Every president inherits something difficult.
Some problems are simply out of the incoming president’s hands.
Obama inherited a financial crisis. Reagan inherited double digit inflation. Kennedy, Nixon, and Ford each inherited the Vietnam War.
For President Trump, it’s debt.
Donald Trump enters the White House with a $19.9 trillion headache. In percentage terms, that’s 107% of our GDP.
Sure, every president inherits some kind of debt from his predecessor. But none of them had to follow the Borrower-in-Chief, Barack Obama. Obama doubled the federal debt during his tenure in the Oval. He pushed the total debt close to $20 billion – an 88% rise from when he first took the oath of office.
Here at the Nestmann Intelligence Unit, this figure weighs heavily on our minds. Especially as we watch the Dow fly past the 20,000 mark to its historic high.
The markets are excited by Trump’s promise of tax cuts, slashed regulations, and job growth. But with the debt at a record high, we’re worried that Trump will find himself choked by a lack of funds.
What happens to the market if the president can’t make good on his business policies?
The Market Is Pricing the Second Coming of Ronald Reagan
Reagan’s former budget director, David Stockman, is worried. He says the markets are anticipating a return to Reaganomics. A return to unrestricted competition and low taxes.
But he says, “There’s no reincarnation coming.”
The key difference here is that Reagan had room to move. When he entered the White House, Reagan had to wrestle with only $1 trillion of debt. A mere 30% of the GDP to President Trump’s 107%.
Worse, on March 16, Congress will impose a new debt ceiling. The ceiling is expected to come in at $20.1 trillion. That leaves Donald Trump slammed up against the debt wall. There will be no more room to borrow, putting Trump’s ambitious plans at risk.
Stockman predicts a bloodbath. The debt ceiling will act as a reality check for the markets, he says. That could mean a sharp reversal from these historic highs.
Trump Has Bills to Pay…
The president has ambitious plans for America, but they won’t come cheap.
Chief among them are a trillion-dollar infrastructure program, a border wall with Mexico, and increased defense spending. At the same time, he’ll treat Americans to a sizable tax break. It’s a welcome policy, but it may leave a hole in the country’s piggy bank.
Trump has also pledged to leave Social Security and Medicare untouched, the two biggest drains on the budget outside defense. “I will do everything within my power not to touch Social Security,” he said.
But if Trump is to reconcile his infrastructure spending and tax cuts, he’ll need to find money somewhere.
To make matters worse, the Fed is raising interest rates. As many as three further hikes could be in the pipeline this year. Obama was lucky enough to ride the wave of low rates. Trump will enjoy no such luxury. With higher interest rates comes higher inflation and larger debt repayments.
The Good News…
… is that President Trump has outlined a vision for reduced spending.
He’ll employ a freeze on federal hiring with a view to cutting 20% on staffing costs. A further 10% will disappear on cuts to wasteful departments and programs. Meanwhile, the president’s commitment to job growth should bring tax dollars back into the pot.
Whispers of a $10.5 trillion cut in federal expenditure over the next 10 years are moving through the White House corridors. However, it remains to be seen exactly where this will come from. And whether it will be enough to bring down the deficit.
The big test will be the president’s inaugural budget. It will offer the first clue as to whether he can balance this knife edge.
President Trump Is the King of Debt
On the campaign trail, Donald Trump hailed himself the “King of Debt.” He said, “I’m great with debt… I’ve made a fortune by using debt, and if things don’t work out, I renegotiate the debt.”
Well, he’s now got his hands on the biggest debt pile on the planet. And he faces a challenge to keep it in check.
If the US defaults on its repayments, we may witness the greatest recession the world has ever seen.
Of course a default is unlikely. Instead, we may see the stirring of the printing press starting up again (also known as quantitative easing) as fresh new dollars are used to pay down the credit (reducing your purchasing power with every print run).
Even worse, the Treasury might just “borrow” funds from the Federal Employee Pension Fund to avoid defaulting. If you think that sounds terrifying and unthinkable, consider this: They’ve done it before.
Time to Create a Plan B
Thanks to Obama’s reckless attitude with the nation’s credit, President Trump may be choked by the debt crisis. It could limit his ability to put his ambitious policies to work. And that may cause the markets to sharply reassess their enthusiasm.
Worse, Trump may be forced to take extraordinary measures to keep the debt sustainable. Measures that threaten your nest egg.
While it’s impossible to time the markets or predict the future, it is possible to take control of your wealth. Perhaps it’s time to create a strategy that spreads your risk and reduces your exposure to the US debt problem.
A global portfolio and diverse assets are the best ways to create your safety net. The Nestmann Group is here to help you create yours.
