Fiscal dominance is an exponential function. It eventually kills the bond market which kills the monetary system. Ending fiscal dominance triggers debt deflation which kills the monetary system. - Frank De Baere
While Elon & the work of DOGE are stealing the light and sound-bytes, the reality is that Congress still has the power AND the checkbook. Only way to shut that down is, literally, to shut that down!
And while the U.S. House and Senate debate their unbalanced budget bills, if there’s no agreement on ONE, or extension, the US government shuts down March14th 10:07 PM ET.
At the crux of the matter is HOW to afford the extension of the POTUS 45 tax cuts of 2017 that are set to expire this year. DOGE was set up to find the waste and fraud of the enormous black hole that is government spending, but their audits take time and doing something about the results takes time. Shedding government labor & office leases and stopping foreign aid and Medicare/social security fraud is a start, but that only slows the ascent that is our massive fiscal deficit trajectory.
And the House bill that passed this week is not going to help that!
The rhetoric being pushed by Trump, Musk & Bessent is that we WERE to expect deficit reduction as a major driver of getting inflation down.
And yet… approval of this bill puts the US on a collision course to not only a $2.8 trillion increase over the next ten years, but really a $4 trillion increase because that figure didn’t include interest costs! Sum total, we are going in the WRONG DIRECTION!
= 125% of GDP by FY 2034 - compared with 117% UNDER CURRENT LAW.
= 6.8% of GDP deficits - compared with 5.8% UNDER CURRENT LAW.
My call for higher bonds & yen Jan 14th is still in play (lower yields).
US Govt shutdown March 14th will greatly influence this trade.
Given the potential for March 13th start of “large-scale reductions in force” and “Agency Reorganization Plans”, we should expect more labor shedding at the government level very soon, as well as those civilian contractors & budgets tied to those agencies.
Note: “maximally reduce the use of outside consultants and contractors”…
It would not surprise me if many get their notice on March 13th and the government shuts down on the 14th. Yes, we still have Treasury General Account flows helping to serve as ballast for our stock market - as summarized in this video - but the bipolar behavior of slashing government services and jobs while expanding the deficit will serve as a nasty backdrop for bonds & our monetary system.
My three favorite voices on DC: Former Congressman Ron Paul, Sen John Kennedy and Rep Thomas Massie.
Of these I have Massie on X notification alert ;-)
"The GOP Budget Resolution that passed the House this week increases the debt limit from $36 trillion to $40 trillion, and spends enough $ to increase in the debt from $36 trillion to $56 trillion over the next 10 years. But yay for tax cuts! I’m the only Republican who voted no." Rep Thomas Massie
I thought the Trump plan was to defend bonds! If this gets approved, we are firmly back in Fiscal Dominance NOT Fiscal Restructuring - and bonds will let us know that.
Add to that, we know government labor shedding is picking up and with it private sector layoffs and both slows economic growth.
The knock on affects are many including that jobless claims will trend higher which translates into less consumer spending which translates into hit on GDP which results in a deflationary impulse, even as, especially as, the amount of goods & services in circulation contract post tariffs! And Trump wants tariffs.
THE LOWER THE DOLLAR & YIELDS FALL,
THE MORE TRUMP WILL TARIFF REST OF WORLD - ESPECIALLY CHINA!!
My point: "Tax Cuts & Tariffs" are what Trump wants - very badly.
With that, he is not going to obsess over trade war retaliation or falling immigration slowing the US labor force/economy or DOGE causing growth contraction - the focus of Wall Street.
TRUMP WANTS LOWER DOLLAR & YIELDS SO HE CAN RAISE TARIFFS ON REST OF WORLD - ESPECIALLY CHINA!!
Where this gets dangerous is what happens when the market realizes this. There are added risks from market leverage dangers:
Japanese bank run/Yen carry trade unwind
Basis trade unwind/Mag7 earnings slowdown
China divesting/Equity “wealth effect” reversing
These are the big macro risks I have written about of late at length.
But I don’t think Trump is focused on the stock market as much as many think. He seems laser-focused on getting his tax cuts extended which means keeping the deficit from growing.
Because of that, I expect we get a US government shutdown until he gets what he wants - either March 14th or at some point before the debt ceiling showdown in August. Place Your Bets!
UPGRADE TO PRO OR JOIN US LIVE AT LADUCTRADING.COM
