Fast Money

Trump to oversee ‘fiscal bloodbath’ instead of prosperity, says Reagan OMB director

Former Reagan budget director warns of 'fiscal bloodbath' under Trump
Former Reagan budget director warns of 'fiscal bloodbath' under Trump

Count David Stockman, former director of the Office of Management and Budget under Ronald Reagan, as one of the non-believers in the Trump rally and coming economic boom.

U.S. markets have hit record highs since the election of President Donald Trump, and Wall Street continues to anticipate pro-business policies that will benefit banks and infrastructure.

However, Stockman reiterated his warning on "Fast Money" that a financial meltdown was in the offing. On the eve of Trump's inauguration, the former director of the Office of Management and Budget offered a reality check for investors who thinks the days of Reagan prosperity will return once again.

"The market is pricing the second coming of Ronald Reagan, but the newsflash on the eve of the inauguration is that there's no reincarnation coming," said Stockman, who served as budget director from 1981 to 1985.

"We're at the diametrically opposite position that we were in 1980," he added.

Stockman explained that in the early 80's when Reagan took office, debt was at a $1 trillion which equaled around 30 percent of U.S. GDP. Now, 35 years later, debt is nearing $20 trillion, or what could translate to 105 percent of GDP.

In other words, Reagan had a lot more room to maneuver with respect to the debt, while Trump could find himself hampered by rising debt.

'The Imperial City'

In a recent research note, Stockman also added that "if Ronald Reagan couldn't drain the Swamp way back then, how in the world after 36-years of relentless self-aggrandizement by the Imperial City [Washington, D.C.] can Donald Trump do it now?"

The author of "TRUMPED!: A Nation on the Brink of Ruin...And How to Bring It Back" added that the budget needed to manage military, homeland security and intelligence spending is now three times bigger than it was under Reagan.

Additionally, he noted that entitlement spending is now five times greater. Stockman went on to say that these developments, coupled with nearly $20 trillion worth of debt, represent a "ticking time bomb" that Trump will be unable to diffuse during his time in office.

"That's before Trump borrows a single dime to fund his Mexican wall, defense build-up, tax cuts, infrastructure boondoggles, veterans benefits and border enforcement initiatives," added Stockman. He said public debt could balloon to $30 trillion in years to come.

A growing number of Wall Street economists tend to agree with Stockman's assessment. In a research note last week, Capital Economics warned that a Trump economy would be "characterized by a spurt of faster growth in the U.S., but higher inflation. After all, he is proposing a major fiscal stimulus at a time when there is little spare capacity in the economy."

Separately, Goldman Sachs pointed out that potential GOP tax cuts would produce "an even larger budget deficit, even if increased investment modestly offsets the impact on tax revenues."

The bank added: "As a result, eventually other taxes would have to be raised or government expenditures cut. With federal debt held by the public over 75 percent of GDP and deficits projected to rise, the fiscal outlook is now less favorable than when taxes were cut in 1981 or 2001," the latter year being when President George W. Bush cut taxes by more than $1 trillion.

Ultimately, Stockman warned that a Trump "fiscal bloodbath" is fast approaching, not a "fiscal stimulus."

"His fiscal program will cause a political and legislative conflagration owing to $1 trillion in annual deficits," concluded Stockman. "This won't be the kind of giant accidental Keynesian stimulus that caused the mid-1980s Reagan boom."