As part of Donald Trump’s “fluid” proposals and trial balloons on how to implement his economic policies, Trump adviser Steven Mnuchin told reporters on Wednesday that the Trump transition team is weighing an “infrastructure bank” to make investments in America’s aging infrastructure. Mnuchin, who is currently under consideration for Trump’s Treasury secretary, said that a “very big focus is regulatory changes, looking at the creation of an infrastructure bank to fund infrastructure investments” which to Wall Street was pure poetry, as it heard just two words: “more debt”, and thus greater probability of future QE.
Also, one wonders if maybe Mr. Mnuchin already has a private bank in mind to fast-track the “infrastructure funding” burden – perhaps his former employer?
Ironically, as Bloomberg notes, Trump’s campaign had previously criticized a similar infrastructure bank plan proposed by Hillary Clinton as being “controlled by politicians and bureaucrats in Washington” and funded by a “$275 billion tax increase on American businesses.” Trump’s economic advisers previously said infrastructure spending can be unleashed without creating a government entity. They released a plan in October advocating the provision of as much as $140 billion in tax credits to support $1 trillion in infrastructure investment, which would offset the credits through tax revenue from the projects’ labor wages and business profits.
In the past, outgoing president Obama also proposed a U.S. infrastructure bank to lend at maturities as long as 35 years to fund transportation, water and energy projects.
Such an entity would potentially emulate organizations from China, which led the establishment of the Asian Infrastructure Investment Bank in 2015, and Canada, where Prime Minister Justin Trudeau’s government is creating a bank to provide low-cost financing for infrastructure projects.
Indicatively, according to the plan posted on Clinton’s campaign website, her five-year plan would have allocated $250 billion to direct public investment in infrastructure and $25 billion to an infrastructure bank. The new institution would leverage the funds to support as much as an additional $225 billion in loans, loan guarantees and other “forms of credit enhancement.” It is interesting if Trump’s “Infrastructure bank” will end up being similar.
But an even bigger question emerges: while the wrapper which Trump’s stimulus takes is irrelevant, whether infrastructure bank, tax credits, or direct investment, the real question is just how much more debt will this fiscal boost end up adding to America’s already $20 trillion in total debt. This matters, because while there are many comparisons being made between Trump and Reagan, there is one key distinction. As the aptly named Bond Vigilantes blog notes, when Reagan came into power, debt to GDP was just 30%. It is nearly 100% now, as such “Reagan had much more fiscal headroom than Trump does today. It’s time to re-read our Reinhart and Rogoff.”
It then echoes something we said last week after the first post-Trump 10 Year auction, which was truly deplorable, when we said that “we may find ourselves in an entirely new regime: one where the bond vigilantes take on not the Fed, but the president.” Here is BV’s subsequent take:
One week of falling Treasury prices does not a bear market make. But if Donald Trump intends to flex the fiscal lever, bond market vigilantes could return with a vengeance, making it increasingly expensive for him to do so.
Of course, there is a simple solution, one we described in a blog post yesterday in which we asked “Is This Trump’s Mandate to Yellen: “Print More Money Or You’re Fired.” In other words, all that would take for Trump’s plans to be realized is simple: more QE.
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