[Urgent
Note: David Stockman warns that the nation’s economy and a massive debt ceiling
hangs in the balance as Wall Street’s peak bull stocks carry on. The economist
is on a mission to send his new book TRUMPED!
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It’s all over now except the shouting about Obamacare repeal and
replace, but that’s not the half of it.
The stand by Senators Lee and Moran was much bigger than putting
the latest iteration of McConnell-Care out of its misery. The move rang the
bell loud and clear that the Imperial City has become fiscally ungovernable.
That means
there is a chamber of horrors coming. With it, an endless political
and fiscal crisis that will dominate Washington for years to come. Its cause is
deep and structural.
Founding
Fathers, Fiscal Crisis and the Washington of Today
The founders, in fact, were small government de-centralists and
non-interventionists. That’s why they agreed to Madison’s contraption of
redundant checks and balances.
Aside from ruthlessly ambitious Alexander Hamilton, the founders
wanted a national government that was hobbled by levels of hurdles and vetoes.
They wanted a government that could act sparingly and only after thorough
deliberation and consensus building.
And that made sense. After all, most believed that the 10th
amendment was the cornerstone of the Constitution. Neither Washington or
Jefferson envisioned the political and fiscal burdens of running an empire.
“It is our true policy to steer clear of permanent alliance with
any portion of the foreign world.” That was George Washington’s Farewell
Address to us.
The inaugural pledge of Thomas Jefferson was no less clear in
stating, “Peace, commerce, and honest friendship with all nations-entangling
alliances with none.”
So when Woodrow Wilson embarked the nation on the route of
Empire in April 1917 and FDR launched the domestic interventionism of the New
Deal in March 1933, the die was cast. It was only a matter of time before the
disconnect between a robust Big Government and the structural infirmities of
Madison’s republican contraption resulted in a deadly impasse.
The Fed has now backed itself into a corner and is out of dry
powder. Even its Keynesian managers are determined to normalize and shrink a
hideously bloated balance sheet. The current account has no basis in
sustainable or sound finance.
The time
of fiscal reckoning has come. With the financial sedative of monetization on
hold, bond vigilantes will soon awaken from their 30 year slumber.
First up is the imminent debt ceiling crisis. Republicans will
never reach agreement on a bill to raise the debt ceiling by at least the $2
trillion that would be needed to get through November 2018. That’s because the
Freedom Caucus conservatives would never agree to a clean debt ceiling bill. By
agreeing to such a measure, they would betray the fundamental reason they went
to Washington.
The Washington Post reported
that sentiment exactly this morning in comments from Freedom Caucus Chairman
Mark Meadows:
Meadows said that he recently attended a meeting of eight of the
most conservative Senate and House lawmakers about how to handle the debt
ceiling and that not once did they consider the idea of backing Mnuchin’s
proposal for a clean debt-ceiling increase.
The end
game is quite clear. After several false starts, the
Trump White House will be forced to turn to Democrats for votes to raise the
debt ceiling but it will come at a price.
Not only would Trump be forced to bailout Obamacare with
subsidies to insurance companies to keep rates out of double digits and coverage
on state exchanges from collapsing, but it would also mean setting aside his
vaguely outlined domestic agenda.
That would include dropping the sweeping domestic spending cuts
contained in the Administration’s budget and settling for a modest tax plan constrained
by revenue neutrality.
Even if
Trump were to agree to a quid pro quo with Democrats to get votes for a debt
ceiling increase, it would soon be surpassed by a far bigger consequence. It would be the complete implosion of any functioning Republican
majorities on Capitol Hill.
That’s because a White House deal with the Dems on the debt
ceiling would amount to giving the GOP rank and file release from party
discipline — ragged as it already is — on fiscal matters going forward. White
House complicity in Obamacare’s rescue would be considered an unforgivable
betrayal.
Donald
Trump, the Debt Ceiling and the Fiscal Reality
The Donald
has almost no real friends in the Imperial
City among the ranks of the seasoned political pros who run the Congressional GOP.
After a debt-ceiling-for-Obamacare-bailout deal with the Dems, he would have no
friends at all. The President would then be completely beholden to political
enemies.
The naïve notions about “bipartisanship” and “working with
Democrats” held by the White House inner circle of economic advisors will then
come into play. As far as we can tell, both Secretary Mnuchin and chief
economic advisor Gary Cohn (and son-in-law Jared Kushner) are lifelong
Democrats. They are individuals who have no fiscal policy principles whatsoever
— except doing whatever is necessary to keep the stock market rising.
They would
likely lead the Donald into a fatal debt deal with the Dems based on the
doctrine that the “credit” of the U.S. must be preserved at all hazards. By doing so, the Wall Street/Washington establishment’s fifth
column in the White House will bring about the final defenestration of what is
left of Trump’s presidency.
The astute leader of the Freedom Caucus made the devastating
political cost of such a maneuver crystal clear. In recent commentary on
the impending crisis, referring to Mnuchin’s campaign for a clean debt ceiling
bill, he explained there is no such thing as 50/50 GOP/Dem coalition to pass a
debt ceiling bill.
The minute
the White House starts making concessions, the GOP bench will jump off the ship
in droves. It will then become an overwhelmingly Democrat vote show:
“He’s certainly in the minority in the administration,” said
Rep. Mark Meadows (R-N.C.), chairman of the House Freedom Caucus. “The problem
is, yes, you could get a clean debt-ceiling, but it would be 180 Democrats in
the House with 40 or 50 Republicans, and that’s not a good way to start.
Before Trump is forced into a surrender, there will be the same
vote count maneuvering in GOP caucuses of both Houses. Similar to what preceded
the GOP collapse of their seven-year crusade against Obamacare, such
maneuvering may even lead to one or more small increases in borrowing
authority.
The more likely case, however, is that the Treasury’s cash —
which now stands at $168 billion — will run-out before they get to a stop-gap
debt ceiling increase. That would cause the Treasury to unleash the nuclear
tool of spending prioritization and allocation of incoming revenues to the
highest uses (debt service, social security payments and military payroll).
Again,
the Washington Post story
hit exactly what is coming:
“One former Treasury official, speaking on the condition of
anonymity to discuss sensitive agency deliberations, said officials are now
“brushing up on options in the ‘crazy drawer.’”
In past administrations, Treasury officials have designed plans
to prioritize payments to government bondholders so that if the government runs
short on cash it could avoid defaulting on U.S. debt.
Such a scenario would be very difficult to manage because some
bills would either be delayed or not paid — making it necessary to prevent an
actual default. Prioritizing payments could lead to a spike in interest rates
and a stock market crash, analysts have said.
The
Undrainable Swamp Meets Wall Street
That’s an understatement, if there ever was one. Prioritization
and unpaid bills piling up in the Federal agency drawers will cause a
thundering shock in both Washington and Wall Street.
Congress would ring with stories about unpaid contractors,
delayed grant distributions, furloughed Federal employers, closed national
parks, and endless more.
If
there’s any lesson from the 2008 crisis, it’s that entitled elites and
robo-machines on Wall Street do not cater to a Congress that’s not doing their
bidding. That became clear when the stock market dropped by upwards
of 800 Dow points during the fifteen minute interval when the first TARP vote was being tallied (and
voted down).
The non-compliance with Wall Street demands for protecting the
credit of the U.S. at all costs and the sight of political disarray in
Washington will come as a shock. It will cause panic on Wall Street and an even
greater headache for the Donald.
That’s because Trump has trumpeted the 18% rise of the stock
market averages since Nov. 8 as an endorsement of his Presidency. Instead, he
should’ve punctured the bubble on Day One by demanding Yellen’s resignation and
blaming the crash on the Fed and its enablers.
Having taken the easy strategy of embracing the stock market
bubble, Trump will soon face a double whammy of unfair blame. He soon will be
blamed for the debt ceiling crisis that he inherited; and nailed for causing
the third major stock market crash of this century. Even though it was fostered
by a rogue central bank that he has not addressed, let alone subdued.
The WaPo story provides
the growing atmospherics, but the real countdown is in the Treasury numbers.
Last year the Treasury collected only $595 billion between July 14 and the end
of the fiscal year on Sept. 30.
Last year’s collections during the back 78 days of the fiscal
year amounted to $7.6 billion per calendar day. This figure might reach $8
billion per day this year based on the 4.4% year-to-date lift in total tax collections.
Under that math, Washington has now spent $2.6 trillion through
the end of May, or about $11 billion per calendar day. So call the cash burn
rate $3 billion per day, and compute the inception of crisis as follows.
That
makes 50-60 days of cash left, at most. Then comes the first great
fiscal temblor of the new era.
The first round of prioritization and allocation will only be
the precursor. It will come when Senator Schumer stands with a hapless Donald
Trump in the Rose Garden announcing that the debt ceiling will be increased
enough to get through the November 2018 election. Perhaps the Wall Street
robo-machines will then be reprogrammed, finally.
At that point there will be no dip to buy. The political and
fiscal crisis will become a permanent disaster in the Imperial City and the dip
on Wall Street will become an extended cavern.
As all school boys know, the original Waterloo decisively
changed the course of history.
So will this one.
Reprinted
from Daily
Reckoning.
Former
Congressman David A. Stockman was Reagan's OMB director, which he wrote about
in his best-selling book, The Triumph of Politics. His latest book
is The Great Deformation: The Corruption of Capitalism in
America. He's the editor and publisher of the new David Stockman's
Contra Corner. He was an original partner in the Blackstone Group, and reads
LRC the first thing every morning.
Copyright © 2017 David Stockman
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