Reagonomics, Clintonomics, Obamanomics, Bushonomics (1 and 2), Trumponomics, and the new Moronomics which has been embraced by both political parties. It seems like every party has their own economics plan whether is it trickle down or trickle up; economists continue to debate which policy works best. Regardless of your political affiliation, there is no clear winner and each prior economic plan has good and bad traits that can be effective when used properly. The advent of Moronomics has changed this dynamic! Inflation is not increasing rates; Moronomics is the culprit!
The new kid on the block is “moronomics”. What is Moronomics? Moronomics was invented by some guy name Bob one hundred years during …… Just kidding, no big long-winded story. Moronomics has morphed in our current political climate. No need for fancy economic terms; I invented the name to classify this new economic “paradigm”. Moronomics is the economic policy currently being practiced in Washington.
Moronomics is the economic policy of “yes” from both political parties. Have you ever been around parents that give their kids everything to “keep the peace”? Well this is what is happening in Washington. Both political parties are acting like bad parents and saying “yes” to spending everything to keep the peace. Any parent knows that if you always say yes, the results are catastrophic for the child. Eventually the easy parenting catches up. The same is true today for Washington, the long-term results from moronomics will be catastrophic.
Both parties are equally guilty of falling into the new paradigm of easy parenting. The last budget deal is a debacle for both parties. The Democrats wanted more domestic spending while the Republicans wanted more defense spending. Instead of having a debate both parties agreed to be bad parents. Why not spend more on both and just increase the budget? Let’s keep everyone happy! This is exactly what occurred with both parties turning into “yes” parents which gave rise to the new paradigm “Moronomics”.
Moronomics is a dangerous new policy. With both parties now the “yes” party deficits have ballooned. Deficits were naturally trending up as entitlement programs like social security, Medicare, Medicaid, etc… but the new budget deal will blow previous budget deficits out of the water! In 2019 the deficit will increase to 1.2 trillion and will continue increasing in future years. This is assuming robust economic growth continues.
Why should we care? Deficits must be funded. How are they funded? They are funded by selling treasuries to domestic and foreign buyers. The amount of treasuries that need to be sold will increase drastically as the deficit continues to balloon. As supply increases price decreases. Remember that as prices decrease rates increase. Buyers will demand a higher yield to continue to buy United States Treasuries. This “higher yield” demanded by buyers of treasuries will flow through the economy in terms of higher rates. These higher rates are already being felt on credit card bills, car payments, mortgages, and any other debt. Rates will continue to rise; this rise could be very drastic depending on how high the budget deficit balloons.
Why are rates important? As a private lender I watch mortgage rates as a primary economic indicator. Mortgage rates have moved up substantially in the last several months, yet inflation has barely nudged. This is due to the market anticipation of the future onslaught of treasury sales as opposed to the economy growing faster. Remember, the last recession was kicked off by a large increase in rates. Will history repeat itself again?
Are deficits always bad? Above, I emphasized rates as a byproduct of increased deficit, but this begs the question, is deficit spending that bad? The answer is no. Budget deficits are not bad when they are used properly. During recessions and downturns deficit spending is critical to help the economy bridge the gap and get it moving again. The economy is in good shape currently. Why are there deficits? There should not be deficits during expansion times like today.
Our new political climate has created an environment of budget deficits all the time. Running deficits all the time is like the over prescription of antibiotics. Peoples bodies adapt to the antibiotics and then when there is a bad disease the antibiotics are no longer effective. This is just like the use of deficit spending, the economy will adapt to constant “medication” of deficits. When the economy needs the economic stimulation, there is not going to be the appropriate medication left.
Parenting is tough work, just like governing. Tough choices need to be made that not everyone will be happy about. As parents we don’t give our kids antibiotics every time there is a cold; yet, why are we using deficits in every economic cycle. This is a recipe for disaster that trades short term gain for long term problems. The new “moronnomics” will lead to higher interest rates and limited ammunition to fight the next economic cold. Wake up Washington and start acting like good parents!
Sources/Additional Reading
- https://www.bloomberg.com/news/articles/2018-02-15/doesn-t-anyone-care-about-deficits-anymore
- https://www.nytimes.com/interactive/2018/02/08/us/politics/budget-deficits-debt-bipartisan-spending-bill.html
- https://www.bloomberg.com/news/articles/2018-02-11/u-s-budget-director-warns-interest-rates-may-spike-on-deficit
- http://image.mail1.wf.com/lib/fe8d13727664027a7c/m/2/mts-20180212.pdf
- https://www.bloomberg.com/news/articles/2018-02-12/dalio-sees-rising-risks-of-u-s-recession-over-18-to-24-months
- https://www.bloomberg.com/news/articles/2018-02-13/gop-silence-on-deficits-under-trump-marks-turnabout-for-party
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).