

Why Is the U.S. Dollar So Important?

Bad as they are, the nation’s fiscal problems would be considerably more troublesome if not for the U.S. dollar’s status as the primary global reserve currency.  American dollars are required for international commerce in commodities like oil and most of the world’s central banks hold dollars as their rainy-day fund.  This elite status of the dollar has immense advantages for the United States.  The government can just print paper dollars and the rest of the world treats them as if they were gold.  Really.

The dollar’s status, however, is not just an historical anomaly.  The dollar is underpinned by American institutions like the independent central bank (Fed) and the democratic processes established by the Constitution, like the rule of law.  These and other keystones of our democratic republic have earned the trust of global investors who see the dollar as a safe harbor when economic waters get rough.  Consequently, U.S. government bonds are treated as one of the world’s safest investments, which greatly facilitates financing federal deficits.

But Trump called the Fed “crazy” and “out of control” for raising interest rates, thereby eroding its independence.  And Trump is undermining the rule of law by denigrating other institutions like the Justice Department and the federal courts.  He’s being aided by Russian President Vladimir Putin, whose operatives use social media to sow mistrust in the U.S. justice system.

These senseless attacks by Trump are sure to shake foreign investor’s faith in the stability of the United States and seriously weaken the dollar’s status in the global economy. But Putin loves what he’s doing and China is attempting to elevate their currency (yuan) to be equal to the dollar as a reserve currency.  Even our European allies chaff at the dollar’s dominance in global finance but Trump treats them with distain.  The “Tariff Man” simply has no clue as to the consequences of his words and actions.

Well, what if our dollars ceased being treated as if they were gold?  What if the U.S. government could no longer solve deficit problems — like it has for decades — by simply printing more dollars and selling its bonds?  The resulting economic consequences for this nation are too catastrophic to contemplate.

Certainly, electing a Democrat-controlled U.S. House will reestablish some checks and balances in our government and restore some of the faith in America that Trump has squandered.  But if the United States is to remain a democratic republic, preserve its financial stability and maintain the elite status of dollar, concerned citizens must overwhelmingly vote Trump out of office in 2020.

We have survived almost two years under his erratic, authoritarian leadership and we can probably endure another two years.  But if he continues as president in 2021, I believe the damage he will do to this nation’s democracy and economy is incalculable.

PS – Congratulations.  I am confident that you now know a lot more about these subjects than Trump.   If you have questions, please send me an email.

 

 

About eeldav

I am a retired corporate attorney who has lived in both Europe and Asia. While working my responsibilities took me to over 40 countries in Europe, the Middle East, Africa and Asia.
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2 Responses to Deficits Damage as Trump Undermines the Dollar

  1. vicvanbell@bellsouth.net says:

    The saddest part of this are the people that should read and understand this wonderfully explained article, will never see this.

    Like

  2. H. David Bashkin says:

    Trump may be voted out of office; but what if he refuses to leave. You paint a likely scene. For the first time in my life I am anxious about the future. This erratic behavior make planning impossible and rational decisions based on facts or alternative facts impossible.

    Bleak!

    David

    Like

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