There is beauty even in winter. Stocks are lifting and bond yields are settling as investors relax in the optimism of America’s new golden horizon. Trump is here, saved by God to bring on America’s golden age, the restored president claims. Everything is going to be swell again.
Perhaps, but I am more inclined to go along with Bill Bonner on this biting winter morning. Though there were reasons for some economic optimism in Trump’s speech, the course for America was already laid in by all the other presidents who shared the platform with him, including Trump in his previous administration. Mountains of debt on the near horizon largely obscure the low-lying sun, and years of movement across the sky say America’s sun is setting, not rising.
If Trump is right about why God saved him, perhaps a miracle is in store for the US; but that is what it will take; and, with the whole world strolling head-on into apocalypse through the pages of 1984 over the past few years, it is hard to believe the zeitgeist—the spirit of this age—is divine providence toward American prosperity, after years of it looking more like a crumbling yellow-brick road to ruin. Why would God suddenly want to bless America? Did America change for the better?
Like Bonner, I will freely admit what Trump did not—that I don’t know the mind of God or his plans for America. However, the path of America looked a lot more like Babylon than like a shining city set on a hill, and it was looking all along like God was going to let America swallow itself up in its own ruin and judgment. So, it is unclear to me why the Almighty suddenly changed course to put Trump in charge to save us all from ourselves. But, again, God has not revealed his mind to me on these matters, and the Lord works in mysterious ways.
Perhaps all that has changed now, but Bonner’s view, toward which I will say I am “resiliently persuaded” (as in my mind can be changed toward something more optimistic if I see it starting to actually happen, unlike the previous Trump years where we saw none of the swamp-cleansing he promised take place but saw Trump, himself, get swallowed into the cattails) is that the path is so firmly established now that, even if all Trump’s plans go as expected, it is highly unlikely the US can be saved from the debt doom loop it has created for itself. How Trump’s economic plans will reduce the deficit and start to turn the debt around remain obscured beyond the purple mountains for now.
As Bonner says, the math just doesn’t work. (Hence, the need for a divine miracle.)
Last year’s deficit ran over $2 trillion, bringing the total since 2020 to over $11 trillion. The largest contribution to that total came from Mr. Trump himself, whose 2020 deficit bulged over $3.3 trillion.
So far this year, the deficit is running at a nearly $3 trillion annual rate (sure to slow down when tax revenue picks up in April.)
There is some loose talk in Washington about how higher growth — from tax cuts and ‘drill, baby, drill’ energy policies — will close some of the deficit gap. Tax cuts — at the margin — can increase GDP. But the math doesn’t work. If the tax take is 20% of GDP, the latter has to rise by 5 times as much to bring in the same revenue. Cut taxes by $1 trillion, for example, and GDP would have to increase by $5 trillion to recoup the lost income….
Unless we missed it, at yesterday’s inauguration there was no mention of the fiscal crisis now bearing down on the US. It will come like a thief in the night… unbidden, unexpected, and unwelcome…but completely foreseeable.
Simply laid out, the amount of economic boost the US gets for each dollar in tax cuts has fallen dramatically at the margin as we made massive tax cuts already. It’s the Law of Diminishing returns.
To spell that out, the cut/benefit path for the economy (GDP) is a declining curve that moves toward flat, and we moved so far along the tapering end of that curve with the first Trump cuts that the return for each additional cut is now incremental. That is speaking of the benefit to GDP. In terms of the benefit to government revenue, it is a bell curve. When taxes were high, as in the pre-Reagan years every cut produced more government revenue. As we worked toward lower taxes as our starting point for the next cut, each cut produced a less dramatic revenue benefit. Now we are on the declining side of that curve where every cut produces less revenue because it cannot generate enough of a GDP boost to offset itself due to the math Bonner lays out.
Glorious dawn or withering empire?
A large enough rise in GDP to offset the tax cuts that helped stimulate it, indeed, doesn’t seem mathematically possible in an environment that Peter Schiff today describes as “stagflation,” as I also have been claiming for some time.
There will be some successes during the Trump presidency. Unfortunately, economically, there’s going to be a lot of failures. And it’s not necessarily because of what Trump’s going to do. It’s kind of preordained. It’s baked into the cake here.
If you remember, commodity prices really started to boom in the second half of 2020. I was talking about that on this podcast constantly, how we were going to have a big move up in inflation just looking at commodity prices. That’s when the Fed was not worried about it at all. …Look at commodity prices. They’re a leading indicator. And the big increase that we have in commodity prices in 2024, that’s not going to show up in the CPI until 2025 this year. So CPI was up 2.9% last year. Now we have soaring commodity prices. So what’s the odds that the CPI is going to be up less in 2025 than it was in 2024 before we had this big run up in commodity prices?
Inflation remains the prevailing force I see. Inflation will continue, even with the falling price of oil that has happened in the last 24 hours due to Trump saying “drill, Baby, drill.” Even deregulation of industries, which will reduce costs, will take a little time to work out and work through. Meanwhile, things like rapid deportations of cheap illegal labor and tariffs threatened for next month are nearly certain to raise business costs. It is hard to see how such things would lower costs. (Less cheap labor equals lower labor costs???) Those changes will likely offset the benefits of cheaper energy while deregulation takes longer to work through industry. Which force prevails in net for this year is hard to say. Only time will tell.
Continuing inflation during the next few months means the Fed is going to remain held back from making rate cuts; and that means the stock and bond market optimism today may be short-lived glee. Sure, stocks will continue to froth upward if no bad news interrupts the market’s bubbling glory, but that means the market needs to continue to get benign inflation reports. One bad report could blow the foam off the top. With the back-pressure already baked into inflation, I still believe we will be seeing additional rising inflation reports that will temper the enthusiasm of a market already priced far above economic perfection.
With “stagflation,” there is not just the withering flames of inflation to worry about but the stagnation of the economy:
You know, while everybody was celebrating the fake good news about inflation, nobody noticed the Empire State Manufacturing Index, which was another disaster. They were looking for a positive number. They didn’t get one. They were looking for plus 1. They got minus 12.6. I think that’s about a seven-month low in the Empire State Manufacturing Index. Look, as far as I’m concerned, all the data confirms stagflation.
Indeed.
What I also noted in the inauguration was that I never saw more billionaires in the choice seats. Some will say, “Great, those are the people we need to save the nation and help all the rest of us get rich,” but I’m not aware of the average person working for Jeff Bezos getting rich or even better off (unless they strike hard to shave off a little for themselves). That’s not how it works. The billionaires work for their own benefit. Others exist to serve them as drones. We’ve never seen the wealth meaningfully trickle down. I don’t know why billionaire row on platform one will change that.
Therefore, what I see is a new administration run by billionaires, and that doesn’t look like change. It just looks like same old thing where government serves big-moneyed interests; only now they brazenly don’t even try to hide it.
Our golden horizon
Yes, Trump and God could turn the economy around and disarm the US debt bomb that is nearing critical reaction. God without Trump could turn that around, but God hasn’t told me his plan, as Trump indicated God has done for him. So, if I look at what I actually have available to go by—the trajectory of recent history even under Trump’s last administration—it looks more like stormy days of judgment ahead than the dawning Age of Aquarius. At the very best, it looks more like a golden sunset than a shimmering sunrise into a new millennium of hope.
So, I’ll take a wait-and-see approach for God to reveal if he is going to use the Golden Gollum of Greatness, as James Howard Kunstler once labelled Trump, to resurrect the United States with a new and glorious body politic into the greatest America any of us have ever seen.
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