Long-dated Treasury bonds continued to sell off, sending yields to the highest level in almost six months. The cause of the selloff was continued economic strength that is defying conventional wisdom. The narrative is also rising that Trump’s proposals will increase the deficit via higher tariffs, lower tax collection and reduced regulations.
The two-month slump has all but wiped out this year’s Treasury gains.
However, currently the market is still projecting about a 50% chance that the overnight rate will be reduced in December.
The President elect has proposed many aggressive ideas to curb the size of government, but the simple fact of the matter is that change is hard and everything that Trump has proposed will face powerful opposing forces.
Anyone who thinks they know what is coming next year should take a big dose of caution. It will be hard to fix the debt problem. It is not just the debt; it is the attitudes and structures that let it grow and are part of the problem themselves.
An argument can be made the current Administration experimented with Modern Monetary Theory (MMT), or the economic philosophy that a country borrow without impunity if the debt is issued in its own currency.
Today it is not just Federal Reserve policy as a primary cause of inflation, it is now also the deficit. If the President is going to really reduce inflation, he will need to do more than cut spending on the margins.
In an attempt to place today into perspective, if the President is to start reducing the debt, the first action to take is to stop borrowing more than it earns. Annual budget deficits are around $2 trillion from a $6.5 trillion budget. To balance the annual budget, either spending cuts and or revenue increases must occur.
There is a gazillion of competing constituencies that will want to keep their benefits dogmatically stating to cut the other guys funding.
Mr. Trump has a goal of eliminating 10 regulations for every new one. According to the WSJ, 217,656 rules have been issued since the Federal Register first began itemizing them in 1976, with 89,368 pages added last year.
As noted several times and as per the WSJ, the federal headcount had ballooned 120,800 during the Biden Administration, more than the amount that were added in the prior thirteen plus years. Has society received any benefit? It must be noted, however, civil service and union projections make it hard to fire workers.
The last time the government was seriously considering reducing the deficit was the Simpson- Bowles Commission in 2010. It began with high hopes and ended up going nowhere.
What will happen today?
Last night the foreign markets were mixed. London was down 0.34%, Paris down 1.15% and Frankfurt down 1.12%. China was up 0.67%, Japan up 0.51% and Hang Seng up 0.44%.
Futures are down about 0.25% on escalating Ukrainian/Russian tensions. The 10-year is up 12/32 to yield 4.37%.
