Some of the biggest names on Wall Street are sounding the alarm on an overlooked threat that could make the next recession way worse
- A growing number of Wall Street experts are calling foul on an economic threat that could make the next recession worse.
- Much of the problem stems from fallout relating to the GOP tax law, which has been great for companies in markets in the short term, but may be creating some daunting long-term consequences.
There's an overlooked scourge sliding under the radar of many investors.
We're referring to America's $1 trillion budget deficit, which has been largely overshadowed by more pressing issues. Over the past several months, it's taken a backseat to inflation, rising interest rates, and the scary prospect of a trade war - depending on the week.
It's escaped heavy discussion up until this point because it's not an imminent threat to the stability of markets. But it's recently caught the eyes of some of Wall Street's biggest names, and they've started to sound the alarm.
But before we get into the expert opinions, it's important to realize just how catastrophic such a large trade deficit could be in the event of a recession. If a large economic downturn does occur, the US government will be hamstrung when it comes to meeting obligation, which will immeasurably worsen the situation.
It's certainly caught the attention of BlackRock chief executive officer Larry Fink. On Tuesday, he spoke as part of his firm's digital conference about factor investing, and lamented the size of the deficit.
"We're going to have a $1 trillion deficit this year," said Fink. "The last time unemployment was near 4%, we had a surplus. You shouldn't have this size of deficit unless you're in a war, or a recession. It's a threat, and that's why we have volatility."
Peter Cecchini, chief market strategist and head of equity derivatives at Cantor Fitzgerald, has a more pointed critique.
"It's senseless fiscal policy," he told Business Insider by phone. "Shouldn't we be trying to run surpluses? When in history, this late in the cycle, can you really point to an increase in the deficit? We're borrowing a dollar to produce 30 cents. It doesn't make sense. The math doesn't work."
Michael Gapen, chief US economist at Barclays, also recently weighed in with his two cents.
"It will dramatically reduce the ability of fiscal policy to respond to the next downturn," he told CNN Money. "It's not what traditional economic theory suggests is appropriate fiscal policy at this mature stage of the business cycle."
Ultimately, what's ironic about the situation is that the new tax law that's helped deepen the deficit to such a degree is what's helping the market do so well right now. Its positive impact has been felt in quarterly earnings reports, as well as forward profit estimates, which could be further blinding traders to the potentially disastrous deficit.
So what happens if the worst-case scenario plays out and we get a recession? It's possible the US government would have to lean heavily on the Federal Reserve for monetary accommodation. But in case you haven't noticed, the Fed is trying to do the exact opposite.
At this point, the budget deficit is more of a nagging nuisance than a full-blown problem. But considering the growing number of Wall Street heavyweights who are concerned about it, it's worth keeping on your radar.