This guest commentary was written on 3/23/21 by Chief Market Strategist Mike O'Rourke of JonesTrading

The Greatest Fiscal Cliff In History - Fullish

Treasury Secretary Yellen and Chairman Powell testified for the House Financial Services Committee today. Witnessing the side by side testimony it is clear there is a united front for the continuation of “print & spend” policies in this nation.

Historically, the Democratic Party and Progressives have been described as proponents of “tax & spend” policies in Congress. While the “tax” has not been dropped wholesale, the “print” has afforded its significant delay. The delay in turn, creates the painless façade of cost free spending. Once the money is spent, it is out the door, but the bill will eventually come due. Secretary Yellen is a political appointee, and thus it is her job to pursue the President’s agenda even.

As far as the Fed Chairman is concerned, his independence was compromised more than two years ago and remains compromised.

Those who have been in this business a decade or longer will recall that coming out of the financial crisis there were repeated debt limit standoffs. It was a period of market and economic uncertainty with fears of fiscal cliffs. 

Chairman Bernanke took it upon the Fed to use excess monetary accommodation to offset the fiscal uncertainty Congress created. Many would argue, the Fed crossed a line and used monetary policy to facilitate Congressional fiscal inaction. Had the central bank refrained and Congress failed to act, markets would have sent a message. That market reaction would have forced Congress to meet its responsibilities as it has done throughout history.

Instead, Bernanke has the set the precedent that the central bank responds to any and every situation that could potentially impact the economy.

That precedent has become the cornerstone rationalization for the Fed’s micromanagement of the economy. Fast forward to today. The Fed’s printing and asset purchases obviously distort the at Treasury market and have thus far artificially lowered the nation’s borrowing costs.

As such, it is much harder for the financial markets to impose discipline or even a modicum of fiscal responsibility on Congress.

Thus, the Federal Reserve’s “print” has been a temporary substitute for “tax” allowing single party dominated government to “spend” at will.

Chairman Powell and Secretary Yellen continue to use the crisis of the Covid-19 pandemic to facilitate what is arguably the most aggressive combination of monetary and fiscal stimulus in the nation’s history. The increase of one does not lead to the retrenchment of the other.

Instead it is a policy of pushing full steam ahead on as much of both monetary and fiscal accommodation as Congress permits.

We agree a fiscal and monetary policy response to the pandemic was necessary. Let’s make the simplistic assumption that the approximately $3 Trillion of stimulus driven deficits in 2020 were necessary. Considering US 2020 GDP only contracted by 2.4%, one could argue it was money well spent. Nominal GDP was $21.75 Trillion in 2019 and was $21.49 Trillion in 2020. Thus, to combat this $260 Billion contraction of GDP the Biden Administration passed a $1.9 Trillion fiscal stimulus and is planning an $3 Trillion of infrastructure spending in 2021.

That is nearly $5 Trillion of spending stimulus (or 22% of GDP) this year alone.

If the Biden Administration’s infrastructure proposal becomes law in addition to the already passed fiscal stimulus, the historic level of monetary stimulus and the economic reopening, it will likely also set the US economy up for the greatest fiscal cliff in history.

There is no restraint here, no long term plan, just spend as much as we can before we lose power.


This is a Hedgeye Guest Contributor piece written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.