by David Haggith, The Great Recession Blog:
Many of the 2017 economic headwinds I’ve described will hit during the Ides of March, just as the Trump stock-market Rally shows signs of topping out. This might not be the Great Epocalypse — not all at once anyway — but a large and likely correction is looming. I think the bear is about to be let out of his cage.
Chaos emerged in emerging-market stocks last week, bond prices plummeted (yields rose to match their last 2016 high), stock-market volatility rose, and the Dow took its worst drop in 2017. Copper prices, a bellwether for recessionary conditions, saw their worst week since last September. It looked like the Trump rally in almost everything was rolling over last week, and that takes us into this week when several likely big bads are scheduled to hit on the same day.
Debt ceiling bomb about to drop
One of the biggest hits happens right on March 15th when the statutory limit to the rise in US national debt arrives. David Stockman has been speaking a lot lately about how March 15th changes everything for congress. Republicans have been loathe for years toward raising the debt ceiling, taking the government near default by using the ceiling and the “full faith and credit of the US government” as a budgetary bargaining chip.
Such a battle over the debt ceiling in 2011 caused a major stock-market plunge when Standard & Poors downgraded US credit for the first time in history because congress chose to walk too close to the precipice. Just prior to that credit debacle, I predicted the downgrade would happen even though I said congress would vote to raise the debt ceiling at the last minute of the last hour.
I said that would happened because Republicans knew they would not let the nation default, even as they pretended for negotiation reasons that they might. There error would be in thinking that their last-minute capitulation would save the US credit rating. I said that belief would prove to be highly misguided because no one else knew what Republicans would do. I said that such brinksmanship over something so important would certainly cause some credit-rating agency to believe that congress was becoming overly risky.
I predicted the downgrade would happen in late July/August, even if Republicans raised the debt ceiling, and the stock market would crash immediately. Four days after Republicans raised the debt ceiling, the US credit downgrade happened, and the stock market plunged. An all-out crash was only averted at the end of September when the Federal Reserve started its new stimulus brain child that Ben Burn-the-Banky called “Operation Twist,” sending the market’s vital signs back on an upward path with breathless hopes of more quantitative wheezing.
Democrats are now embroiled over Republican efforts to disembowel Obamacare, which is moving toward a congressional vote just as the debt ceiling hits; so this time Democrats may be the ones to use the ceiling as a bargaining chip. I think they will be less likely to take things to the edge of the cliff than Republicans did, if only because everyone has seen what can happen when you play roulette like that; but they will use it to some extent, and they are likely to find Republicans who are reluctant to raise the ceiling, too. So, that battle begins in ernest this week, putting all of Trump’s stimulus plans in peril, which puts all recent stock speculation at obvious risk since the Trump Rally was largely based on belief that Trump would amp up spending and hugely cut taxes — actions that would make the debt-ceiling problems much worse.
The debt bomb is likely to hit much harder this time than in the past because congress, in creating the free expansion of US debt that was allowed up to March 15th, stipulated that the US treasury could not build up a surplus of cash by taking out debt immediately prior to the debt ceiling date, as it did when Obama was in office as a way of buying the US time after the debt ceiling limit hit (i.e., this time the government could not take out debt while there was no limit in order to pile up cash for the time when there was a limit). In honoring that, the treasury has been spending down its cash on hand to make sure that the amount of cash remaining on March 15th is no higher than the the amount the government typically keeps on hand.
Only thing is, the treasury is now down to less than it usually keeps on hand, making one wonder whether the huge draw down has anything to do with bankrupting the Donald just as he approaches congress for action. The US treasury has plunged from $435 billion in cash back in October to just $66 billion as of the last count. Last year’s cash balance at this time was $223 billion. One might be tempted to guess that such a spending of borrowed and hoarded cash had something to do with keeping the economy alive to the present and leaving it broke by the 15th of March. Even with so much spending of last-year’s borrowed cash, the federal debt is up $237 billion since January.
One has to remember that the treasury has only been under Trump’s control since January 2oth, by which time the balance was already well drawn down. One should also realize that numerous expenditures may have been made before January 20th that assured depletion of funds thereafter as the bills came due. David Stockman speculates that the initial borrowing and hoarding of cash happened in the belief that Hillary would win so she’d have a treasure chest to get her through the debt-ceiling crisis. It wouldn’t be the first time Obama & Co. sidestepped the rules.
At the same time, tax revenues have been way down in 2017, which may be a less nefarious explanation for the cash drawdown. At the rate tax revenues are coming in, the government will face a greater cash crisis than it usually faces at this time of year. February’s deficit was $190 billion more than last year’s deficit for the month. February became the third consecutive month in annual government revenue declines and was the largest drop in revenue since 2008.
As Stockman has said a number of times in the past, nothing is more telling about the onset of recession than declining tax revenues. Government tax receipts almost always turn sharply negative just before a recession. Confirming the possibility that we are already headed into recession, we saw US GDP growth fall off precipitously in the last quarter of 2016.
The fall in revenue is in large part due to a decline in tax filings. This could be because the IRS has said it will delay refund checks (so why rush to file?), or it could be because many liberals have said they will not file at all because they will not pay taxes to a government that is not their government at a time when they wish to secede from the union or flee to Canada. (You know, the same people who were enraged beyond measure when Trump wouldn’t promise that he’d accept election results if they won! Oh, the hypocrisy!) Nearly six-million fewer people have filed their taxes this year than at the same time last year (an 8.5% decline in US tax filings).
The main thing I’m pointing out is not whether the drop in taxes is due to recession or tax warfare, but that revenues are declining at a time when debt will also suddenly be frozen and that (for whatever reason, nefarious or benign) cash is just about out, too. That presents a big problem with or without recession. Usually, when tax receipts fall off as we head into recession, the government just takes out more debt. This time it can’t, and this time it has less cash socked away to survive on than it had when the debt ceiling hit during Obama’s reign, and this time the US has an even more aggressively divided congress than it had under Obama and has far greater debt interest payments to maintain.
So, the treasury can play some accounting games to keep the government running for a little longer, but not nearly as long as it did during the last debt-ceiling crisis when congress kicked the can down to the road to land in the middle of this week. I’d say, as I did earlier in the year, its game over by late June or July.
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