Bloomberg

Former Treasury Secretary Robert Rubin says fiscal policy should aim to keep markets confident in the outlook.

Tax cuts that are paid for by higher deficits, like the Trump tax-cut plan, carry the risk of sparking a bond market sell-off, warned former Treasury Secretary Robert Rubin on Thursday.

Even a small increase in the debt-to-GDP ratio, might shoot interest rates higher because it would all of a sudden focus the markets on a risk they had long ignored, Rubin said, during a discussion at the Peterson Institute for International Economics.

“You could have a bond-market explosion on the downside and an interest rate [explosion] on the upside,” he said.

“Markets can long ignore risks, even for years, until all of a sudden they don’t. And when they do, the reaction can be savage and sudden,” he said.

Rubin said Congress always underestimates the potential negative impact of any spending or tax cuts funding by higher deficits because it can provide a short-term stimulus.

“The result is we have an inherent tendency to get a worse and worse fiscal situation…and I think in the final analysis we are likely to pay a very high price for that,” he said.

Instead, Rubin suggested the U.S. might benefit from tighter fiscal policy, as it would likely boost business confidence.

The former Treasury secretary, who help draft the Clinton 1993 deficit-cutting plan, scoffed at the notion that current low interest rates would make the next downturn less damaging on the economy.

Such complacency makes the danger of a downturn greater, he said.

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