Some Thoughts On The Trump ‘Budget’ And A Possible Minsky Moment

And thanks to budget chief Mick Mulvaney, nothing I write could be more stupid than anything he’s said–love clearing them low-lying punditry bars! Let’s deal with the ZOMG! TEH IFLATIONISMZ! typified by Steven Ratner (boldface mine):

Perhaps I shouldn’t be surprised, but that’s just not responsible governing. While I’m all for meeting pressing needs, as part of doing so, both the White House and the Congress have an obligation to find other savings or sources of revenues. Just like every household and business must.

I recognize that those of us who have warned of the ominous consequences of deficit and debt have yet to be proven right by a market crisis or the like. And the current gyrations in both stocks and bonds may not turn out to constitute that proof.

We’ve been through this many times, but we don’t have to worry about deficits per se, as long as there is slack in the economy–and unmet real needs that can be solved by the mobilization of existing, real resources. One man’s excessive Keynesianism is another man’s necessary Lernerism (you don’t have to visit Appalachia to figure this out; Ratner could just travel a couple miles north to the Bronx). What does matter is whether the deficit spending will lead to inflation.

Given that the spending increases primarily to corporations, military contractors, and the wealthy, the Trump budget will probably be less inflationary than predicted. The housing component of the CPI probably will rise some more (it’s already double the entire index), as wealthy people in some urban areas will continue to bid up housing and rental prices. And, while stocks aren’t measured in inflation indices, the Case-Shiller P/E ratio is sky high, and will probably climb further–the rich are not spending those tax cuts on workers, but plowing the money into various investments.

But the Republican/Trump plan also has a lot of deflationary activity. The infrastructure bill has almost no new spending, as it pulls $200 billion from existing sources. Worse, it will lead to two outcomes. First, states and municipalities will have to put up hundreds of billions of dollars, which will require higher taxes or decreased spending–and the layoffs the latter entails (local and state governments aren’t currency issuers; they must pay back these loans one way or another). Second, there will be a lot private money involved, and some of that money won’t cash on hand, but loans. Third, Republican policies are not really helping middle class or lower income families–and they are running up more and more debt.

That leads to a really scary scenario. We’re already dangerously close to a Minsky moment–a sudden and sustained collapse in asset prices due to overindebtedness (pdf). Thankfully, the Trump administration has a reputation of cracking down on fraud. Combined with the long-standing efficacy of federal regulators, I’m sure nothing too bad could happen.

HAH! WE MAKE THE FUNNY! There is probably some fraud out there already*, and Trump’s infrastructure program is tailor-made for fraudulent loan activity. We have a lot of private debt out there, and the odds of some assholes not having a match and gasoline seems relatively low.

A Minsky moment is what we should be worrying about, not the phantasm of inflation.

*Hell, CDOs are back, though they are now called ‘bespoke tranche opportunities.’ What could possibly go wrong?

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1 Response to Some Thoughts On The Trump ‘Budget’ And A Possible Minsky Moment

  1. kaleberg says:

    I’m expecting higher interest rates and an economic slow down. I think the Fed will justify the former based on the anticipated rising deficit, and the slow down will come as the various Republican cuts come on stream. Republican presidents always have a recession, but I’m guessing it’s coming sooner rather than later.

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