Notes From Underground: The Mnuchin Budget — 96 Tears With ? and The Mysterians

The rollout of the long-anticipated U.S. Treasury budget brought tears to my eyes. Why? Because it couldn’t help but wonder how supposedly intelligent people could present a politically ridiculous BUDGET and tax plan. The drafters lose the battle when they first present an increase in defense and make it a sacred cow of the Trump White House. You cut many social safety net programs while finding MONEY for questionable foreign entanglements and many unneeded weapons systems. The beauty of the original Bowles-Simpson plan was that all the sacred cows of the budget process were GORED. In my opinion real budget changes and reform must start with reining in the defense sector, but unfortunately too many Congressional districts are the recipients of defense spending and, of course, defense sector jobs. In a GREAT SANTELLI INTERVIEW Wednesday, former Senator Alan Simpson ripped apart the White House budget proposal and noted that it was sprinkled with fairy dust.

Simpson also agreed with Larry Summers, who referred to the GDP numbers as fantasy. The numbers used by the Trump Administration are subject to doubt. As Larry Summers wrote in his blog: “Then the administration asserts that it will propose revenue-neutral tax cuts, with the revenue neutrality coming on part because the tax cuts stimulate growth! This is an elementary double count. You cannot use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue. At least not in a world of logic.” My long-time readers are aware I frequently criticize Summers but this time I believe he has it right.

More importantly, the optics are the work of supremely naive policy makers. If the U.S. is ever to get tax reform and budget responsibility it begins with cutting defense spending. President Trump came into office with the desire of rolling back Pax Americana. In light of that promise this BUDGET PROPOSAL is a boondoggle. And the questions that this mysterious act of self-destruction from Mnuchin and his minions left me crying with 96 tears of exasperation from the stupidity that permeates our decision makers. AND YET THE U.S. STOCK MARKET RALLIED. Question mark and the Mysterians, indeed. But at the end of the day the global central banks’ policy decisions continue to elevate markets … and now the FOMC minutes.

***The May 2-3 FOMC minutes revealed that the FED would possibly begin shrinking its balance sheet by capping the amount of securities that would be reinvested as they mature. For example, if $60 billion of assets are maturing each month, then the FOMC may only reinvest $45 billion allowing for the balance sheet to shrink. There was nothing definitive revealed but in my example the process could be very long in duration. This suggests that the FOMC is very uncertain about its ability to undo the QE program. The market initially viewed the FOMC language as “hawkish” but as the headlines gave the markets some perspective as U.S. Treasury yields fell, the DOLLAR declined in value and GOLD rallied.

The decline in Treasury yields was reportedly driven in part by investor expectations of a somewhat slower pace of policy rate increases following FOMC communications after the March meeting and some WANING of INVESTOR OPTIMISM about the prospects for more expansionary fiscal policies” (hat tip to Bloomberg reporters, who annotate the minutes). If this is what the FOMC is watching, I would conjecture that with the Mnuchin Budget proposal the FED should be very cautious because the Congressional budget battle will slow down any sense of fiscal stimulus.

Also from the Minutes: “Concerns about the outcome of the French presidential election and tensions in the Korean peninsula pushed down 10-year sovereign yields in the advanced economies for several weeks.” Well, the FED and their analysis is really in trouble because yields on 10-YEAR notes are lower today than the May 3 FOMC meeting and outcomes to both noted events have been positive, which in FED thinking should have resulted in HIGHER yields.

Will this piece of data make the FED rethink a June rate increase, especially as the 2/10 yield curve is sitting at recent low flattening levels? Just something to watch in trying to comprehend the questions revolving around the mysterious budget propositions of the Trump economic policy team. It’s hard to wipe away the TEARS generated by such gross incompetence.



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12 Responses to “Notes From Underground: The Mnuchin Budget — 96 Tears With ? and The Mysterians”

  1. silverbug2155 Says:

    Money is failing. The escape hatch leads to private investments. Whether it be equities,PM’s, or collectibles. It just makes sense. Sovereign debt is in crisis everywhere. Apple, Google, and Tesla’s of the world are not.

  2. Arthur Says:

    Well, Trump’s election was a repudiation of that approach (Summers & Co.) via Heritage Foundation

  3. kevinwaspi Says:

    Once again we see the infectious impact of D.C. politics on both monetary and fiscal policy. Washington D.C. = 67 square miles surrounded by reality. Santelli’s interview with Simpson was a pearl! So, I suggest, we up the ante from 96 Tears, to THE KNICKERBOCKERS “Lies”
    Lies, lies,
    You’re telling me that you’ll be true
    Lies, lies,
    That’s all I ever get from you

    Tears, tears,
    I she’d a million tears for you…..

  4. Rob Syp Says:


    Do you have comments? It has been something watching this play out the last month.

  5. David Richards (@djwrichards) Says:

    The defense spending is tragic. All that military hardware is unnecessary and most of it will be of no practical help to the next battleground where future wars will be won or lost: cyber warfare. Who needs a new fleet of aircraft carriers that can now be oh-so-easily and cheaply sunk? Ultimately this high level of defense spending in its present form is self-defeating because it is destroying the economy.

    The key to peace is to have some basic prosperity. That starts with massively slashing defense spending and reaping the economic benefits of a peace dividend like we experienced in the 1990’s.

    But I’m no American and not even a Westerner anymore so I have no voice, except here, thanks for listening. You’d be surprised how many Westerners are expatriating to the East (or south). And many Asian millennials are returning to Asia. So much so that it’s called the “turtle wave”. Migrant flows aren’t just from MENA to Europe.

  6. Yra G Harris Says:

    Reblogged this on Notes From Underground.

  7. Chicken Says:

    My view is, increasing military spending at the expense of other potentially more productive (but more complex to comprehend) options is simply more of the same old thing, or old same thing, if you prefer.

    Forward, into the past!

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