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A guide to what the 2024 US election means for Washington and the world.
It’s Groundhog Day in Washington. Brinkmanship has repeatedly erupted in recent years whenever Congress has tried to raise the debt ceiling, usually because voices on the right have threatened to shut down the government if their demands aren’t met.
here we go again. This week, Republican House Speaker Mike Johnson tried to pass a stopgap debt ceiling deal with a $6.75 trillion budget, but President-elect Donald Trump, Elon Musk and Vivek Ramaswamy The plan was thwarted by his supporters, including
“This bill should not be passed,” Musk fumed at X, launching final negotiations amid threats of a government shutdown.
Investors should note three important points. First, President Trump’s landslide victory last month means that the key political battles in 2025 will take place within the Republican Party rather than across the Democratic-Republican aisle.
Second, this Republican-on-Republican battle is going to be ugly. Figures like Mr. Musk and Mr. Ramaswamy hope to make their voices heard by attacking congressional Republicans like the hapless Mr. Johnson.
Third, fiscal policy will be an early flashpoint in this battle, especially given the sharp rise in bond yields this week after the Fed revised down its outlook for rate cuts in 2025.
Washington is one of the focal points of this fight. But so is Mar-a-Lago, the seat of President Trump’s political court, where his associates are currently making clear decisions about how to tackle America’s current $36 trillion national debt. expressing different views.
Some see little need to panic about this debt mountain, arguing that the dollar’s status as a reserve currency will encourage global investors to continue gobbling up U.S. Treasuries. President Trump often seems to sit in this camp. In fact, this week he called for the debt ceiling to be lifted.
But those around him, including former White House chief strategist Steve Bannon, are more wary. That’s because, as I’ve noted many times, the Treasury will have to refinance about $9 trillion in bonds next year as inflationary pressures mount. President Trump has promised policy changes that could add trillions of dollars more to debt, while also threatening to weaken the dollar and undermine the Fed’s independence.
This is a very tricky cocktail, as Treasury Secretary nominee Scott Bessent knows all too well. To make matters worse, potentially capricious hedge funds are expanding their role in the U.S. debt market, and potentially hostile China is also gaining influence. Take the Chinese government’s recent decision to issue $2 billion in bonds in Saudi Arabia. The issuance was a ridiculous amount, but it was a symbolic blow to Washington, especially since the yield was similar to that of U.S. Treasuries.
The second dividing line for Mar-a-Lago is taxes. President Trump has repeatedly promised to make permanent the 2017 Tax Cuts and Jobs Act, which included massive income and inheritance tax cuts. That would create millionaires among wealthy Americans, including dozens of billionaires on his top team.
He also wants to lower corporate taxes on U.S. companies from 21% to 15%, eliminate taxes on Social Security payments, tips and overtime pay, and extend child care deductions.
Mr. Bessent and others are heard telling Mr. Trump that the resulting fiscal hole could be filled by faster growth, tariff revenue and $2 trillion in government spending cuts promised by Mr. Musk. Some have called for higher taxes on wealthy foundations.
But it would be nearly impossible to significantly reduce federal spending without slashing Social Security and defense spending, and President Trump seems reluctant to do so. The scale of customs revenue is also unclear. President Trump may prefer to use tariffs as a geopolitical threat above all else.
Furthermore, growth alone will not fill the fiscal hole. Debt service costs could also be higher than expected given signals from the Fed that it is slowing its pace of rate cuts.
That’s why Mr. Bannon is calling for more drastic measures, including raising taxes. “We’re going to have to raise taxes on the wealthy … to get a handle on the debt that’s gotten out of control,” he said at the Republican Dinner this week. Yes, really.
reason? Mr. Bannon said that the recent assassinations of health care executives show that anti-elite anger is currently running high, and that President Trump’s preference for the wealthy while squeezing the middle class is a political challenge. I think it would be suicidal. He believes ignoring the bond market is equally dangerous.
Therefore, “the neoliberal neocons will have to pay for what happened,” he says. This means that “populist nationalists” must dominate “republican orthodox people.”
Bannon’s argument about public anger is spot on. But Trump’s problem is that raising taxes on the wealthy terrifies “orthodox” Republicans in Congress. They will also infuriate the many wealthy entrepreneurs who supported his presidential bid.
So the $36 trillion question at hand is not simply whether the plutocrats or the populists will win this battle. It is also important whether the bond market can remain calm while this situation continues.
In other words, this week’s skirmish over the debt ceiling could be just a prelude to a bigger fight in 2025. The situation is expected to become dire.
