Christine Lagarde (who heads the IMF) recently cautioned “fix the roof while the sun is shining” to US law makers. Her comments refer to an adage of preparing (when times are good) for any potential storms that may be brewing. The US Congress appears instead to be sitting around the pool, enjoying beers and BBQ, instead of turning their energy to Budget repair.
It was less than a month ago that US Government institutions were shut down as financial supply was cut off. US debt is now tracking around $20 trillion, and President Trump has just enacted another $1.5 trillion in tax cuts. Cutting taxes has 2 main side effects;
Trump is effectively taking an aggressive approach with the economy, and instead of taking the opportunity to repair the Budget with stellar economic conditions, he is pushing ‘’full throttle’’ which risks inflation and higher interest rates. Economists might argue that as an economy speeds up, the existing debt levels dwindle into insignificance as debt/GDP ratios begin to improve. But locking in structural tax cuts at the peak of the economic and business cycle is not prudent.
Foreign exchange markets remain unconvinced, with what should otherwise be a stronger USD (based on interest rate differentials), is instead weaker compared to other major currencies. The Trump Administration’s policies and economic conditions are now strangely reminiscent of the late eighties;
The late eighties ended with a significant stock market crash (even with a strong economy), which then pushed the economy into recession. This time around it would seem we have another issue – trade wars. Let’s hope they put down the beer and at least go and inspect the hole in the roof.
