Could US fiscal expansionism lead us to QE4?

The credit crunch era has been one where monetary policy has taken centre stage. There are many ways of expressing this but one is that technocrats ( central bankers) have mostly run the economic show as elected politicians have chosen to retreat to the sidelines as much as possible. Whatever you may think of President Trump he is not someone who is happy to be on the sidelines as he has exhibited publicly once or twice with some pushing and shoving. But more importantly we are seeing something of a shift in the balance of US economic policy as the monetary weapon gets put away at least to some extent but the fiscal one seems to be undergoing a revival.

A relatively small reflection of this was last night’s budget deal. We have become used to talk of a US government shutdown followed by an eleventh hour deal and no doubt there is a fair bit of both ennui and cynicism about the process. But as the Washington Post notes as we as giving the national debt can another kick there was this in the detail.

According to outlines of the budget plan circulated by congressional aides, existing spending caps would be raised by a combined $296 billion through 2019. The agreement includes an additional $160 billion in uncapped funding for overseas military and State Department operations, and about $90 billion more would be spent on disaster aid for victims of recent hurricanes and wildfires.

An increase in military spending was a Trump campaign promise so it is no surprise but spending increases come on top of the tax cuts we saw at the end of last year.

The Trump Tax Changes

According to the US Committee for a Responsible Fiscal Budget there was much to consider.

The final conference committee agreement of the Tax Cuts and Jobs Act (TCJA) would cost $1.46 trillion under conventional scoring and over $1 trillion on a dynamic basis over ten years, leading debt to rise to between 95 percent and 98 percent of Gross Domestic Product (GDP) by 2027 (compared to 91 percent under current law). However, the bill also includes a number of expirations and long-delayed tax hikes meant to reduce the official cost of the bill. These expirations and delays hide $570 billion to $725 billion of potential further costs, which could ultimately increase the cost of the bill to $2.0 trillion to$2.2 trillion (before interest) on a conventional basis or roughly $1.5 trillion to $1.7 trillion on a dynamic basis over a decade. As a result, debt would rise to between 98 percent and 100 percent of GDP by 2027.

This is a familiar political tactic the world over where the numbers depend on others taking the difficult decisions in the future! One rather sneaky move is the replacement in terms of income tax thresholds of inflation indexation by the US Consumer Price Index by the chained version which is usually lower. So jam today but more like dry toast tomorrow.

Won’t this boost the economy?

There are enough problems simply doing the direct mathematics of government spending and revenue but the next factor is how do they effect the economy? Well the US Congress has given it a go.

The Joint Committee staff estimates that this proposal would increase the average level of output (as measured by Gross Domestic Product (“GDP”) by about 0.7 percent relative to average level of output in the present law baseline over the 10-year budget window. That
increase in output would increase revenues, relative to the conventional estimate of a loss of $1,456 billion over that period by about $451 billion. This budget effect would be partially offset by an increase in interest payments on the Federal debt of about $66 billion over the budget

The idea of tax cuts boosting the economy is a reasonable one but the idea you can measure it to around US $451 billion is pure fantasy. To be fair they say “about” but it should really be if you will forgive the capitals and emphasis “ABOUT“. Anyway for the moment let us move on noting that there is already a fair bit of doubt about the impact on the US deficit over time from US $1 trillion or so to a bit over US $2 trillion.

What is the deficit doing?

According to the US CBO ( Congressional Budget Office) it has been rising anyway in the Trump era.

The federal budget deficit was $174 billion for the first four months of fiscal year 2018, the Congressional
Budget Office estimates, $16 billion more than the shortfall recorded during the same period last year.
Revenues and outlays were higher, by 4 percent and 5 percent, respectively, than during the first four
months of fiscal year 2017.

As you can see revenues are doing pretty well and in fact are being led by taxes on income being up by 8%. However spending rose even faster at an annual rate of 5% which at a time of economic growth gives us food for thought. There was one curious detail and one familiar one in this.

Social Security benefits rose by $11 billion (or 4 percent) because of increases both in the number of beneficiaries and in the average benefit payment.

That seems odd at a time of economic growth but the next bit reminds us that the rise in inflation has a cost too due to index-linked bonds called TIPS.

Outlays for net interest on the public debt increased by $13 billion (or 14 percent), largely because of differences in the rate of inflation.

More Spending?

It looks as though we will find out more about the much promised infrastructure plan next week. From Bloomberg.

President Donald Trump expects to release on Monday his long-awaited plan to generate at least $1.5 trillion to upgrade U.S. roads, bridges, airports and other public works, according to a White House official.

How much of this will come from the government is open to debate. The modern methodology is to promise some spending ( in this case US $200 billion) and assume that the private-sector will do the rest. One of the more extraordinary efforts on this front was the Juncker Plan in the Euro era which assumed a multiplier of up to twenty times. But returning stateside we can see that there will be upwards pressure on spending but so far we are not sure how much.


In my opening I suggested that the United States was switching from monetary expansionism to fiscal expansionism. Let me now introduce the elephant in this particular room.  From the Atlanta Fed

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 4.0 percent on February 6, down from 5.4 percent on February 1.

They may well be somewhat excitable but if we look at the 3.2% predicted by the New York Fed the view is for pretty solid economic growth. So the fiscal position should be good especially if we add in the fact that for all the media hype treasury bond yields are historically still rather low. Yet none the less the fiscal pump is being primed. Or to put it more strictly after a period of pro-cyclical monetary policy we now seem set for pro-cyclical fiscal policy.

There are obvious implications for the bond market here as there will be increases in supply on their way. No doubt for example this has been a factor in pushing the thirty-year bond yield above 3%. You might have expected more of an impact but I am increasingly wondering about something I suggested some time ago that the path to higher interest-rates in the United States might be accompanied by QE4 or a return to bond buying by the US Federal Reserve. Should the economy slow at any point which would boost the deficit on its own then we could see it. Also this could be a factor in the weaker US Dollar as in is it falling to reflect the risks of a possible return to Quantitative Easing?

The deep question here is can we even get by these days without another shot of stimulus be it monetary,fiscal or both?

Me on Core Finance TV





37 thoughts on “Could US fiscal expansionism lead us to QE4?

  1. Hi Shaun

    The key sentence in your piece is the final one and the answer appears to be a resounding No!

    If this is indeed the case then whether GDP forecasts are robust or nor is really beside the point. In any case, and as with the UK, the current upturn is long in the tooth and there has to be a growing probability of a downturn in the next year or two and this will make these numbers for both debt and deficit look very rosy indeed. At some point the $US has to come under pressure and this will really bring on the pains.

    To see what is really happening in the World economy we might be better looking at the Chinese “One Belt One Road” initiative which is designed to shift the locus of the World economy eastwards to where it has been for most of the last 5000 years. The shenanigans in the US are the mark of a declining power which is having to perform ever more egregious gymnastics in order preserve the illusion of a pax Americana.

    • Hi Bob J

      Well there was certainly market stress today in the US as the Dow Jones had another day where it fell over 1000 points. As to Pax Americana I recall a book written some years back which argued that the last stage of any empire involves higher defence spending ( to protect the gains) which sounds rather familiar.

      Meanwhile if I look east I note that as even at times like these the Yen has strengthened and with the Nikkei 225 likely to be well down it will not be the best of days for Abenomics.

  2. They’ve shoved the blue pill of monetary stimulus down our throats to keep themselves and their sponsors rich, and now thats making the plebs violently ill which could lead to TPTB losing money and power, its time to try the red pill of fiscal stimulus to get the right kind of inflation.

    Thatcher said her greatest achievement. was, “Tony Blair and New Labour. We forced our opponents to change their minds.”

    Wonder if former President Mugabe would claim Western governments and central banks are his greatest achievement as they’ve followed his lead.

  3. America has the best economic policy money can buy so naturally it tends to favour those who bought it. America would have us believe that you build a great economy by supporting the owners of certain classes of assets and it is those wealth creators who drive job growth. “The Precious” (copyright S.Richards) must be protected from risk and competion, a very new sort of capitalism.

    If America was serious about stimulating the real economy it would pump money in at the bottom and let capitalists compete for that spending power. The Trump plan has everything exactly backwards as I understand capitalism.

  4. I am a Brit spending time in a particular part of the US ( as well as France) and have a son in another part of the US. Its a big place with many different ‘economies’. ‘My part’ is booming, there is no other description. Net migration from other parts is up, jobs are plentiful, signs of increasing wealth are all around ( the number of new boats and docks at private residences is multiplying). People in general are more economically optimistic than in years. ‘My son’s part’, a very different, ‘older’ region, with a different political hue, is also booming.
    At the same time there is a two year decline in average lifetime across the US, mainly due to white, poorer states, with continuing deprevation , drug abuse, ‘no hope’, ‘end of the american dream’ etc. The eastern part of ‘fly over’ land. Trump heartland, if you like.
    Recent tax changes will benefit some higher paid , no doubt, but it would be wrong to dismiss them as not helping more ordinary folk. I calculated that if I was taxed in US I would see a benefit of some $000s. This is not small potatoes.
    Bob J, you will have to wait a long time, before the average joe in China has anything like the wealth of the average joe in the US.
    There are many many things wrong in the US, many areas of crassness, bigotry, ignorance etc. The on-going fight between what outsiders characterise as ‘red claw capitalism’ and ‘western europe-style social democracy’ ie Republican versus Democrat is multi facited and could also be described as individualism versus identity politics.
    What I discover is that the citizen of the US has an enormous capacity to ignore almost everything thrown at it, and get on with the ‘real’ purpose; the pursuit of happiness and the right to individual choice. It seems odd to ‘aliens’ but the average joe really does continue to believe they are ‘exceptional’ and in some funny way, they are.

    • Jim

      In 1960 the US share of World GDP was 40%; it is now half that. The decline in the share of the US has been going on for many years. I’m sure you are right that it will be many years before the average Chinese has the wealth of the average American but the decline is clear and has been for many years. All empires go the same way.

      • perhaps Jim needs to read

        The Wealth of Households: An Analysis of the 2016 Survey of Consumer Finance. – David Rosnick and Dean Baker.

        some sober reading there…….


        300 million cars almost as many as American people (US) .

        • Hi Forbin
          Thanks for the reference. I have read the summary and conclusions and skimmed the rest. I don’t dispute the stats, especially about the top 2% grabbing far more than their fair share. However the underlying trends of ‘wealth’ are dominated by one stat , the value of their property. It peaked around 2004 nationally, although with local variations. It fell substantially after 2007/8, it is now rising again.
          There are substantial problems with non-funded pension schemes; municipal, corporate and government. This is the real elephant in the room, as it is in virtually all western societies/countries.

          • Good points. I saw today about council tax rises about to go up more than inflation and wondered whether some of this is accounted for by having to top up pension funds in deficit because of low returns because of QE. We have so many experts on this site – do any of you know whether this is right?

      • I don’t dispute America is on the decline due to exporting much of its manufacturing base to Asia + South/Central America and replacing these jobs with debt.

        But in 1960 China, Russia, Eastern Bloc etc were communist so a fall of world GDP would have happened no matter what. Sadly the neolibs of America and Europe have sped this process up.

        • Arthur

          I don’t dispute that the decline is more about other countries getting stronger; it’s all relative but it doesn’t really mean much. Am I weaker or is the other person stronger? In terms of power it doesn’t matter and the fact is that the US is in relative decline and has been for years.

          China has been the largest economy for 4800 of the past 5000 years; as far as they are concerned they are just returning to their natural position in the World.

          • Hi Bob
            I don’t think anyone can seriously believe we have a clue about ‘size of economies’ much beyond 150 years ago. I would argue we don’t have much real idea right now, especially when comparing countries is like apples and pears. I know its the current fashion to say how wonderful China was when we in the west were still ‘living in the dark ages’. But those stories don’t really survive forensic examination. Sure there are examples of great art, thriving diverse cities; but if you look across europe you can find comparable examples. if they were so ‘big’ why did their society keep fracturing and be so open to invasion from the ‘savages’?
            It strikes me its one of those ‘myths’ developed to denigrate western civilisation, we seem very good at puritanical self-flagellation.
            Modern China has apparently ‘done’ what it took europe/usa 200 years, in 20/30yrs. Forgive my scepticism but outside some major conurbations there is little sign of this rapid development; and it has yet to pass the test of time ( including physically some of the infrastructure).

          • Was China’s economy really larger than Spain or Portugal after they’d taken over South America and looted the gold and silver?
            Or the Roman Empire?
            Or the Egyptians?
            I am not being sarcastic, just curious as your perspective of the Chinese view of themselves is very interesting.

          • See this:

            and this Section 2:

            and this (this actually shows India as the largest for some of the time:

            and this:

            Nothwithstanding that some of these articles show India as the largest economy others show China as the mot advanced.

            I remember reading the fact about China having the largest economy in the last 5000 years but can’t remember where. In any case as China/India had the largest populations it is not at all surprising.

    • A very good comment and you raise an interesting point that is also applicable to Europe- the uneven distribution of economic activity and wealth. I travel around quite a bit and I am always struck by how localised business activity is and how large chunks of different countries in Europe have very little going on and are quite poor. I have always thought that quoting economic figures for ‘The Eurozone’ is a waste of time as it includes Germany at one end and Greece at the other. Even within countries such as Spain and Portugal there are huge variations- far greater than in the U.K. We really do need more regionalised economic statistical analysis to take informed action.

      • Yes, Shaun and I have debated in the past about what I dubbed the ‘Swiss effect’ . If you draw an admittedly non-uniform circle around Switzerland of say 100 km you capture a very wealthy area of Europe. There are clearly pockets elsewhere, but its quite stark the difference between economic activity in this region and elsewhere in Europe. Italy probably demonstrates the clearest difference, inside and outside this zone.

  5. QE hasn’t really worked so it makes sense that they’ll try a plan B.

    Having said that,starting to include private debt in their modelling might be a good place to start with that Plan B.

    • I’m not so sure there is a plan B

      just more of Plan A

      QE for ever ( until they can’t ) *


      * the name will change of course , just like Winscale to Sellafeild

    • Depends what side of the fence you’re on as to whether QE worked. For banks who lent like fools, and those who leveraged up to the hilt prior to 2007/8 and those owning property it has worked so well it gave them another 10 years and counting of free money to draw on.

  6. Great blog as usual, Shaun.
    You mention that the US fiscal initiatives “the replacement in terms of income tax thresholds of inflation indexation by the US Consumer Price Index by the chained version which is usually lower”. You are one of the only commentators I have read who bothers to mention this. It doesn’t fit the narrative of a billionaire president rewarding his billionaire buddies that the corporate media are pushing so they tend to ignore it. This will, of course, not hit lower income Americans at all, while wealthy Americans will take the biggest hit. Where you say “usually lower” I would write “almost invariably lower” and where it isn’t it would be showing the same inflation rate.
    Obama had agreed with former Republican House leader John Boehner in 2012 to index Social Security using the chained CPI, which would have done a lot more to help the US budget balance than Trump’s initiative, but weaseled out of it. This will likely be the next shoe to drop but it is complicated because Trump pledged not to do anything to hurt US Social Security recipients during the election campaign and there is another candidate to replace CPI-U, CPI-E. Like CPI-U, it is calculated as a chain Lowe index and so is subject to the same upward upper level substitution bias that the chained CPI eliminates entirely.
    Although it has not received much attention, it is a giant step forward in indexation. The US chained CPI uses a different formula than the Swedish CPI but both its Törnqvist formula and the Swedish Walsh formula satisfy the time reversal test. (Not a lot of humour in index numbers, but it is funny that the Swedish CPI uses a formula with an Anglo name while the American chained CPI uses a formula with a Scandinavian name.) The US is now just the second country to use such a chained CPI for indexation after Sweden, and the first G-20 country.
    The drawback, minor in my view, of a chained index with a formula that passes the time reversal test is that it requires revision over a period of a year or more. Carney, as is his wont, takes a reactionary position on this, writing in January 2013 that one of the characteristics of a “a good measure of inflation to target” is that “[i]t is not subject to revisions”.

  7. I know that you don’t do politics on this site, but it seems to me that the banking collapse ten years ago led to QE and that QE has led to politicians simply having nothing that can rein them in. We now see in the USA:
    1. Strong growth;
    2. Still ultra-low interest rates;
    3. A huge deficit and accumulated debt;
    4. High personal debt
    It used to be the case that this combination might lead to a reining in of government expenditure (welfare costs would go down in a booming economy) and the bond market would force higher interest rates if the deficit appeared too high or the risk of inflation looked to be an issue.
    Instead, we have bipartisan agreement in the senate (it seems to be the only thing that is bipartisan) to jack up expenditure (for the Republicans on defence, for the democrats on social spending) immediately on the back of a large tax cutting exercise.
    It doesn’t feel to me that it is going to end well.

    • oh the future is clear and it will end horribly, rest assured. It get worse before it gets worse….

      but its always a case of when. So where will I be and can I avoid most of the fallout ?

      prediction is difficult – especially about the future…


    • James, as long as the dollar is the world’s reserve currency , it can keep going. There is an argument that the dollar remains the world’s reserve currency as long as its backed by the US armed forces if they are perceived to be ‘fearful’. Hence the bipartisan agreement in the senate to increase armed service spending. Energy ‘independence’ helps obviously.
      Russia as an energy and commodity rich nation is a long-term threat to dollar hegmony, hence all the cr*p about election interference etc. China , not so much, its human resources rich but not much else.

      • Good points. Do you think that the dollar will lose its reserve status any time soon and would you agree that, if it does, the effects could be very dramatic?

        • Depends on the ability of the US to project its strength globally where required. Its sometimes called a petro-currency but this I think is simplistic. China, Russia, Iran etc would love to remove its reserve status. Every few months you can find a report by someone forecasting the dollars demise because of this and that ( usually Russia selling gas to someone based on a local currency). But so far its chickenfeed and the dollar dominates. If and when global confidence in the dollar collapses it will change everything, and I mean everything. Some see that as good, to them I would say, beware what you wish for, the human race, generally speaking, has never had it so good economically speaking.

    • I think that it was one of the most brilliant deceptions ever played on us. Independence actually meant
      1. Deniability by government
      2. Loss of responsibility by ministers
      And, of course, the governor is appointed by politicians anyway.

    • I disagree. In any democracy it is unhealthy if the politicians directly control the interest rates that they can borrow at. If you compare the UK to other countries in the Anglosphere, the Bank of England is still ordered around much more than the others. The US Fed can change its inflation targeting regime as it sees fit or abandon it altogether. The Reserve Bank of New Zealand must negotiate a Policy Targets Agreement with the Finance Minister every few years and the Governor of the Bank of Canada must negotiate a renewal of the inflation-control agreement every five years. It is quite a contrast with the way the Chancellor of the Exchequer can impose his own remit on the Bank of England.

  8. The show must go on….and the only way to keep it going is more debt…more QE.
    No western economy is booming they are dying ,kept alive by ever greater amounts of borrowed money…the figures regarding growth are meaningless,the poor are getting poorer and those at the top are obscenely wealthy.

    • I would add that the obscene wealth, instead of going to entrepreneurial risk takers and creators is actually going to a set of parasites known as the City.
      I really don’t mind James Dyson making money, but have yet to find anyone who can explain why employees of companies with balance sheets and franchises created by other people should earn any more than, say, a teacher.

      • Like the CEO of Persimmons making 120mln from the state backed Help to Buy for putting up poorly built houses.

        13000GBP per house all for 1 man.

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