The conventional wisdom regarding the recent stock market shellacking is that it’s largely good news—a much needed correction fueled by a healthy dose of accelerating inflation and rising bond yields, but also accompanied by robust corporate profits and “a synchronized pick-up in global economic activity,” as Mohamed El-Erian put it in the FT Monday.
But a devil’s advocate might wonder whether it’s more than a coincidence that all this market commotion follows so quickly after reports confirming that the Trump tax cuts will seriously compound the U.S. government's debt problems at the same time that its push to reduce legal immigration will only reduce government revenues and economic growth in perpetuity.
Let’s start with just how dramatically the recently passed “Tax Cuts and Jobs Act” has changed the U.S. government’s fiscal outlook. The GOP bent over backwards to make sure that its bill would “only” add $1.5 trillion in new debt to the government’s balance sheet, but then proceeded to convince its members to vote for the package with the promise that it would never go through with planned middle-class tax increases that kept the bill from adding even more to the debt after 2027.
According to the Committee for a Responsible Federal Budget, if you discount these and other budgetary fig leafs, and it’s much more likely that the bill will add $2.2 trillion to the debt in ten years, and leave the federal government with even fewer resources to care for a baby boom generation that will be aged between 61 and 81 years by the end of this decade.
It’s more than a little rich to see a Republican Party that decried the unaffordability of the 2008 stimulus package so enthusiastically embrace a corporate tax cut three times the size of the Recovery Act, especially in an economy healthy enough to withstand a bit of fiscal prudence. This is not to say that the GOP was right to warn that rising federal debt would turn the U.S. into the next Greece—the Fed’s ability to create dollars means that creditors to the U.S. government will always get paid—but these creditors will, at some point, wonder what exactly these dollars they’re being paid are worth.
In other words, investors in U.S. Treasuries are worried about inflation risk, and rightly so. Economists have been scratching their heads at the lack of inflation in the U.S. economy, even as the U.S. unemployment rate flirts with a three handle. But Torsten Slok, Chief International Economist at Deutsche Bank makes a convincing case that labor market slack—which has lingered since the end of the financial crisis—has been eliminated, and that higher inflation is just around the corner.
To make matters worse, the powers that be in Washington are pairing their enthusiasm for debt with a distaste even for legal immigration, with the Trump Administration proposing to cut by nearly half the number of legal immigrants to the U.S. annually. These policies would reduce the number of working-age Americans paying taxes into programs that will care for the wave of boomers entering retirement, as immigrants to the U.S. are younger and more fertile than Native-born Americans.
Rising debt, in and of itself, isn’t necessarily a bad thing. Just like there’s a difference between an individual borrowing money for a Ivy-League law degree and putting a week-long Vegas bender on your credit card, government debt can be used to finance smart investments or foolish ones. But given the trends of rising economic inequality and the deteriorating finances of large swaths of the American public, it makes sense to question whether the best use of new debt is tax cuts for corporations which have been struggling to come up with anything productive to do with their capital than buying up their own stock.
But even when borrowing to fund smart investments, higher debt loads unquestionably makes an economic system more fragile, and its participants more fearful. (Your student loan debt must be paid, even if you lose that white-shoe gig). The case of Japan’s soaring sovereign debt, which is three times the size of even America’s, is direct evidence that we really have no idea how much debt is too much debt when it comes to the most developed economies. But logic dictates that at some point we’ll pay the price for growing debt-induced fragility, and the boneheaded macroeconomic policy on display in Washington. In other words, don’t be surprised if the recent spike in volatility is just an overture for what’s to come.
Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.