The current Republican regime will run a deficit in 2019-2020 as large as Obama’s. America is wandering into uncharted territory. “The economic outlook has strengthened in recent months,” The Fed said, Recently, and raised its rate by a quarter point to a range of 1.5-1.75%, a neutral range, a range that neither boosts nor slows the economy. Implication is that the cycle could go on longer than previously thought. There are two ways things can go wrong: the government outbidding the private sector, thus crowds out business. Lenders make the government pay higher rates to compensate for the risk of a default. This could tip government into a fiscal crisis. The government must then adopt draconian austerity measures.
There is reason that this orthodoxy may not apply. Our fiscal expansion occurring when the global financial system has had an insatiable appetite for safe government debt. Our government is nonetheless among the safer ways to meet the world’s need for safe assets.
This clearly can lead to more trouble in future, by deepening the world’s dependence on treasuries. Today’s rising debt seems likely to be used to justify future austerity, say, when control of the government swings back to the Democrats. America may regret its abandonment of budget principles. An overheating economy stems from an expansive fiscal policy at a time of full employment. An overheated economy would trigger monetary policy discipline and plant seeds of recession. Whatever turns the Fed unfriendly would likely be sufficient to derail the US equity market. But for now, we continue to expect the Federal Reserve to remain friendly to risk markets for a while longer.