President Trump will soon own the same economic problems they talked about in the campaign, the first amongst them is the debt.
US debt is now growing at twice the pace of GDP, which in itself is a robust pace.
Every president from WWII to 2008 had talked about resolving the debt issue. Non accomplished this feat for the exception of President Clinton and Speaker Gingrich did from 1996 to 2000 when “the Era of Big Government is [was] over.” The economy grew at a 4% rate for that period, taxes were cut and the government had annual surpluses
The CPI is released tomorrow. The bond market is suggesting that inflation is not dead as yields are up about 60 bps since September, not a vote of confidence.
In 2019 federal spending was under $5 trillion. COVID came along and massive stimulus ensued. The issue at hand is that spending never came back to trend. The latest CBO estimate suggests the FY25 deficit is about $1.9 trillion.
To actually reduce the debt, the country first must stop digging its hole deeper, defined as increasing revenue and or reducing spending by around $2 trillion a year.
The CBO indicates the country is spending $3 trillion more than it did five years ago, literally a 75% increase. Inflation in that same period totaled 23%.
The problem is not on the revenues side. The Treasury Department states that revenues are up $1 trillion, over 30% since the 2017 tax cuts and are now over 20% of GDP,
One cannot raise taxes enough to make up the $2 trillion difference. Studies indicate that even if the government taxes 100% of income on the top 50%, it still does not get one there.
Deficit spending, especially at current levels, is inflationary….too much money chasing to few goods, fearing higher prices tomorrow.
Is the current rise in long-term rates a signal that bond vigilantes may not be dead?
The other day the WSJ indicated that since January 2021 employment in the federal government rose by 120,800. Washington added as many workers in the last two years as it did during the prior 13 years.
Will federal [and state/local] workforce be subject to the laws of economics and be the first target of the Administration? Since workers are the largest cost of production, will any government job that can be automated be automated via AI, just like in the real world?
Wining the election was easy. Now comes the hard part…governing and addressing an issue that many believe is electoral suicide…spending.
Commenting on yesterday’s market activity, the bond market was closed for Veterans Day. Equities were quietly mixed. Commenting further about the Treasury market, considerable attention has been focused that Trump’s policies will increase inflationary pressure.
An argument can be made that investors believe the opposite. According to Bloomberg, “a cohort of ETF traders are piling into a high-octane Treasury bet be that interest rates have well and truly peaked…a record $625 million has poured into TMF or the 3X 20-year Treasury Bull ETF.”
Bloomberg also writes that TLT [20 year plus Treasury ETF] had a $1.4 billion infusion last week, following the prior week’s inflow of $1.6 billion.
Last night the foreign markets were down. London was down 0.98%, Paris down 1.31% and Frankfurt down 0.96%. China was down 1.39%, Japan down 0.40% and Hang Seng down 2.84%.
Futures are flat. Questions are now being raised about valuations. TSLA has surged about 65% or about $400 billion since October 23. Is this sustainable or realistic? The 10-year is off 15/32 to yield 4.37%.
