Analysts of every persuasion are predicting a Great Reset due to the world’s enormous debt levels, the imbalances in international trade and the extreme skew in wealth held by the top 5% versus the bottom 95% of people. The inevitability of a new monetary regime is close to 100% because the Global South, led by China, has begun trading among themselves over their own international payments systems using digital currencies backed by gold domiciled locally in secure vault depositories located in various countries.
Because the US Dollar is the world reserve currency, we have been able to borrow at favorable interest rates for eighty years and amassed a $37 Trillion debt which now seems to have reached the crossover point—the juncture where interest is compounding more rapidly than the growth of the economy. In economic terms, our debt is accumulating faster than the growth our GDP (Gross Domestic Product). This is a serious problem that threatens the long-term power & influence of the US.
The Trump Administration’s solution is to “Win” by incenting business growth with tax cuts and lax government regulations, while tariffing trading partners—friends and foes alike. While such targeted, anticompetitive policies undermine relationships and inclinations to work together to solve problems, the Administration’s bet is prioritizing US business growth while forcing interest rates lower will reverse Dollar degradation—a balancing act that must be expertly timed and managed because lower interest rates with rising debt levels are ordinarily inversely correlated. GDP growth must exceed Debt growth which has ranged between 4.4% to 6.9% since 2021 and most recently YTD debt growth is 4.5% according to both the US Treasury and Joint Economic Committee data. Current GDP is estimated at 3.0% (GDPNow.com). The challenge is that debt accrual is continuous while rate of economic growth is subject to business cycles.
Implicit in the Administration’s strategy is the promise of on-going consumer spending—after all that’s the “lure” to pay the tariffs or avoid them by building product here. ‘Build it Here’ creates jobs which supports this policy except the US has higher labor and raw materials costs in addition to regulatory, environmental, and legal (Tort) hurdles which increase Cost of Goods Sold. Though unstated but a likely part of the plan, may be Financial Repression, letting price inflation hover just above fixed income yields to deflate our debt over time.
Before year end, the US must refinance $6.4 trillion of its maturing debt. This issuance will create market turbulence, but absent some Black Swan event, and with interest rate cuts on the way, we expect improved earnings in the other non-Mega-Tech companies that have lagged in performance. Lower interest rates stimulate consumer spending and reduces debt service, which is beneficial. The unknown factors are enough buyers for our increasing debt and what happens to long-term interest rates. Treasury is already at work lowering bank reserve requirements and with the turmoil in Europe 3.0% - 3.5% yields on US 10-Year Treasuries will attract sufficient buyers. If not, we can be sure QE by some other name will get it done.
Looking back to 1971 when the US went off the Gold Standard, Nixon opened China to make US goods ushering in a long-term deflationary epoch. AI may be this same force for decades going forward. And although we seem to be a less civil society at present and partisan politics are exacerbating division, we all must remember money begets power & influence, and the Trump Administration certainly understands they must protect American wealth as it’s the collateral for our debt. Let’s be thankful for that peace of mind.