Trump boosts US stocks with BORROWED government money
US stock prices continue to trade at near record highs and a lot of the recent rise has a lot to do with the policies of President Donald Trump.
The surge in the Dow Jones Industrial Average has been phenomenal. Since the November 2016 Presidential election, the Dow Jones is up around 50 per cent despite a few hiccups at the start of 2018 as the US Federal Reserve hiked interest rates and the threats of a US trade war turned into a reality.
The rise in US stocks, whilst impressive, is built on all the wrong things. ‘Wrong’, that is, in terms of sustainability.
As President, Donald Trump has delivered a range of tax cuts that have a total cost to the budget of around US$1.5 trillion. This one-off, impossible to replicate policy like any other policy that dumps cash into the economy has underpinned stronger economic growth and a temporary lift company profits. The tax changes has seen US companies engage in a record level of stock buy-backs which by design, has been a powerful driver behind rising share prices.
The problem with the Trump tax cuts is that every cent of the US$1.5 trillion has been funded with money borrowed by the government.
Such is the destruction to the US budget, that the US Congressional Budget Office is now estimating the US budget deficit to average a staggering 4.8 per cent of GDP in every year in the decade from 2018 to 2028. When Trump became President, the budget deficit had narrowed to just 2.5 per cent of GDP.
Everyone stopped talking about government debt, but here's why it still matters
Having been a headline issue for many years, government debt no longer gets the media or political focus that is used to.
At one level, this is odd, because the level of gross and net government debt have continued to rise unrelentingly in recent years, with gross debt at a record high and net debt touching a peace-time high.
The lack of focus on government debt probably reflects the fall from grace of the chief debt fear-mongers Tony Abbott, Joe Hockey and Barnaby Joyce who were vocal advocates of the “debt and deficit disaster” that Australia was allegedly confronting five years ago.
The fact that the Coalition government has demonstrably failed in its policy approach to the issue is also likely to be a factor why it has dropped off the list of popular political topics. It could also reflect the fact the belated realisation that Australia level of debt and deficit are, and always have been, low and manageable.
So low is Australia’s government debt, even today, that the three major sovereign credit ratings agencies have assigned a triple-A rating even though the path to a balanced budget and debt stabilisation has been slow and unconvincing. This is not to say that the level of government debt is not an issue. It still is.
And just because it is not a constraint on the economy or a meaningful concern to markets, it doesn’t mean policy makers should take their eye off managing government debt, especially at the moment when the economy is growing and the global economy is giving Australia a helping hand.
Sensible and pragmatic economists are usually pragmatic about debt and deficit. Pragmatic in a sense that a move to debt and deficit are good policy when the economy is weak and debt reduction and surplus are good policy when the economy is growing strongly. Suffice to say it will be important to ensure that the path to small, but growing, budget surpluses over the next few years is kept, but only if the economy continues to grow at a reasonable pace.