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Ken Langone: US Must Slash Debt Even If It Triggers Recession

By    |   Monday, 04 December 2017 03:02 PM

Home Depot co-founder Ken Langone warns that the only way to really get America's financial house in order is to cut debt.

The U.S. should risk a "very significant recession," and even a stock market drop, "to get it done," he told CNBC.

He warned savvy investors that any compromise tax-reform bill signed into law by President Donald Trump probably won’t go far enough.

Langone touted the GOP tax-cut plan, predicting it would "unleash economic forces all to the good for a lot of people."

However, before Republicans get giddy taking a financial victory lap, he admitted he would "feel better when we address the debt, when we address the deficit, in a way where we're doing this over a period of time."

The U.S. debt recently totaled $20.591 trillion, according to numbers from the Treasury Department at USDebtClock.Org, which tracks how much the US debt grows in real time.

Meanwhile, the Senate on Saturday approved their version of tax bill in a narrow 51-49 vote.

Once the Senate and House of Representatives reconcile their respective versions of the legislation, the resulting bill could cut corporate tax rates to 20 percent from 35 percent.

The S&P 500 has risen about 18 percent this year on strong corporate earnings and solid economic growth as well as on the hope that Trump's agenda of corporate tax cuts and looser regulations could come through, Reuters said.

“With this tax deal, markets could pick up speed into the end of the year. It looks like the ingredients for a year-end rally are there,” said Angelo Meda, head of equities at asset manager Banor SIM in Milan, predicting equity gains of 3 to 4 percent.

Langone said that even though his personal income taxes will rise, he doesn’t have a problem with that.

"My taxes are going to go up. And I think that's wonderful," he said, adding that he supports "anything we can do to enhance" the system in which he found success and was "blessed to be born into."

"Nothing is going to change in my life if I pay more taxes," said Langone, founder and chief of investment bank Invemed Associates, specializing in healthcare companies.

Meanwhile, the U.S. Treasury would exhaust all of its borrowing options and run dry of cash to pay its bills by late March or early April if Congress does not raise the debt ceiling before then, the non-partisan Congressional Budget Office said last week.

“If the debt limit remains unchanged, the ability to borrow using extraordinary measures will be exhausted and the Treasury will most likely run out of cash by late March or early April 2018,” it said.

“If that occurred, the government would be unable to pay its obligations fully, and it would delay making payments for its activities, default on its debt obligations, or both,” the CBO added.

Tax cut hopes have been a significant tailwind this year for U.S. stocks, helping them hit successive record highs. A note from JPMorgan forecast that if the tax rate indeed fell to 20 percent from 35 percent, U.S. firms’ earnings-per-share estimates could rise by about 8 percent in 2018, Reuters said.

The flip side is that the cuts will add to a $20 trillion U.S. debt pile and may increase the chances of more aggressive near-term rate rises in the world’s largest economy.

The U.S. Federal Reserve will almost certainly raise interest rates later this month, while markets are pricing roughly another two hikes in 2018. But many reckon the tax cuts will result in a more hawkish Fed.

“This environment should question whether the market is being too conservative in only pricing 50 basis points of (U.S. Federal Reserve) tightening next year,” analysts at ING Bank told clients. “Loose fiscal and tight monetary policy should be sending the dollar firmer.”

Others warn of risks ahead, especially that of a U.S. government “shutdown," should this Friday’s deadline to authorize new borrowing pass without a deal.

(Newsmax wire services contributed to this report).

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Ken Langone: US Must Slash Debt Even If It Triggers Recession, Stock Plunge
ken langone, debt, recession, stock, economy
Monday, 04 December 2017 03:02 PM
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