Debts, rates, deregulation: three risks

Debt, rates, deregulation: it is the three-card game that President Trump is proposing. Like any game of chance, the aim is for the banker, i.e. the occupant of the White House, to win, where the payoff is political consensus. Too bad the risks of economic losses, not only for the citizens of that country, are high.

The first card is the state of public debt. The day before yesterday on these pages it was pointed out how the guardians of the debt - the markets - are back in action, raising the premium the US has to pay to place its bonds, in return for increased riskiness. The increase in risk is in turn linked to the steps forward taken by President Trump's public accounts policy project - described with his usual modesty as a Boterian Beauty Budget (BBB) - which will lead to an increase in the deficit, hence in debt. An increased riskiness that has just resulted in the downgrading of the quality level of US government bonds by the rating agency Moody's. It should be noted that a similar decision was already taken two years ago by the other agency Fitch, and over ten years ago by the third major agency Standard & Poor's. This reminds us that for some time now, US presidents have been approaching the debt issue with the ostrich strategy. In the last presidential race, both the Democratic and Republican candidates systematically ignored the problem, in fact implementing a policy of collusion, aimed at making voters forget that the debt problem exists, and is as big as an elephant.

What is Donald Trump doing to address the debt issue? In general, there are two options. If you think in economic terms, a public deficit can be approached in three different ways: reduce spending, raise taxes, or ignore it, then finance it. It is a trivium, where each choice will affect both growth and inflation. But the trivium itself can be evaluated in terms of political consensus. It is the path chosen by Trump, who has modulated a BBB that cuts taxes and slashes government spending like a suit that must fit his constituents. The result is that in a ten-year perspective the BBB will increase the public deficit by up to three trillion dollars.

There is a deficit that has to be financed. Here is the second card: rates. Trump has an endemic preference for low rates, which is associated with an aversion to a 'too' strong dollar, the enemy of his favourite sector: manufacturing. Today the new president has one more reason to love low rates: to ease the burdens associated with debt. Moreover, the Fed can buy US sovereign bonds on both the secondary and primary markets, providing oxygen to the ailing public coffers.

But there is a problem: the excess liquidity that has been accumulated over two decades of systematically expansive monetary policy, before the delayed and bitterly restrictive turn, which is still ongoing. If debt is an elephant, excessive liquidity is also an elephant that Trump has to deal with. How? Again, one can reason in economic or political terms. In economic terms, liquidity has to shrink, otherwise the risk of inflation may rise; so rates cannot go any lower. But if one thinks in terms of political consensus, then inflation is less scary; above all, one can attribute it, if need be, to bad FED policy, also given the financial illiteracy of voters. So anyone who does not lower rates - i.e. Governor Powell - is a fool, or at the very least a chronic laggard.