“The White House is seeking to slash federal spending by $3.6 trillion over the next decade through steep cuts across most agencies and tough new restrictions on aid to the poor — a dramatic rethinking of the role of government in the American economy”, wrote Ylan Mui, CNBC Corespondent.
The goal of the White House’s 2018 budget is to slash the deficit, but what are the ramifications to the U.S. economy should these budget cuts become reality?
If you are a disciple of MMT (Modern Monetary Theory) you scoff at the suggestion that a draconian reduction in government spending will be a springboard for economic activity. Charles DuBois, a former colleague of mine while at Invesco, would tell you that “a reduction in the deficit will dramatically reduce private sector income”. Unfortunately, most people think that a reduction in private sector spending “frees up” private sector resources, but, according to Chuck, ” they don’t explain how that exactly works. Worse, no one asks!”
Michael Norman wrote in MMT Trader Update, that the proposed budget is “ridiculous if this is true”. He further explained, “that’s 2% subtracted from GDP each year for 10 years COMPOUNDED!! Do the math…that could be like a 40% contraction in the economy.”
We already have an economy working on only half its cylinders. How would dramatically reducing government spending, especially in light of the fact that the private sector isn’t reinvesting in new plants, equipment, and/or inventory, be an economic catalyst?
Another recession/depression would crush the stock market, and potentially be the final nail in the coffin of defined benefit plans that cannot afford a significant hit to the asset side of their asset/liability equation.