It has been reported that President Trump responded with this quote "I won't be here when it blows up!" when confronted with forecasts of an out-of-control debt situation at a 2017 meeting of senior officials. This is not really an unexpected response from Mr. Trump, given his background in New York real estate and his history of walking away from debt overloads on many of his property deals.
The problem one administration leaving another administration a legacy issue when the new administration takes over is not an unknown situation in American politics. There are many examples of one president leaving another president a difficult situation created by the actions of the preceding president.
But, before we get back to the current situation, let me present a case where one president left another president a gift that kept on giving during the latter president's term in office.
The leaving president, in this case, was George H. W. Bush… Bush 41.
As we have seen over and over again, in the days leading up to his funeral, Mr. Bush apparently lost his second term when he went back on his promise of "No, new taxes!"
Analysts appear to believe that if Mr. Bush had not raised taxes during his term in office, or if he had not made the promise to not raise taxes, he would have been re-elected for a second term.
Well, we can argue all night about this conclusion. The conclusion that we cannot argue about, I believe, is that the increased taxes voted on while Mr. Bush was still president set the stage of his successor Bill Clinton, so that, when Mr. Clinton took office, he would create a program, focused on economic growth, that had a foundation of a solid and stable budget situation.
In other words, I am arguing that Mr. Bush's budget efforts set the stage for Mr. Clinton's success. Mr. Clinton was able to be in office for eight years without the clouds of a recession ever showing up. In fact, his tenure in office is looked upon as a showcase for economic policy construction, a time in which the United States budget actually went into surplus mode.
Without the tax increases of Bush 41, it is my belief that Mr. Clinton would never have achieved the economic record he did. Mr. Clinton might have produced a very commendable performance, but, in my mind, he would not have been able to match what he eventually was able to do.
The point is that, in our democratic system, very often, one administration can do all kinds of things that leave a residual for the next administration to deal with. If the 'leavings' are good, as they were in the case of the transition from Bush 41 to Clinton, that is great.
If the leavings are not so good, well, that is what the next administration has to deal with.
Right now, it looks as if the Trump administration is setting the stage for a not-so-good set of leavings for whoever follows it.
Is Mr. Trump concerned about the deficit?
According to the article cited above, for those who have worked with Trump, it was par for the course. Several people close to the president, both within and outside his administration, confirmed that the national debt has never bothered him in a truly meaningful way, despite his public lip service. "I never once heard him talk about the debt," one former senior White House official attested.
One reason for this is that, as some people close to him testify, Mr. Trump believes that economic growth will resolve the problem. That is, his tax cut efforts and deregulation efforts, along with a substantial bill to build infrastructure, will create an environment that will generate enough economic growth and enough government revenues to close the gap, so that it will not be a problem.
However, Mr. Trump has never spoken much publicly on this issue.
As readers of my blog know, I am skeptical of this conclusion and have expressed my doubts in my recent post "The Big Fallacy Is That Economic Growth Will Eliminate The Federal Deficit." I don't believe that there are any consistent examples of this taking place in the United States or elsewhere.
If forthcoming economic growth is not sufficient to reduce the expected deficits, then we may have a debt crisis somewhere on the horizon.
And, right now, investors seem to believe that it is even necessary to question the expected strength of economic growth in 2019. If economic growth slows in 2019, certainly, the US economy will not be able to generate the revenues necessary to reduce or eliminate the expected future deficits.
There is another problem, however. If the economy does slow down in 2019 and a debt problem occurs in the energy sector and then spreads to other areas of the financial markets, the Federal government could find itself with few "normal" tools to combat such a spreading disruption.
First, the federal government is already generating excessive amounts of debt with the expectation that the federal deficits are already expected to grow over time. How can the government add more debt into an already problematic situation?
Then there is the Federal Reserve and the level of interest rates. Even though the Fed has been raising its policy rate of interest for some time now, most economists still believe that the level of short-term rates has still below normal. Thus, lowering interest to combat a debt problem will not be as effective as when rates are above normal, which is usually the case of financial stress.
This would put Federal Reserve officials back into the position of renewing quantitative easing or create some other form on response that can, hopefully, resolve the problem.
Facing an out-of-control budget problem at this stage of the economic recovery can be a daunting task. Hopefully, the United States will not face such a crisis.
But, as he has already told us, Mr. Trump will be gone... he won't be here. This could be as early as the 2020 election, if some of these events take place in 2019 or in 2024, if he survives into a second term. 'Not my problem!'
So, dealing with this situation might fall into the lap of a brand new president. In such a case, the campaign in 2020 or 2024 will be about how the president will clean up the debt problem, and not about what kind of economic program he or she is bringing to the country.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.