DC Advisory
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We all hope that, after 7-8 years of sub-par growth in the wake of the ’08-’09 financial crisis, the economy will finally pick up steam as the new administration implements more business-friendly policies. Ronald Reagan took office, in January 1981, following the stagflation of the 1970s, also promised less government intervention, controlled spending and lower taxes. In short, he promised fiscal and monetary measures that would stimulate the job-creating private sector, in turn nurturing consumer confidence and spending.

There are however, HUUUGE differences between the economic situation that Reagan inherited versus the current situation. There are always situational differences, but the following facts will provide serious impediments to economic progress.

From a monetary standpoint:  the Fed Funds Rate at 12/31/80 was TWENTY PERCENT. The 10 year treasury note yielded THIRTEEN PERCENT.  Today the Fed Funds Rate is 0.4% and the ten year treasury yield has moved all the way up to 2.2%. The reduction of interest rates will help any economy, and by 12/31/1982 the fed funds rate had been reduced ten points to 10%, and the ten year treasury yield was down 3 points to 10%. Rates moved still lower by 1984-1985 when the economy finally strengthened. Obviously, DJT does not have this option. To the contrary, rates are trending higher since the election, signaling the possibility of a higher inflation rate and/or slowing potential economic gains.

From a fiscal standpoint: both parties have been talking about substantial stimulus, and there appears to be bipartisan support for a major infrastructure spending program. Ronald Reagan increased government spending but he inherited a far less leveraged situation, at a run rate as well as cumulatively. The 12 month trailing deficit in 1980 was about 1% of GDP. The same measure today is 3%. The cumulative debt in 1980 was 32% of GDP and today it is about 107%. Obviously, the inherited problem in terms of debt is A DIFFERENT ORDER OF MAGNITUDE.

Further, from a fiscal standpoint: The new administration is well aware of the need to control government spending and not  increase the debt load. The very low interest rates have allowed for the higher debt without too much burden on the budget. More on this in a moment. However, the realities include the following: In 1980, Medicare and General Health Spending was 9% of the budget. Today it is 25% and no one expects that this can be reduced. However Obamacare is restructured, lower government spending in this area will not happen. National Defense spending was 23% in 1980 and today it is about 14%. That 14% will likely move up much closer to 23%. A dramatic situational comparison is the “modest” 5% of the budget spent on interest today, versus 9% in 1980, on more than 20 times the debt. With 19.7 trillion of debt, and rising, each point increase on the total (the weighted average maturity of which is 5.65 years) would be $197 billion or an incremental 5% of the budget. Higher interest rates could therefore be an important hindrance to legislators as they attempt to keep government spending under control.

As described above, between health spending, defense spending, and interest costs, even before considering a large infrastructure spending program, our leaders will have options seriously limited by inherited financial realities. Overall, non-discretionary spending that includes entitlements, health expenses and defense spending amounts to about 75% of the total budget. The 25% that is “discretionary” includes departments like Education, Housing, Energy, Commerce, Agriculture and Community. Even if these departments are restructured, the larger categories mentioned above still dominate overall spending and the resultant deficits.

We haven’t seen the above hard facts discussed, (might have missed it, I suppose) before or after the election, as both parties have provided the typical campaign promises of better (and cheaper) health care, better education, more high paying jobs, ongoing social security and disability benefits, tuition debt relief, higher defense spending (by DJT), etc.etc.etc.  This is before even discussing new social programs or infrastructure construction. A presidential choice has been made, but either candidate would have faced the current unprecedented financial realities  as described above. I suggest we hope for the best, but be prepared for something less than an ideal outcome.