Multi-Trillion Debt Splurge Could Hit Global Economy Hard

Donald Trump’s debt-fuelled spending and tax cut plans are a growing risk to the US and world economies, as a short-term boost threatens to turn into a bust next year.

Almost $400 billion of extra spending combined with a $1.5 trillion tax cut in an economy could trigger overheating, top economists fear. A sharp interest rate rise in response typically leads to a downturn, news outlets reported.

Both Jerome Powell, the new chairman of the Federal Reserve, and analysts at the International Monetary Fund have warned against surging deficit spending, while avoiding direct criticism of the president.

Powell told the US Senate: “We are not on a sustainable fiscal path. We need to get on one. This is a good time to be doing that, when the economy is strong. It becomes a problem gradually over time as we spend more and more on interest, on debt servicing, and we have less and less to do the things we really need to do, as we pass along bills to future generations.”

Powell made clear that a “sugar high” from fiscal policy could damage the economy regardless of the Fed’s actions, according to Mark Haefele at UBS.

The IMF pointedly called on indebted governments to seize the opportunity of strong growth to cut their borrowing. Upbeat forecasts and growing confidence “ignore debt levels that remain close to historic highs and the inevitable end of the cyclical upswing,” said Christoph Rosenberg in the IMF’s finance and development report.

He said: “Estimates of underlying growth potential have hardly budged, and interest rates–the cost of servicing all this debt–are starting to rise, making it harder to refinance bonds and loans.”

Carefully calibrated warnings at the top table were translated into more direct attacks on Trump by other economists, The Telegraph said.

This “pro-cyclical fiscal stimulus threatens overheating” and risks “destabilizing the US economy”, warned Llewellyn Consulting. JP Morgan said “the fiscal deficit next year should be the widest peacetime, non-recession deficit”.

Its economist John Normand warned: “Congress risks overheating the US economy. We think this cycle will end through an overheated economy that requires a restrictive Fed.”

Legal and General Investment Management expects the risk of a recession next year to build as a result. “We do think that US inflationary pressures will continue to build, aided by a tightening labor market, strong growth, high resource utilization and rising import price pressures.”