A New 'Golden Age' for America?

in July 2020, the vigilantes woke up. Inflation and interest rates soared. And investors became keenly aware that they could lose money in Treasury bonds as well as make it.

Monday, November 11^th, 2024 

Bill Bonner, writing today from Baltimore, Maryland 

“I will not rest until we have delivered the strong, safe and prosperous America that our children deserve and that you deserve,” said Donald Trump in his victory speech. “This will truly be the golden age of America. That's what we have to have. This is a magnificent victory for the American people that will allow us to make America great again." 

—President elect Donald Trump

Big man. Big promise. Can he make good on it?  

Nobody knows the future. Certainly not us! Instead, we bet on the patterns of history — in politics and markets — and hope for the best. Those patterns suggest that The Donald will face long odds.  

Fairly soon, the Trump Team will be confronted by a credit crisis.  

Budget deficits are expected to run about $2 trillion per year over the next four years. Interest on the debt is already running at $1 trillion per year. Plus, the federal government will have to refinance about $4 trillion per year in existing debt, every year. 

Elon Musk, genius of universal renown, can do the math. But if he thinks he’s going to cut $2 trillion of deficit spending by eliminating ‘waste’ from federal spending he has a staggering lack of cynicalism. 

No chance.  

Donald Trump has already pledged to spare the essential parts of the Welfare/Warfare program (the Pentagon, Social Security and Medicare) — leaving only about 18% of the budget exposed to the knife. Even if you cut all of it, you’d still have a deficit of nearly $1 trillion. 

In addition, Trump proposes to eliminate federal taxes on Social Security recipients, veterans, first responders, people who earn tips, and federal employees’ overtime pay. Together, these should widen the federal budget deficit by about $11.5 trillion in revenue loss over the next 10 years — or about a third of all revenue. 

This lost revenue Trump plans to replace by taxing imports... with a 20% across the board tax and a 60% tax on imports from China.  

We interrupt to point out that a tax on imports is really a tax on consumption. So, consumers would feel the pain right away... and know the cause of it, unlike the Fed’s money-printing inflation, whose effects take years to be felt.

This would also discourage people from spending money and encourage them to save... thereby potentially lowering real interest rates, while increasing savings. Over the long run, implemented properly, these changes could help make a stronger economy. 

But Mr. Trump and his entourage can’t afford to look into the distant future. They’ve got a four-year term. And any changes they make will  be revised, corrupted and perverted by Washington’s slimy swamp critters (working hard to get exceptions, exemptions, and special treatments).  

And the last time the US implemented a sweeping tariff program was, not coincidentally, at the beginning of the Great Depression, not at the end of it. Reed Smoot and Willis Hawley should have never been allowed anywhere near Congress. But their tariff proposal became law in 1930. The foreigners responded with tariffs of their own. And soon world trade was reduced by some 67%... and helped make the aforementioned depression so great. 

Putting the chaos and unexpected consequences aside, however... the tariffs simply wouldn’t raise enough money. At present levels, they would generate about $9 trillion over the next 10 years — about $2.5 trillion short of the amount lost to the tax cuts. That loss would grow as the flood of imports turned into a trickle. And it would be added to the national debt, along with the already programmed increases that are expected to take the debt to over $50 trillion by 2034. 

But the one big difference between today and Trump’s first term is that additional debt now costs additional money. Because the ‘bond vigilantes’ are back in the saddle. In 2016, bond yields had been falling for 36 years. The feds could borrow as much as they wanted... and their interest payments would generally go down, not up. Even as late as 2016-2020, Team Trump spent trillions... borrowed trillions... and ‘printed’ trillions as interest rates continued to fall.  

But in July 2020, the vigilantes woke up. Inflation and interest rates soared. And investors became keenly aware that they could lose money in Treasury bonds as well as make it. 

And now, in anticipation of Mr. Trump’s second act, investors are already demanding more interest to compensate for the inflation they see coming. These higher rates will raise the cost of financing the debt... slow the economy... and goad the administration and the Fed to take action. 

That is when the Golden Age gets badly tarnished.  

Stay tuned...  

Regards, 

Bill Bonner