By David Stockman – Re-Blogged From Stockman’s Contra Corner
Yesterday I noted that the frogs of Wall Street linger in the boiling pot because they are under the delusion that stocks are cheap based on the sell-side hockey sticks that always show $135 per share of S&P earnings and a 15X multiple in the next year ahead. Besides that, should anything go awry with the economy, Washington purportedly stands ready to bail-out the stock market with a new round of fiscal stimulus after the election.
The latter delusion brings to mind what might be called the “CBO hockey stick”, which is a fiscal fantasy so unhinged from reality as to make the Wall Street stock analysts look like models of sobriety by comparison. To wit, CBO’s latest 10-year budget projection assumes that the US economy will hit full employment next year, and remain there with nary a bump or recession in sight through September 2026, at least.
Well, now. Don’t bother to say Rosy Scenario move over because the arithmetic of CBO’s fantasy speaks for itself. That is, it is advising Washington to relax——we are heading for 207 straight months without a recession. And not in the next world, but this.
Since that’s roughly double the longest expansion on record its worthwhile to recall what’s changed since that one-of-a-kind expansion started in March 1991. For starters, the China export tsunami had not even commenced. Nor had the US economy been hollowed out by the massive off-shoring of breadwinner jobs that has resulted from the Fed’s bubble finance policies of the last two decades.
Thus, what had been nearly 25 million goods-producing jobs at the start of the 119 month-long 1990s expansion has been reduced to only 19.5 million today.
Even when you throw in the ostensible growing number of full-time, full-pay jobs in the white collar professions and service industries, the story is similar. There has been no growth of breadwinner jobs since the 1990’s expansion ended in the dotcom bust at the turn of the century.
Likewise, the Fed’s balance sheet was only 8% of its current $4.5 trillion girth, meaning a lot of dry powder remained. And among many other more favorable things, the Federal debt was 40% of GDP, not 100%, and total credit outstanding in the US was $15 trillion or 180% of GDP, not $63 trillion and 350%.
But here’s the thing. Even under CBOs fairy tale assumptions, it projects that by 2026 the deficit will be back up to $1.3 trillion and 5% of GDP under current policy. And the cumulative addition to the public debt over the next 10-years will be $9.3 trillion, bringing the gross Federal debt to nearly $28 trillion.
Yes, that’s where we would be after 207 months without a recession and full-employment as far as the eye can see. Its also why there are a lot more frogs in the boiling water than just some sell-side stock peddlers on Wall Street.
Perhaps more egregious is the mainstream Keynesian commentariat represented by the likes of Mohamed A. El-Erian, who appeared on Bloomberg recently to unload a snark-job on Donald Trump’s purportedly primitive fiscal views. Trump has worried publicly about our $19 trillion national debt—–even suggesting that if it keeps inflating at the current rate, it might eventually result in a negotiated discount.
Not too worry harrumphed El-Erian, your Keynesian bettors are not alarmed in the slightest:
“Although the longer-term trajectory of debt should be kept under close scrutiny and contained, there is no evidence that the U.S.’s existing stock of federal debt is a major problem. Borrowing costs are extremely low. The U.S. has access to abundant financing. And unlike many developing countries, the U.S. has historically issued almost no debt that is denominated in a foreign currency.”
Let’s see. Even by CBO’s rosy-tinted glasses, the gross public debt is heading for $27.7 trillion ten years down the road, while this year’s net interest expense of $253 billion is projected to soar to $839 billion by 2026.
Apparently that along with the $1.3 trillion annual deficit which comes with it is non-problem when it comes to financing the government’s stock of debt. Alas, what happens if economic reality is allowed to intrude on the projections?
A very simple case will suffice. Let us simply assume that US economic performance during the next 10 years is no better or worse than the average annual performance since the last cyclical peak in Q4 2007.
As it happened, nominal GDP of $14.69 trillion in Q4 2007 is now $18.22 trillion, meaning that it grew at a 2.6% annual average during that period. There is no reason to believe that this rate of growth will accelerate during the next decade if you average in another recession somewhere along the way.
By contrast, CBOs recession-free growth forecast of 4.3% per year compounds to a wholly different figure over a 10-year period. To wit, where CBO projects $27.9 trillion of nominal GDP in 2026, a continuation of the recent 2.6% trend would result in only $23.8 trillion of GDP to carry the nation’s rapidly growing debt.
And that’s not all. CBO projects that combined income and payroll tax receipts will grow from $2.7 trillion this year to $4.3 trillion by 2026. But that all depends upon 207 months of a recession-free world, and a wage and salary income growth rate of 4.2% annually.
Indeed, the growth rate of wage and salary income is crucial to the projections because the current law tax take amounts to about 34.7% of the total. And that gets exactly to the skunk in the woodpile.
During the 2007-2016 cycle, nominal wage and salary income has grown at only 2.5% per year, and there is no evidence that it can average much more than that during the next decade if you factor in a recessionary slump in payrolls. Accordingly, if you assume the existing trend rate of wage and salary growth you end up with $10.2 trillion of taxable income in 2026, not CBO’s $12.3 trillion.
Needless to say, at the 34.7% tax take under existing law, the US treasury would collect $3.6 trillion or $600 billion per year less by 2026.
Even before you compute the proportionate shortfalls implied for all the years in between and the incremental debt service that stems from it, the implication is obvious.
During the next decade, the US will incur cumulative deficits of not $9 trillion per CBO’s ultra Rosy Scenario, but upwards of $15 trillion. And the public debt is likely to hit $34 trillion or 140% of GDP.