In July 2020, the vigilantes woke up. Inflation and interest rates have soared. Investors then realized that they could lose as well as make money with Treasury bonds.
“I will not rest until we create the strong, secure, and prosperous America that our children deserve and that you deserve. The strong, secure, prosperous America that our children deserve and that you deserve. This will truly be America’s golden age and that’s what we must do. This is a magnificent victory for the American people that will allow us to make America great again. » – Donald Trump.
A big promise. Will he be able to hold it?
No one can read the future. And certainly not us!
Instead, we study the patterns of history – in politics and markets – and hope for the best. These models suggest that Donald Trump will face great difficulties.
Indeed, very soon, Trump’s team will have to face a credit crisis.
Budget deficits are expected to be around $2 trillion per year over the next four years. Interest on the debt is already $1 trillion a year. Additionally, the federal government will need to refinance approximately $4 trillion in existing debt each year.
Elon Musk, world-renowned genius, knows how to do accounts. But if he thinks he’s going to reduce the deficit by $2 trillion by eliminating “waste” in federal spending, he’s showing a stunning lack of cynicism.
There’s no chance he’ll make it.
Donald Trump has already pledged not to touch key parts of the Welfare/Warfare program (the Pentagon, Social Security and Medicare), leaving only about 18% of the budget open to change. Even eliminating this entire budget would still leave a deficit of nearly $1 trillion.
Mr. Trump also proposes eliminating federal taxes on Social Security recipients, veterans, first responders, people who earn tips, and overtime pay for federal workers. Taken together, these measures are expected to widen the federal budget deficit by about $11.5 trillion in lost revenue over the next ten years – or about a third of all revenue.
Trump intends to compensate for this shortfall by taxing imports, with a general tax of 20% and a tax of 60% on imports from China.
We must emphasize that a tax on imports is in reality a tax on consumption. Thus, consumers would immediately feel the pain… and would know the cause, unlike inflation by the Fed’s printing press, the effects of which take years to be felt.
It would also discourage people from spending, and push them to save, which could lower real interest rates while increasing savings. In the long term, if implemented correctly, these changes could help make the economy stronger.
But Mr. Trump and his entourage cannot afford to project into the distant future. Their term is four years. And any changes they make will be revised, corrupted and perverted by the slimy swamp creatures of Washington (who work hard to get exceptions, exemptions and special treatment).
The last time the United States implemented a large tariff program (not a coincidence) was at the start of the Great Depression, not at the end. Reed Smoot and Willis Hawley should never have been allowed near Congress. But their tariff proposal became law in 1930. Foreign countries responded by imposing their own tariffs. And global trade was reduced by 67%, which helped deepen the depression.
Setting aside the chaos and unintended consequences, tariffs simply wouldn’t raise enough money. At current levels, they would generate about $9 trillion over the next ten years, about $2.5 trillion less than the amount lost to tax cuts.
This loss would increase as the flood of imports turns into a trickle. It would add to the national debt, with increases already scheduled which should bring the debt to more than 50,000 billion dollars by 2034.
But the big difference between today and Trump’s first term is that additional debt now costs additional money. Indeed, the “bond vigilantes” are back in the saddle. In 2016, bond yields had been falling for 36 years. The feds could borrow as much as they wanted…and their interest payments generally went down, not up. Even through 2016-2020, Team Trump spent trillions…borrowed trillions…and “printed” trillions as interest rates continued to fall.
But in July 2020, the vigilantes woke up. Inflation and interest rates have soared. Investors then realized that they could lose as well as make money with Treasury bonds.
Now, in anticipation of Mr. Trump’s second act, investors are already demanding higher interest rates to offset the inflation they see coming. These higher rates will increase the cost of debt financing… slow the economy… and pressure the administration and the Fed to act.
The golden age risks becoming seriously tarnished.
