In this article, we’ll discuss the unusual timing of the fiscal stimulus and how it could affect markets. Keep in mind, this isn’t a partisan article. Our purpose is to review objectively both the good and the bad. Most administrations want to cut taxes and increase spending to boost the economy. Usually the election cycles are coordinated with the business cycle since the business cycle is manipulated by fiscal and monetary policy.

While regulation and tax cuts help the economy, they were combined with extra spending, thus deteriorating the US balance sheet, which carries with it long-term consequences that may not be evident today. Something which many economists and pundits overlook is that the budget is supposed to look its best at the end of a prolonged economic expansion, towards the end of the business cycle because corporations have high profits and most people have a job. These factors improve tax revenues and push down spending on services such as food stamps and unemployment insurance. The worry is this poor timing means there won’t be any solutions, otherwise referred to as “ammo” left to stimulate the economy once the business cycle ends and a recession begins. As we have mentioned previously, recessions are necessary because they fix nonperforming uneconomic aspects and allow the economy to grow stronger and healthier in the long-run.

What’s particularly troublesome this time during the late cycle expansion is the already high deficits imply devastating deficits during and after an inevitable recession. We can argue whether a recession is likely to occur in the next two years, as we have indicated previously, or sometime around 2023 or later as the market is pricing it, however the reality is that the US balance sheet is slated to worsen, not improve. There are some optimistic investors who believe deficits don’t matter because they haven’t caused a crisis yet. However, past is not prologue, and this doesn’t imply that larger deficits of the future won’t cause a tipping point which could lead to a significant currency depreciation over-time. However, with that said, if you are expecting Zimbabwe or Venezuela style inflation, you are mistaken, at least given the current political and economic trends.

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