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Every recession is preceded by reduced government deficits (red-highlights below), and every recovery is engineered by increasing government deficits (negative-sloping line below).

Since Trump took office in January, DOGE cuts to government spending have been covered over by increased spending in other areas such as ICE, and by the severance and voluntary separation payments, but the government shutdown has significantly reduced the deficit (see Fund-Flows below). If reopening the government doesn’t increase deficit-spending, then the health of the stock market will be determined by the level of bank credit alone.

So far, bank credit is rising rapidly and contributing to the money-creation the economy and stock market require (chart below).

Despite all the press about private debt being “too high” and on the verge of collapsing, the numbers themselves show that private debt is at historically low levels (two charts below). There is lots of room for private debt to grow and provide money to fuel the economy and the stock market.

Household debt:GDP

Household debt as a percent of disposable personal income

I am watching closely how the spending recovers after the government opens fully. If the deficit doesn’t improve, then we need the bank credit to rise even faster for the stock market to keep rallying. That is what happened in the late 90s when the Clinton administration reduced the deficit so much they produced a budget surplus — i.e., net-drained money out of private bank accounts — but bank credit exploded higher to make up the difference. (Note: the private debt must be paid back and cancelled, while the government deficit can remain in the economy). The level of private debt eventually became unsustainable, assets had to be sold, and recession ensued in 2000 and again in 2008. The current, historically low, level of private debt is in no immediate danger of becoming un-serviceable.

As corrupt and lawless as the Trump administration is, it will take time for the economy to be beaten into a recession. My guess is 2–4 years before that happens.

More By This Author:

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How The Market Behaved During Past Government Shutdowns
Fear, Greed, And Money Reign Supreme — Even Among The Machines