A Tidal Wave of Debt

Bill Bonner, writing today from Baltimore, Maryland

When Mr. Trump spoke of a Golden Age in his victory speech, we immediately thought of the Golden Age of Greece… when Pericles delivered his famous funeral oration. Athens was at war, and many people thought they should give it up, sue for peace… and get back to work. Not Pericles. He saw an opportunity to Make Athens Great Again.

Pericles was a ‘war hawk’… and no slouch as an orator. The Athenians rallied around him, put on their panoplies — sword and shield — and the war cries resounded through the city as the menfolk, young and old, marched out to combat.

Uh oh… the result was a crushing defeat in which the Athenian empire was destroyed, the city itself conquered, occupied by foreign troops… and its population sold into slavery.

Not a good example for the uplifting spirit we’re looking for today…

So, we turn back to Donald J. Trump.

And one of our Dearest Readers writes:

Yes, there’s an entire mountain range of debt, but what if Trump’s policies actually do make things better? What if manufacturing does return to the US in a huge way? (Does America have any choice other than to incentivize it?) What if energy prices do drop 30-50%? What if regulations and federal government employment are meaningfully cut? What if the economy does start growing at 4-6%?

Scott Bessent, BSD on Wall Street, and mentioned as a possibility for Trump’s Secretary of the Treasury, had this to add. In the Wall Street Journal:

The failure of Bidenomics is clear. But Mr. Trump has turned around the economy before, and he is ready to do so again. [Nobel winning economists] may not understand this, but the financial markets have clearly spoken.

And not since Herbert Hoover’s election in 1929 have they shouted out so loudly. Bitcoin traded over $89,000 this morning. The Dow was falling, but still near a record high.

Mr. Bessent at least nods in the direction of the tidal wave of debt soon to wash over the new administration. “Mr. Trump must also address government borrowing,” he says. But he thinks the problem is that it is ‘expensive shorter-term debt’ that must be ‘deftly handled.’

Well… good luck with that! The problem is not the term, but the amount. Mr. Bessent needs to listen to the market more carefully. It’s saying that interest rates will have to go higher to cover it. MarketWatch:

10-year Treasury yield breaks through key resistance levels on way to 5%

Since mid-September, the widely followed yield has risen past one resistance level after another, starting with 4.21% and 4.3%, the latter of which is described as a proverbial line in the sand that has begun to cause problems for the stock market over the past year… The rate has jumped about 80 basis points from its 52-week low of 3.62% reached on Sept. 16.

Already, the feds paid $1.13 trillion in interest on the US debt over the last twelve months. It’s unlikely that that amount will go down — not with rates rising and debt increasing by $3 billion per day.

And now that the markets have got a good look at the approaching tsunami, they may figure that it’s time to head to higher ground. As reported in this space, the feds need to refinance $16 trillion in the next four years. Add to that amount deficits that are expected to come in at $2 trillion per year.

Investors might also recall that The Donald added $8 trillion to US debt during his first term. So, it wouldn’t be hard to imagine a total of nearly $44 trillion by the end of this term, with much of it sporting a 5% yield. That would mean interest payments of over $2 trillion per year. How are the feds going to handle that, investors will want to know? With more printing press money?

To make matters worse, only days after the election, Trump is already bringing in his hawks — war hawks, trade hawks, China hawks. Notably absent, so far, are the budget hawks — people who want to reduce federal deficits by cutting spending or raising taxes.

They are probably absent because they don’t exist. Members of Congress, political hacks, lobbyists and ‘influencers’ of all types earn their money and power by spending the public’s money, not by saving it. And like a Freudian nightmare, in the absence of serious budget cutting, the ‘Golden Age’…turns into the something much less appealing.

More to come…

Bill Bonner, writing today from Baltimore, Maryland

Uh oh… the result was a crushing defeat in which the Athenian empire was destroyed, the city itself conquered, occupied by foreign troops… and its population sold into slavery.

Not a good example for the uplifting spirit we’re looking for today…

So, we turn back to Donald J. Trump.

And one of our Dearest Readers writes:

Yes, there’s an entire mountain range of debt, but what if Trump’s policies actually do make things better? What if manufacturing does return to the US in a huge way? (Does America have any choice other than to incentivize it?) What if energy prices do drop 30-50%? What if regulations and federal government employment are meaningfully cut? What if the economy does start growing at 4-6%?

Scott Bessent, BSD on Wall Street, and mentioned as a possibility for Trump’s Secretary of the Treasury, had this to add. In the Wall Street Journal:

The failure of Bidenomics is clear. But Mr. Trump has turned around the economy before, and he is ready to do so again. [Nobel winning economists] may not understand this, but the financial markets have clearly spoken.

And not since Herbert Hoover’s election in 1929 have they shouted out so loudly. Bitcoin traded over $89,000 this morning. The Dow was falling, but still near a record high.

10-year Treasury yield breaks through key resistance levels on way to 5%

Since mid-September, the widely followed yield has risen past one resistance level after another, starting with 4.21% and 4.3%, the latter of which is described as a proverbial line in the sand that has begun to cause problems for the stock market over the past year… The rate has jumped about 80 basis points from its 52-week low of 3.62% reached on Sept. 16.

More to come…

By then the receipts on my desk had arranged themselves into a sort of chorus. I heard, faintly, another refrain—one from Kentucky. In the first days of the shutdown, Senator Rand Paul stood alone among Republicans and voted against his party’s stopgap, telling interviewers that the numbers “don’t add up” and that he would not sign on to another year that piles $2 trillion onto the debt.

That, I realized, is what the tariff story shares with the broader budget theater: the habit of calling a tax something else, of shifting burdens into the fog and then celebrating the silhouette as victory. Even the vote tally made the point: he was the only Republican “no,” a lonely arithmetic lesson in a crowded room.

Senator Rand Paul, (R. KY), who was the sole Republican to vote against a continuing resolution, seems to care about the actual finances of the government. “I would never vote for a bill that added $2 trillion in national debt,” Paul said in various interviews over the weekend.

The $2 trillion he’s referring to is the lesser of two proposals made by the national parties… and would accrue during this next fiscal year.

Oy.

We liked what Liz Wolfe at Reason wrote on Friday, so we’ll repeat it here: “One of the dirty little secrets of every shutdown is that everything remains mostly fine. Private markets could easily replace many federal functions.”

It’s a strange kind of confidence — one where Wall Street soars while Washington goes dark.

The Liberal Democratic Party victory has sent Japanese stocks soaring, as party President Sanae Takaichi – now set to become Japan’s first female Prime Minister – is a proponent of stimulus spending, and a China hawk. The electoral win is a vote to keep the yen carry trade alive… and well.

The “yen carry trade” is a currency trading strategy. By borrowing Japanese yen at low interest rates and investing in higher-yielding assets, investors have profited from the interest rate differential. Yen carry trades have played a huge role in global liquidity for decades.

Frankly, we’re disappointed — not because of the carry trade but because the crowd got this one so wrong!

Back in the Global Financial Crisis (2008), we recall mass layoffs were driving desperation.

Today, unemployment is relatively low, if climbing.

Affordability is much more of an issue. Food, rent, healthcare, and childcare are all rising faster than wages. Households aren’t jobless; they’re stretched. Job “quits” are at crisis-level lows.

In addition to the top 10% of earners, consumer spending is still strong. Not necessarily because of prosperity, but because households are taking extra shifts, hustling gigs, working late into the night, and using credit cards. The trends hold up demand but hollow out savings.

It’s the quiet form of financial repression. In an era of fiscal dominance, savers see easy returns clipped, workers stretch hours just to stay even, and wealth slips upward into assets while daily life grows harder to afford.

The $2 trillion he’s referring to is the lesser of two proposals made by the national parties… and would accrue during this next fiscal year.

Oy.

It’s a strange kind of confidence — one where Wall Street soars while Washington goes dark.

Frankly, we’re disappointed — not because of the carry trade but because the crowd got this one so wrong!

Back in the Global Financial Crisis (2008), we recall mass layoffs were driving desperation.

Today, unemployment is relatively low, if climbing.