Albert Edwards On Trump’s Legacy: 15% Deficits Then A Deflationary Bust

Albert Edwards at Societe Generale does not have kind words for Trump’s stimulus package.

In his latest Email, Albert Edwards at Societe Generale fires a shot at Trump’s tax cut.

Edwards says the “fiscal expansion is probably the most foolhardy escapade in modern economic policy, and the timing of the fiscal stimulus that is utterly ridiculous and will only accelerate the collapse of US financial markets as the Fed hikes rates even more quickly.”

I doubt this is the most foolhardy expansion in history, but it is reckless and ill-timed.

Here are a few clips from Edwards.

After some eighteen months of surprising to the downside, US wage and price inflation are rising briskly, putting intense downward pressure on financial markets. Yet another Fed-inspired financial Ponzi scheme now looks set to collapse into the deflationary dust. But the post-mortem will identify President Trump’s ludicrously timed fiscal stimulus as a key trigger for the collapse. A 15% deficit will be his legacy.

Whatever the arguments are in favour of tax reform in the US (and there are many), this is probably the singularly most irresponsible macro-stimulus seen in US history. To say it is ill-timed and ill-judged would be a massive understatement.

The outcome of this front-end loaded stimulus package is patently obvious. It will rapidly accelerate the end of the economic cycle.

Tim Lee of pi Economics opined recently on why the VIX will struggle to regain the very low levels of a couple of weeks back. “We are much further into the cycle of what might be thought of as an underlying tightening of monetary conditions. The Fed is contracting its balance sheet and raising interest rates. On top of that … US imbalances are worsening with the personal savings rate set to fall to a new low while US government finances deteriorate further. Nominal and real bond yields are rising.”

Notwithstanding the fact that I do occasionally get my forecasts correct, I have another prediction on the US deficit. Because of the starting point of US fiscal policy, I have a very high confidence that in the next, not so distant, US recession, the US general government deficit will soar way beyond the 13% the OECD say was the peak for 2009. A ruinous fiscal deficit in excess of 15% of GDP will be Trump’s legacy.