The Republican party's proposal to avoid a “shutdown” on the American government was rejected in the House despite Trump's support: 38 members of the Republican party voted against to defend a conservative fiscal line. With the shutdown, all non-essential public services could be interrupted and hundreds of thousands of public employees could find themselves without pay.
The Trump presidency has not yet officially begun, but Thursday's “defeat” highlights one of the themes of the next presidency and 2025. American public finances are not on a sustainable trajectory. For several quarters this fact has been noted both by the managers of the main American financial groups and by the Treasury Secretary of the Biden Administration, Janet Yellen. A week ago the former Fed President declared that she was worried about American fiscal sustainability, adding that she was sorry for not having done more. He also declared himself in favor of reducing the deficit especially in the current environment of higher rates.
The United States runs unprecedented deficit levels in times of economic growth, usually seen in recessions or wars. The current account deficit, already highly negative, continues to rise; the strengthening of the dollar will most likely contribute to making it worse.
The concerns of the elite of American finance are bipartisan, but they do not have an impact on the markets. If US finances are not on a sustainable trajectory, then we would expect higher interest rates and a weakening of the currency. However, this does not happen and the dollar rises. In part it is possible that this happens because others are “worse off”. Europe has much lower deficits, but it must reinvent its model in the midst of an energy and geopolitical crisis that involves it much more directly than its ally. However, the dollar is the reserve currency and global savings flow towards a haven that has so far guaranteed protection from currency devaluation and inflation. If inflation falls or does not rise, “everything is fine” and the markets can continue to ignore the problems of American finances. The incentives for the Chinese government's production system are deflationary and help America; however, this applies in the absence of duties.
However, anything that can shift this balance is destabilizing for the markets. Duties are inflationary, the reduction of incoming migratory flows too, and the same goes for tax cuts. This explains the attention that investors reserve for these issues. The more rates rise, the more they absorb the public budget, fueling a vicious circle. It is unclear how markets might react in a higher inflation scenario. The alternative is for the Trump Administration to launch a deficit reduction program. In this case the fears would be about growth because cutting public employees, always possible in America, or reducing very expensive plans such as the forgiveness of study debts impact consumption. A trade agreement with China could contribute to the calm of the markets, but at the moment it is too early to draw conclusions. The abandonment of any ambition for a European-style energy transition, even if this is bipartisan, helps America to control its financial problems and prices.
These days, therefore, the first signs of a fundamental issue are appearing that will accompany us for many months.
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