How does the stock market declining affect US funding for deficits? Deficits are funded by bonds, which (almost always) move in the opposite direction from stocks. This also means that your second sentence doesn't follow.
> ... though I think unlike in past downturns, the dollar and US economy is in a much worse position.
I'm a bit undecided, but I fear that you are right on this one.
I've been following the thesis of @LukeGromen, (here's a sampling)[0].
Here I think he covers it mostly in full [1].
Definitely worth a listen..
Also, here is a great 5 part podcast from December where he (and other Dollar bears) talk about the dollar decline[2].
Because of US dollar reserve status, government spending has been financed by foreign buying of treasuries, especially China. In recent years, they have rightly seen the fiscal situation of US, with massive liabilities, as being fixed only by devaluation of the dollar and therefore in real terms holding treasuries, or especially continuing to stockpile them not prudent. And he points out many examples of how they have recently been declining their purchases of treasuries and stockpiling gold (them and Russia).
He argues their recent opening of a Oil futures market as their avenue to moving away from dollar, eventually (long long term) pushing Renminbi to gain reserve status but in medium term using gold / oil as their leverage away from dollar.
On the stock market/taxes connection, he points out usually a yr over yr decline in tax receipts occurs in recessions. But last month, in the midst of an "everything bubble" (stocks, real estate, bonds, etc.) we saw a year over year decline of tax receipts. [3]
Also that stock market is increasing % of GDP & most taxes paid by wealthy whose income increasingly based on stocks market returns implies a dependence at the margin of government spending on high equities valuations. [4]
If the market continues to decline, and future months tax receipts decline, the "fed put" will get called into action, as China has stopped funding deficit (enough to match it's increase) so it has to be funded by rising rates in the private market. Libor shows this, as does the decline of the dollar.
Here's a link his slide deck covering all of this [5].
See slide 26 for a chart showing that when tax receipts fall "enough", US quickly takes action to weaken the dollar.
Slide 25 shows that declines in tax receipts usually correspond to recessions, but except recently..
> ... though I think unlike in past downturns, the dollar and US economy is in a much worse position.
I'm a bit undecided, but I fear that you are right on this one.