Trillion-dollar budget deficits will make next recession more painful

1. Maxing out the credit card: House Speaker Paul Ryan, who built his career on the promise of fisca...

Posted: Apr 15, 2018 4:47 PM
Updated: Apr 15, 2018 4:47 PM

1. Maxing out the credit card: House Speaker Paul Ryan, who built his career on the promise of fiscal responsibility, is leaving behind a looming $1 trillion budget deficit.

In the short run, Ryan's signature achievement of tax cuts could extend the life of America's recovery from the Great Recession.

Yet those same tax cuts, enacted during a time of broad economic health, have helped increase America's already bloated budget deficit.

By maxing out its credit cards, Washington will have less flexibility to come to the rescue during the next recession with tax cuts and federal spending.

In other words, the United States won't have the financial resources, precisely when it needs them.

"It will dramatically reduce the ability of fiscal policy to respond to the next downturn," said Michael Gapen, chief US economist at Barclays.

Because of the Republican tax cuts - and recently enacted bipartisan spending hikes - the Congressional Budget Office now expects the federal government to run a $1 trillion budget deficit in 2020, two years earlier than previously anticipated.

That's the kind of red ink normally reserved for a downturn, not a boom.

Related: Why trillion-dollar deficits may turn into $2 trillion

Yet the US economy is nowhere near a recession, raising questions about the wisdom of providing expensive support that wasn't really needed.

"It's not what traditional economic theory suggests is appropriate fiscal policy at this mature stage of the business cycle," Gapen said.

Consider that interest payments on US debt are on track to quadruple to $1.05 trillion by 2028. At that point, the deficit could hit $2 trillion if current policies stay intact.

Although a recession may not be on the horizon, it will come eventually.

Guggenheim Partners, a New York investment firm, recently predicted the next recession will arrive by the end of 2019 or 2020. Hedge fund billionaire Ray Dalio says there's a 70% chance of a downturn before the 2020 presidential election.

Given the deficit situation, Washington would likely be forced to lean heavily on the Federal Reserve to blunt the pain of the downturn.

That could mean a return of unconventional Fed policies that left many uncomfortable: near-zero interest rates and massive purchases of bonds.

2. High hopes for Netflix: Netflix will report its first quarter earnings on Monday, and Wall Street is expecting a blockbuster. The company, which has evolved from streaming platform to content creator, has had a stellar year.

It nabbed its first Academy Award for the documentary "Icarus," struck a deal with Verizon and expanded a deal with Comcast. The stock has soared more than 60%. And Deutsche Bank analyst Bryan Kraft raised his price target to $350 a share, 12% above its Friday close.

Analysts think Netflix will report a 40% jump in sales and 60% more profit compared with a year ago, and 7.5 million more subscribers than the previous quarter.

Related: Netflix is unstoppable

3. GE puts shareholders on edge: General Electric is reporting earnings on Friday. And investors could be forgiven for wondering what bad news is coming next.

Over the years, GE has made a string of bad decisions. In 2016 and 2017, CEO Jeff Immelt went on a $24 billion spending spree to buy back GE's stock at what turned out to be extremely high prices. The buyback squeezed GE's cash haul and increased its debt. That huge debt load has forced GE to scramble for cash by selling even more businesses - a strategy that will eat away at future profits.

The conglomerate has laid off workers, slashed its dividend and put long-held businesses up for sale. And Wall Street has punished it. GE stock plunged 45% last year, and has fallen more than 22% this year.

Related: GE's $24 billion buyback boondoggle

4. More banks report earnings: Wells Fargo, JPMorgan Chase and Citi reported earnings on Friday. The news has been good so far: JPMorgan posted a profit of $8.7 billion for the quarter, an increase of 35% from a year ago. Even troubled Wells Fargo beat analyst expectations.

Bank of America is on deck for Monday, Goldman Sachs is reporting on Tuesday, Morgan Stanley on Wednesday and Bank of New York Mellon on Thursday.

Related: JPMorgan Chase CEO Jamie Dimon still bullish on economy

5. Coming this week:

Monday - Bank of America, Netflix earnings; Retail sales

Tuesday - Goldman Sachs, United earnings

Wednesday - Morgan Stanley, American Express earnings

Thursday - BNY Mellon earnings

Friday - State Street, Procter & Gamble, GE earnings

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