One piece of good news got buried in last week’s falling stock prices and the rush to safety in the bond market. This Bloomberg headline from last Friday says it best: Trump Has Signed Budget and Debt-Limit Legislation. Why is this such good news and what impact does it have on your financial and investment life? Aside from the messy political rhetoric, here’s what happened and here’s how we can keep it in perspective.
Borrowing limit raised
By a substantial margin the House and Senate agreed that the debt limit should be raised. The President immediately signed the bill. Since Congress is the only body that can spend money, its approval on a debt limit bill is material. Congress has decided that next year’s deficit will be $1.3 trillion, up from this year’s $1 trillion. I am using these numbers loosely since Congress can spend an additional $324 billion in 2020. And they will have to decide 2021’s deficit, which will certainly be more than $1.3 trillion. Importantly, there is no indication that deficits and spending will rise materially, say to $1.8 trillion. The fact that the bill’s passage was jointly engineered by House Speaker Pelosi and Treasury Secretary Mnuchin shows the bi-partisan nature of this legislation. This sets the stage to revisit deficit reductions in the coming decade. Despite the constant drama of tweets and headlines that steer our daily attention, this event is a sign of a reasonably well functioning US government and therefore a positive sign for investors.
MMT still in the political laboratory
Reactions are mixed on the debt limit pact. The optimists and pragmatists argue: the government can keep operating. Spending and budgeting will continue. There will be no fiscal cliff, no government shutdown and no government furloughs or waivers.
On the other hand, the pessimists argue: we’re headed on a perilous path to Modern Monetary Theory. Overspending by the government continues. Without fiscal restraint, interest costs will crowd out essential costs and there will be debilitating debt burdens for future generations. Naturally, the MMT argument is extreme. While problematic, our current fiscal situation is serious but not critical and we are not in a 2008-09 era.
This latest action by Pelosi and Mnuchin is a breath of fresh air when compared to narrative around MMT, perhaps a sign that economic and other issues can be resolved even when political discourse is sour and coarse.
Those nasty tariffs
In other economic news, tariffs between countries have continued to escalate. Tariffs are a no-win, retaliatory tool that any country can use on imported goods. Tariffs beget other tariffs since no country will accept for long a one-sided economic broadside. The US is leading the way in imposing tariffs. Naturally, China, the UK, Europe, Canada, Mexico, Brazil and others have fought back.
Frankly, it is hard for me to tell who is winning the tariff battle. It seems like we are all losing economically. (Stock market reactions support this view.) We – meaning the entire world – are also running out of additional tariffs to impose. Although I expect tariffs to continue I don’t expect them to cause excessive market declines. I do think tariffs will be a low, slow negative drag on returns. We will get an occasional break.
Noisy times continue
You could spend all day every day reading about current economic developments and debates, but we’d never recommend that! Investors benefit from concentrating on their own personal investment fundamentals – income, taxes, and staying in balance. August is neither the most dangerous month or the sleepiest month. As I write this on a Monday morning more IPO announcements are coming out after a virtual blackout last week. Investing goes on 365 days a year.