Spending Restraint Evaporates

August 29, 2016

The large-cap markets took a breather last week, with the S&P 500 declining 0.67%, while the smaller-cap Nasdaq 100 only fell 0.37% and the Russell 2000 was able to advance by 0.11%. The Jackson Hole monetary commentary produced some late-week market volatility. Futures markets increased the probability of September [36% chance of an increase] and December [64%] Fed Funds increases, but the Fed won’t increase rates ahead of the presidential election. It has become clear that global economic conditions are key to Fed decisions, not US economic data reports.

On the fiscal front, the Federal government is ramping up spending far faster than tax revenues, producing the inevitable increase in the deficit. The Congressional Budget Office now forecasts that Fiscal 2016 federal spending will increase by $178 B while tax revenue [due to lackluster GDP growth] will increase by only $26 B, thus increasing the deficit to $590B [from $438B last year].

Putting this in perspective, debt held by the public will be back up to 76.6% of GDP, the highest since 1950, when the US was repaying the enormous cost of World War 2! Even more disturbing, as the following chart shows, current projections call for this burden to exceed 80% by ~2022. This is a lot, even for a reserve-currency country.

Past needn’t be prologue, but it will take uncommon resolve by the next administration to improve these trends.

“History is a gallery of pictures in which there are few originals and many copies”Alexis de Tocqueville