Tags: trump | nato | uk | brexit | inflation

Cutting US Defense Spending Would Reduce the Budget Deficit

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Thursday, 12 July 2018 08:34 AM Current | Bio | Archive

Trump at the NATO summit

Yesterday, at the NATO summit in Brussels, Belgium, President Donald Trump seemed rather excited about having other NATO member countries (19) increase their defense spending to 2 percent or indeed 4 percent of GDP, although also getting a little muddled about how NATO actually works.

However, this seems to be getting things the wrong way around. Economic security would be best served if NATO insisted the U.S. cut its defense spending by 1.5 percent of GDP to bring it down to 2 percent of GDP.

Cutting U.S. defense spending would reduce the U.S. budget deficit. All things being equal, that would reduce the Unites States' current account deficit. Certainly, it would be far more effective in reducing the current account deficit than any of the tariffs on trade.

U.S. productivity may well rise. A lot of U.S. defense equipment spending seems to be focused on defending the jobs of members of Congress rather than defending anything else. The risk of economic overheating in the United States would be reduced, and that is probably the second greatest threat to economic stability after trade at the moment. And, as long as wasteful pork barrel projects were cut and things like intelligence spending were not cut, security may not actually be reduced.

President Trump’s visit to the U.K.

President Trump visits the United Kingdom today with a schedule that includes a visit to the Queen and Prime Minister Theresa May and that, besides that, seems designed to hide the president from protests.

Brexit white paper

More important to the U.K. economic outlook is the publication of the U.K. government’s “white paper” on getting out of the European Union (EU). This is set to give details of the “escape mechanism.”

The question is how quickly the EU rejects the paper. 

One can make a case that the faster the paper is rejected, the greater the risk of a “hard exit” from the EU because the U.K. government is now approaching the limit of the number of concessions that can be made.

A slower rejection may suggest fewer additional compromises need to be made and that would mean that a “soft exit” is still realistic.

U.S. and EU inflation data

U.S. consumer price inflation (CPI) is without any doubt interesting. Although this is not the inflation measure favored by the Federal Reserve, it is the inflation measure that the financial markets pay most attention to. The expectation is that headline and core consumer price inflation measures will pick up. Corporate pricing power has certainly been getting stronger in the United States and companies are keen to pass on cost increases.

Little change is expected for year-on-year rates, which are expected to increase 1 tenth overall to 2.9 percent and remain unchanged for core at 2.2 percent.

Indeed, the rise in the oil price may be serving as a convenient excuse for passing on other cost increases as well. While consumer price inflation has its problems as an overall inflation measure, the details in today’s numbers may also be helpful in trying to assess how visible President’s Trump trade tariffs are likely to become for U.S. consumers and how much of the trade tariffs are being passed on to the U.S. consumer.  

Today, we got also the final consumer price inflation numbers for Germany and France.

German consumer prices were unrevised in the final report for June. A 0.1 percent monthly increase in the CPI was small enough to trim annual inflation to 2.1 percent, a tick short of May's final print and its first decline since February.

The provisional CPI for France was revised a little softer in the final June data. An unchanged level on the month left annual inflation at May's final 2.0 percent mark but this still equaled its highest outturn since August 2012.

It might be good to recall that ECB President Draghi always insisted that it was headline inflation (CPI) that mattered when headline inflation was low, which it still is.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Economic security would be best served if NATO insisted the U.S. cut its defense spending by 1.5 percent of GDP to bring it down to 2 percent of GDP.
trump, nato, uk, brexit, inflation
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2018-34-12
Thursday, 12 July 2018 08:34 AM
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