Finance

Specialist from Wall Street draw attention to a threat

More and more specialists from Wall Street draw attention to a serious threat that can make the consequences of the next recession much more deplorable. A large part of the problem is the result of tax laws pushed through by the Republicans, which in the short term are beneficial for companies, but which – in the long run – can have far-reaching consequences.

It is a serious oversight that finally appeared on the radar of many investors. I am talking about a trillion US budget deficit in the amount of one trillion dollars – a problem that has died in a flood of other more pressing issues: over the past few months inflation had to give way, rising interest rates, a trade war threat, or a break with Iran – depending on week.

The US budget deficit will be a problem stretched over time
Until now, the deficit has been able to avoid major discussions because it does not pose a direct threat to the stability of the markets. Recently, however, he has attracted the attention of some of the major Wall Street institutions, which in turn have been alarming.

However, before we get to the opinion of experts, it is worth realizing how devastating the consequences of such a huge deficit during the recession can be: in the event of a serious economic slowdown, the US government will not be able to meet its obligations, which will further aggravate the situation.

The president of BlackRock, Larry Fink, surely paid attention to the budget deficit. On Tuesday, he appeared in a video conference of his company on factors affecting the investment and broken his hands over the scale of the deficit.

“We will have a trillion dollar deficit this year,” said Fink. – The last time unemployment was close to 4 percent, we had a budget surplus. Such a deficit would be understandable during the war or during the recession. This is a serious threat and hence such turmoil on the market.

Peter Cecchini, chief strategist and head of the derivative products department at Cantor Fitzgerald, is more specific.

– Current fiscal policy is senseless – he told the Business Insider editorial in a telephone interview. – Should we not have a surplus? Historically, can we afford to increase the deficit in the phase of the cycle in which we are currently? We’re borrowing one dollar to produce 30 cents. It does not make any sense. It does not fasten.

Expected impacts, reductions and deficit of the US budget by 2028.
Photo: TPC
Expected impacts, reductions and deficit of the US budget by 2028.
The deficit will not help slowing down
Michael Gapen, the chief economist at Barclays, also threw in his three cents.

– This will drastically reduce the ability of fiscal policy to react to the next slowdown – he told CNN Money. – This is not the proper fiscal policy conducted in this phase of the economic cycle, which is taught to us by traditional economics textbooks.

The most paradoxical in the whole situation is that the new tax regulations, which have so deepened the deficit, have helped the market to some extent. Their positive impact is visible in quarterly reports, as well as profit forecasts, which will probably make the potentially catastrophic level of the deficit still ignored by investors.

So what will happen if the worst-case scenario comes true and we’re in a recession? It is very possible that the US government will have to rely on the Federal Reserve and adjustment monetary policy. However, if someone has not noticed it yet, we remind – the Fed is trying to do exactly the opposite.

Today, the budget deficit resembles a pebble in a shoe – it hurts unpleasantly. However, it is worth remembering, especially if we take into account the growing number of important financial institutions, which is beginning to disturb.