Here Come the Big Spenders — Fiscal Bloodbath Dead Ahead

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Donald Trump is an utterly accidental President who has fine aspirations to make America great again, but no semblance of a program that can accomplish that goal. And no prospect that the ruling elites will permit him to govern.

In fact, they will thwart him at every turn — as should have been more than evident by the hysterical campaign about Russian hacking that was waged against Donald Trump during the final weeks of the campaign, and then with almost frenzied malice after his shocking victory on November 8.

There can be no doubt whatsoever that the Deep State was attempting to delegitimize his Presidency from Day One, and that it will intensify the mobilization of its vast resources, and the tools and shills it controls in the mainstream media, now that he has taken office.

So do not expect the kind of honeymoon period of goodwill and deference that has been granted to every President in modern times. Instead, within weeks the Trump White House will be engulfed bitter partisan conflict and crisis.

On the Neil Cavuto Show Wednesday I summed up my outlook for the incoming Trump Administration: Lots of hope, zero faith.

That is, the stinging defeat Donald Trump administered to the ruling elites on November 8th was surely the single most hopeful political event of this still young century, and may well even eclipse Ronald Reagan’s shocking victory in 1980. I sure hope Trump drains the Swamp. I wish him all the best. But I’ve seen this movie before — and even had a bit part in it.

And the plain truth is that if Ronald Reagan couldn’t drain the Swamp way back then, how in the world after 36-years of relentless self-aggrandizement by the Imperial City can Donald Trump do it now?

In fact, in inflation-adjusted dollars, the military-industrial-intelligence-homeland security-veterans complex is 2X bigger than it was in 1980 and total entitlement spending is 4X greater (from $700 billion to $2.6 trillion in constant dollars).

In fact, in inflation-adjusted dollars, the military-industrial-intelligence-homeland security-veterans complex is 2X bigger than it was in 1980 and total entitlement spending is 4X greater (from $700 billion to $2.6 trillion in constant dollars).

The problem, of course, is that Donald Trump wants to spend more on the former and give a free pass to the latter.

Likewise, he has said hardly an intelligent word — or any other kind — about how he intends to defuse the ticking time bomb of $20 trillion in public debt he will inherit, which is objectively $30 trillion based on built-in policy through the next decade.

And that’s before Trump borrows a single dime to fund his Mexican Wall, defense build-up, tax cuts, infrastructure boondoggles, veterans benefits and border enforcement initiatives.

Ronald Reagan was at least willing to tilt at windmills in the entitlements arena and hated fiscal profligacy and public debt. To be sure, he ended up an accidental Keynesian who presided over a massive spree of red ink stimulus the likes of which had never been seen in prior peacetime history, but that was a consequence of beltway politics, not philosophical belief.

As I have chronicled in the Triumph of Politics, the Kemp-Roth supply-side tax rate cut was targeted at 3.5% of GDP but ended up at more than 6% of GDP due to a bidding frenzy on Capitol Hill among business groups and special interest lobbies ranging from real estate developers (like Donald Trump was then) to oil royalty owners and wood-burning stove manufacturers.

Likewise, he pledged 5% real growth in defense spending during the campaign and ended-up with a 10% real growth rate once the military-industrial-Congressional complex got through with his build-up by adding one of everything to the Pentagon’s swelling budget — needed or not — in Noah’s Ark fashion.

Reagan even got a mini-infrastructure program in the area of fixing local potholes and funding bus and mass transit lines when he had promised to turn those functions back to state and local government in proper Federalist fashion.

At the same time, what began as an all-out rhetorical assault on the domestic welfare state on the campaign trail ended-up as a few incidental nicks in the night when it was all over. Not a single significant Federal agency was eliminated. By his second term total spending for domestic function amounted to 15.5% of GDP — only a hair under the 15.9% average under the purportedly big spending Jimmy Carter.

Needless to say, it didn’t add up — not by a country mile. In fact, the $930 billion of public debt Ronald Reagan inherited had erupted to $2.7 trillion by the time he left office. Stated differently, the $1.8 trillion Reagan added to the debt was nearly double that incurred by all of his 39 predecessors during the first 190 years of the Republic.

Republican cheerleaders have pronounced the 1980s to have been a supply side miracle of growth and resurgent capitalist vigor. But it was actually nothing remarkable except for a three-year boom of 4-6% real GDP growth in the mid-1980s fueled by the greatest Keynesian deficit stimulus ever imagined before that time. At the peak, red ink exceeded 6% of GDP compared, for instance, to LBJ’s infamous “guns and butter” deficits which barely amounted to 2% of GDP.

More importantly, the GOP lost its fiscal virginity during the Reagan red ink spree and thereafter became the tool of the K-Street tax (cutting) lobbies rather than the sentinel of fiscal rectitude it had functioned as historically. Dick Cheney pronounced the benediction, as it were, on the old time fiscal religion early in the George W. Bush Administration when he pronounced that “deficits don’t matter.”

But that’s exactly why Donald Trump has a monumental fiscal problem and can never be the second coming of Ronald Reagan that the sell-side stock peddlers have now “priced-in.”

After the Gipper sent the public debt soaring, there ensued a free lunch competition between the two parties that at length raised the public debt by 20X from where in February 1981. At the time, Reagan begged the Congress for a debt ceiling increase to $1 trillion in order to fund Jimmy Carter’s deficits.

He said he would never ask again and that the budget would be balanced by 1984, at the latest. The rest is history, of course.

The implications for the Great Disruptor taking the oath today could not be any clearer. His predecessors have entirely used up the nation’s public balance sheet. Whereas the Gipper inherited a debt equal to just 30% of GDP and had wide-open fiscal spaces to stumble into the political accident of the giant Reagan deficits, Donald Trump has no running room at all with a public debt at 106% of GDP.

Donald Trump has no running room at all with a public debt at 106% of GDP.

Moreover, unlike the Gipper, Donald Trump self-evidently has an affinity for debt and lots of it, and a program that by design is in many way more fiscally irresponsible than Reagan’s was, at least on paper.

On top of that, Trump is fixing to unleash political forces from the Imperial City’s vasty deep that will strangle and paralyze the process of governance within six months.

We refer here to “repeal and replace” on Obamacare, restoring America’s military strength, the corporate tax cut and reform, the infrastructure program, the turn toward protectionism and his nativist promises to close off the borders and expel millions of illegals.

The truth is, our splinted and checks-and-balances ridden Madison system of government serves the nation well most of the time because it quells the natural impulses of elected politicians to intervene, meddle and spend.

But when you are sitting on a ticking time bomb of entitlements and public debt and possessed with a program to make it worse, you are asking for a legislative train wreck.

In the days ahead we could be seeing the Great Conflagration — which is likely to be Trump’s legacy.

Trump will likely lose control of the fiscal equitation nearly from Day One — and most especially after the debt ceiling holiday expires on March 15 and the countdown to a thundering debt ceiling crisis begins.

Yet Wall Street has ignored the obvious Fiscal Bloodbath dead ahead and has been stampeded straight into fantasyland on the hopium that Trump will make growth great again with 3-4% GDP gains and soaring corporate profits.

It’s not going to happen, and beginning today the world will begin to find out exactly why.

In fact, buckle your seat belts because the Swamp is about to get a lot deeper. Donald Trump has assembled a team of war hawks, protectionists, tax cutters, spenders, crony capitalists, border control militants and naïve outsiders.

The chances that anything other than a fiscal bloodbath results from this posse of amateurs and irreconcilables is somewhere between slim and none.

Not that Donald Trump doesn’t have admirable intentions to operate the machinery of government in behalf of Flyover America rather than the establishment elites, beltway racketeers and the permanent bureaucracy.

But Uncle Sam is so broke after three decades of borrowing, spending and money printing that there is little that Trump can do to provide economic relief — even tax cuts — to the voters who elected him.

At the same, he has mistakenly taken policy positions which provide an opening for the swamp creatures to eat him alive, and from the very inside of his own government.

Regards,

David Stockman
for The Daily Reckoning