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Your guide to what the 2024 US election means for Washington and the world
It's groundhog day in Washington. In recent years, brinkmanship has appeared repeatedly when Congress tries to raise debt ceiling – Usually because good voices have threatened to shut down the government unless their demands are met.
Here we go again. This week Mike Johnson, the Republican Speaker of the House of Representatives, tried to pass the stop-gap of the debt and the 6.75tn budget – but it was destroyed by the incoming president Donald Trump and his supporters, including Elon Musk and Vivek Ramaswamy.
“This bill should not pass,” Musk fumed announced on X, sparks final debate, amid threats of government shutdown.
Investors should be aware of three main points. The first is that last month's clean victory by Trump means that the most important political fight in 2025 will not be across the street, Democrats against Republicans, but within the Republican party itself.
Second, this Republican-to-Republican battle is going to be ugly. Men like Musk and Ramaswamy want to make their voices heard by attacking congressional Republicans like Johnson's unhinged.
Third, monetary policy will be a priority in this fight – especially given this week jump in bond yields following the Federal Reserve's downgrading of its forecast to cut interest rates by 2025.
Washington is one focus of this fight. But so is Mar-a-Lago, the seat of Trump's political court, where his representatives are now expressing different opinions on how to deal with America's 36tn national debt.
Others see little need to panic about this debt pile, arguing that the dollar's reserve currency will force global investors to keep piling up Treasury bonds. Trump always seems to be in this camp. Indeed, this week he demanded that the case be expunged.
Yet others around him, such as Steve Bannon, a former White House strategist, are more fearful. Because, as I have often remarkedThe Treasury must pay about $9tn of bonds next year at a time when inflationary pressures are growing. Trump has promised to make policy changes that could add trillions to the debt, while also threatening to weaken the dollar and undermine the Fed's independence.
This is a very nasty cocktail, as Scott Bessent, his nominee for Treasury secretary, understands all too well. Worse, runaway hedge funds have a growing role in the Treasury market, and potentially hostile China is also strong. Just look at Beijing's recent decision take out $2 billion in sovereign bonds in Saudi Arabia. This release was piddling in size, but it became symbolic for Washington – not least because the yield was similar to that of US bonds.
The second dividing line at Mar-a-Lago is over taxes. Trump has repeatedly promised to do his own thing 2017 Tax Cuts and Jobs Actand its large income and property tax payments, which are fixed. That would be it make a bonanza to the wealthiest Americans, including the twelve millionaires in his elite group.
He wants too reduce corporate taxes from 21 to 15 percent in institutions in the United States, taxes ending social security payments, tips and overtime and expanding child care credits.
I was told that Bessent and others told Trump that the resulting financial hole can be drawn with rapid growth, tax revenue and 2tn of government spending decided by Musk. There are also calls for tax increases on the wealthy.
However, it will be very difficult to reduce federal spending without reducing spending on social security and defense, which Trump seems reluctant to do. And the extent of any income tax is unclear. Trump may choose to use tariffs more as a geopolitical threat than anything else.
Moreover, growth alone is unlikely to close the financial gap. And debt servicing costs could be higher than expected given the Fed's signals that it is slowing the pace of rate cuts.
This leaves Bannon calling for more measures, including tax increases. “You're going to have to raise taxes on the rich. . . (to) hold an uncontrollable debt,” he told The Republic dinner this week. Yes, indeed.
The reason? Bannon believes that current execution The health care executive points out that there is now so much anger against the elite that it would be politically suicidal for Trump to squeeze the middle class while favoring the rich. He thinks it would be equally dangerous to ignore the bond markets.
So, he says, “the neoliberal neocons will have to pay for what happened” – which means that the “nationalists” must control the “Republican Orthodox people”.
Bannon's argument about popular anger is spot on. But Trump's problem is that raising taxes on the rich will scare “regular” Republicans in Congress. They will upset many of the wealthy businessmen who are backing his presidential bid.
So the question for the next 36tn is not whether the plutocrats or the populists will win this fight; it was that the bond markets would remain calm while it played out.
In other words, this week's debt crisis could be just the beginning of big battles in 2025. Expect it to be bad.