President Trump is not a man to be trifled with. He has declared a trade war on America’s two important trading partners, signatories to the trade agreement he negotiated to replace Nafta. It seems that when they responded to his threats by doing more to close their borders, they did not satisfy him enough, unless he is looking for a headline to make Americans forget his disastrous attempt to blame the horrible Washington air crash on Biden’s hiring policies.
Trump Needs Cash To Offset Tax Cuts
Or unless he needs the revenue from tariffs on Canada and Mexico to make up for some of the revenue to be lost from the extension of the 2017 tax cut, and for removing taxes on tips, overtime pay and pensions. Tax rates are to be lowered from 21 per cent to 15 per cent on corporations that build facilities in America. Princeton economist Alan Blinder, a former Fed vice chairman and no Trump fan, reckons that Trump’s “income-tax cuts should spur slightly faster growth, perhaps roughly offsetting the drag from higher tariffs.” Add that “tariffs do not have a significant or persistent effect on inflation”, as Fed governor Christopher Waller puts it. As Americans who have incorporated Aussieisms into the language might put it, “no worries”.
The Administration Ups Its Order For Red Ink
Now worry. We are dealing with a President with a long history in the private sector of near-ruinous excessive borrowing, and this weekend with a proved history of fire, ready, aim. During his first stay in the Oval Office, he added some $8 trillion to the national debt. Old IOUs paying 2 per cent interest are now coming due and being replaced by money borrowed at double that rate. Treasury Secretary Scott Bessent would like to reduce the deficit, now running at close to 7 per cent of GDP, to 3 per cent, but is unlikely to be able to hit that target and may even prove unable to prevent the deficit from increasing, even relative to GDP, its growth slowed by none other than the bond market vigilantes.
This group, which Trump has no ability to bully, has saddled up and loaded their saddle bags with government IOUs. The vigilantes are prepared to sell and sell if deficits persist, driving down the prices of these government bonds, raising interest rates not only on government borrowings but on mortgages, already double pre-pandemic levels, credit cards and business loans.
The Fed Copes With The Prospect Of More Deficits
The Federal Reserve Board monetary policy committee knows we are in for a period of loose fiscal policy, which may be an unstated reason that it has decided to leave its benchmark interest rate unchanged, rather than continue cutting rates. Trump, who earlier had demanded that interest rates “drop immediately”, posted on Truth Social, “If the Fed had spent less time on DEI, on gender ideology, ‘green’ energy and fake climate change, Inflation would never have been a problem. Instead, we suffered the worst Inflation in the History of our Country!” Fed chairman Powell says he has not spoken with the President.
The Economic Outlook
Informed guesses as to the contours of the American economy of the future are now possible, although given Trump’s volatility, subject always to the warning label, “at the time of this writing.” When Trump departs the scene in four years, quietly we hope, deficits will be higher than when he returned to the Oval Office. So will interest rates. So will the inflation rate.
Bessent will find his plan to reduce deficits to 3 per cent more a quixotic impossible dream than an attainable goal. The Fed will find itself debating whether to leave rates unchanged or raise them, as it struggles to reach its goal of holding the inflation rate to 2 per cent. Meanwhile, deficits will roll on, adding an estimated $20 trillion to the $36.4 trillion national debt by the time Vance, who favours driving down the value of the dollar, its inflationary effect notwithstanding, serves out what would probably prove to be his only term.
Enter Musk But Not To A White House Office
It is, of course, possible that Elon Musk will squeeze the odd trillion out of spending by persuading congress to loosen the stranglehold of regulations besetting entrepreneurs, eager to dip into investors’ cash hoards now that Trump has released their animal spirits. But others have broken their picks on the US debt mountain. And Musk might have passed the zenith of his influence. Trump’s chief of staff denied him office space in the White House West Wing, and his Department of Government Efficiency (Doge) has been incorporated into the US Digital Service (USDS), which reports annually to congress. Mars beckons.
There is a better chance that the economy’s productivity, the output of goods and services it can produce per unit of labor and capital input, will accelerate. That would lower the cost of producing a majority of goods and services. But even if AI develops to justify the trillions being hurled at it, there are limits. The late economist William Baumol, an expert on analyzing productivity, once wrote that you cannot increase the efficiency of a quartet by firing one musician.
The End Is In Sight But Not Nigh
Perhaps the best news is that there is time for America’s politicians to begin a serious assault on the deficit. Goldman Sachs’ Investment Strategy Group, drawing on a wide range of data and models, concluded, “The level of debt-to-GDP is still comfortably below estimates of the level at which it would become truly unsustainable.” That would be between the 166 and 188 per cent of GDP it might reach in 2050, compared with the current level of around 123 per cent.
It is important that current officeholders not learn of this computation, as most lack interest in any emergency that might not emerge until after their time in power.