US equities are being driven by purely domestic investment flows — rejoicing over Trump’s MAGA policies is understandable. But it ignores an enormous, dangerous elephant in the room: debt!
History is littered with well-meaning attempts to correct an accumulation of past economic errors. The script goes like this. Common sense tells us we are heading for a crisis, unless there’s a change in economic and political philosophy. For years, we have been talking about the need for a great policy reset. There are two paths to follow: either try force the pace on change to prevent an obvious crisis which damages everyone, or to take the view that fundamental political reform can only occur after current policies have completely failed.
Essentially, Trump is a patriot trying to steer the US economy back from the brink. But he is an isolationist in a commercially integrated world, and he relies on foreigners to fund his policies. We have to look at Trumpenomics from their point of view. How do they read consumer price inflation, in the wake of extra trade tariffs? How do they read the stimulus of income and corporate tax cuts? How is it all going to be paid for?
The answer to these questions is being revealed in the chart below:
There are early signs that this bond yield is moving higher to challenge the 5% level. And it seems unlikely to stop there.
It is dawning on bond markets that Trump’s plans can only be funded at higher interest rates and bond yields, and that’s before we consider second order consequences. There is little doubt that his policy clone of the Smoot-Hawley Tariff Act of 1930 will plunge the global economy into recession — or worse. On this basis alone, Trump’s assumption that his proposed tariffs will pay for income and corporation tax cuts should be dismissed. Furthermore, a global recession will drive the US into recession/depression as well. Remember Smoot-Hawley, and don’t ignore the real prospect of retaliatory tariffs by other nations.
Trump’s autarkic economic policies will hasten the collapse of global supply chains, which is already their direction of travel. They will lead to the end of free trade. They will probably be only Round One in a new tariff war. While Federal budgets will face escalating welfare commitments, revenues will fall far short of expectations — the deficit is set to soar.
Far from avoiding a Bidenomics socialist calamity, Trumpenomics will bring forward its own crisis.
This is how foreigners tend to see the consequences of Trump’s election. And it couldn’t come at a worse time, with all G7 nations bar possibly Germany in their own debt crises. And even Germany depends for its currency in common with its indebted neighbours. Furthermore, with half the world trying to distance itself from the dollar, the value of US Government debt is demonstrably far too high. Foreigners are not going to fund it anything like these yields.
It is a plain fact that the US Government is already in a debt trap, whereby its debt obligations are growing at a far faster pace than nominal GDP, which represents its ability to cover its debt. Britain faced this problem in 1975—1976, when the IMF was called in to take economic policy out of the hands of its government in the wake of a sterling crisis. Gilt yields soared to over 15%. There is no one able to rescue the US from its debt crisis — the IMF is its subsidiary organisation and it would be a stretch of imagination to expect a child to rescue its parent.
Sooner or later, the current euphoria over Trump and his economic policies will give way to reality. Reality will be reflected in a prospective collapse of US Government finances because foreigners will not only refuse to fund its soaring debt, but will increasingly sell fiat dollars for gold, which is real money without counterparty risk.
Increasingly, foreign central banks and government wealth funds are already reducing their dollars and dependent fiat currencies, accumulating gold. They cannot do it fast enough. It is only a matter of very short time before the wider world understands what is happening: credit is going down, because it’s the debt stupid!
‘…There is no one able to rescue the US from its debt crisis …’. The only remedies are to reduce the size and scope of the Federal government including pensions, welfare, foreign aid, medical subsidies and so on. That will have to come from the DOGE and be supported by the Congress, the latter is likely to baulk at cutting pork.
Perhaps following Mr Milei’s example in Argentina would just about allow the USA to survive, but over a century of economic error can’t be put right in 4 years, even if that is a start.