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Your guide to what the 2024 US elections mean for Washington and the world
It’s Groundhog Day in Washington. In recent years, brinkmanship has flared up repeatedly every time Congress has tried to raise the stakes. debt ceiling – usually because right-wing voices have threatened a government shutdown unless their demands are met.
Here we go again. This week, Mike Johnson, the Republican speaker of the House of Representatives, attempted to pass an interim debt ceiling deal with a budget of $6.75 trillion, but was derailed by incoming President Donald Trump and his supporters, including Elon Musk and Vivek Ramaswamy.
“This bill should not pass,” Musk fumed. declared in X, prompting last-minute negotiations amid threats of government shutdowns.
Investors should keep three key points in mind. The first is that Trump’s landslide victory last month means that the critical political fight in 2025 will not be between Democrats and Republicans, but within the Republican Party itself.
Second, this battle between Republicans will be ugly. Men like Musk and Ramaswamy want to make their voices heard by attacking Republican congressmen like the hapless Johnson.
Third, fiscal policy will be one of the first sources of tension in this fight, especially given this week’s crisis. jump in bond yields following the reduction of the Federal Reserve’s projections for interest rate cuts in 2025.
Washington is a focus of this fight. But so is Mar-a-Lago, the seat of Trump’s political court, where his quasi-courtiers now express distinctly different views on how to address America’s current $36 trillion in national debt.
Some see little need to panic about this debt buildup, arguing that the dollar’s reserve currency status will force global investors to continue gobbling up Treasury bonds. Trump often seems to sit in this camp. In fact, this week he demanded that the debt ceiling be removed.
However, others around him, like Steve Bannon, former White House chief strategist, are more alarmed. That’s because, as i have often noticedThe Treasury must refinance about $9 trillion in bonds next year at a time when inflationary pressures are rising. Trump has pledged to make policy changes that could add many trillions more to the debt, while threatening to weaken the dollar and undermine the independence of the Federal Reserve.
This is a very unpleasant cocktail, as Scott Bessent, his candidate for Treasury secretary, understands very well. Worse, potentially volatile hedge funds have a growing role in the Treasury market, and a potentially hostile China also has influence. Just look at Beijing’s recent decision to affair a $2 billion sovereign bond in Saudi Arabia. This issue was insignificant in size, but it was a symbolic poke in the eye for Washington, especially since the yield was similar to that of US bonds.
The second dividing line at Mar-a-Lago is taxes. Trump has repeatedly promised to make his Tax Cuts and Jobs Act of 2017with its enormous exemptions from taxes on income and wealth, permanent. that would be create a bonanza for wealthy Americans, including the dozen or so billionaires on his core team.
He also wants cut corporate taxes from 21 percent to 15 percent for entities in the United States, end taxes on social security payments, tips and overtime and expand child care credits.
I’m told that Bessent and others have told Trump that the resulting fiscal hole could be plugged with faster growth, tariff revenues, and a $2 trillion government spending cut promised by Musk. There are also calls to increase taxes on wealthy foundations.
However, it will be nearly impossible to significantly cut federal spending without cutting spending on Social Security and defense, something Trump appears reluctant to do. And the size of the tariff revenue is unclear. Trump may prefer to use tariffs more as a geopolitical threat than anything else.
Furthermore, growth alone is unlikely to plug the fiscal hole. And debt service costs could be higher than expected given signs from the Federal Reserve that it is slowing the pace of rate cuts.
This leaves Bannon calling for more radical measures, including tax increases. “You will have to increase taxes on the rich. . . [to] control out-of-control debt,” he told a republican dinner this week. Yes, really.
The reason? Bannon believes that recent murder The image of a health care executive shows that there is now so much anger against elites that it would be political suicide for Trump to squeeze out the middle class and favor the rich. He believes it would be equally dangerous to ignore bond markets.
Therefore, he says, “neoliberal neoconservatives are going to have to pay for what happened,” which means that “populist nationalists” must prevail over “orthodox Republicans.”
Bannon’s argument about popular anger is spot on. But Trump’s problem is that tax increases for the rich will horrify “orthodox” Republicans in Congress. They would also anger many of the wealthy businessmen who backed his presidential bid.
So the looming $36 trillion question is not simply whether plutocrats or populists will win this fight; It’s also whether bond markets will remain calm as this plays out.
In other words, this week’s debt ceiling skirmish could simply be a prelude to bigger battles in 2025. Expect things to get ugly.