And now Trump is president.
And interest rates are rising.
Even as the Fed is cutting.
As you can see on the right side of this chart below, this recent divergence between the Fed Funds Rate (going down in pink) and the two-year Treasury Note (going up in blue and white) is usually not what’s supposed to happen, as the entire left side of the chart demonstrates.
This is the bond market (who really runs the world, by the way) telling everyone that the rules have changed because the ruler has changed, and today they bent Fed Chair Jerome Powell to their will when he kept the Fed Funds Rate steady and subtly admitted they have a point. Powell did his usual good cop/bad cop routine of putting the bad news in the release ahead of his press conference, then talking about how strong the economy is during it, but yields spiked when the Fed released their statement, for good reason. They changed a notable sentence they wrote after their last meeting. It went from “Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated” to “Inflation remains somewhat elevated.” That’s what we in the biz call hawkish.
I wonder why the fight against inflation might stop making the progress it previously made? Maybe the self-described Tariff Man has the answer.
Measuring from the day of the election to now, the 30-year Treasury Note is up eight percent. But if you measure from its bottom in September where I placed that vertical white line in the chart with the two-year above, when it really became obvious that Trump was capable of winning, the 30-year government bond is up a little under 23 percent. This is a big move for the price of long-term debt that lines up perfectly with Trump’s ascension to the White House, and this is why mortgage rates are going up even as the Fed cuts.
Trump’s Office of Management and Budget (OMB) illegally attempted to revoke all federal grants worth trillions, and this utterly insane act that has created untold chaos is basically a synonym for trying to crash the economy. Shutting down Medicaid portals like they did would only grease the wheels of this effort, because there is very simple math here at play. About 36 percent of state budgets come from federal grants and Medicaid comprises the largest part of each state’s spending. Take that away and you remove around a third of every state’s fundamental economic output at minimum. Trump is now doing what he does best, and like his diplomatic loss with Colombia, he is backing down and revoking this broad-based unconstitutional directive while telling everyone that he’s not actually doing that, all while the temporary ban on his illegal actions gets upheld in court.
These people clearly think they are untouchable. They are powered by ketamine bro and fake video game superhero Elon Musk, who genuinely believes that the rules don’t apply to him (I can hear every bond risk manager laughing in the distance). It’s pretty obvious that the directives to slash spending that Dave Levitan has done a terrific job reporting for Splinter are coming from the co-president who Trump has seemingly handed the federal bureaucracy to, and Elon’s desire to cut the government well past the bone is currently the biggest threat to the American economy.
As many astute observers like Zoë Schiffer of Wired have pointed out, what is unfolding at the federal level right now is similar to how Musk barnstormed his way into Twitter, as banks are now selling the debt he took out from them at a loss while Musk says the business is “barely breaking even.” Ultimatums and phony buyouts are being sent from nebulous sources, and poorly written language suggesting its author desperately needs to be seen as more intelligent than he ever will be dots the landscape. This unconstitutional order that seems to have finally awoken some of the Democrats from their slumber is the most obvious assault on the economy that you could conjure up.
Ideologues on the right like to think that government spending has nothing to do with economic growth as anything other than hampering it, but people who have actually studied economics know that there is a lot of government spending, like all of transportation infrastructure, that provably has a multiplying effect on growing the economy. GDP, the thing that Democrats and the media spent the last two years pointing to while telling you that your bank account was wrong and the economy is good, has four components that go into how it gets calculated, including one that Republicans never want to talk about. Let’s take a quick tour through each one and see how Trump and Elon are trying to attack each of them, putting the smartest money in the world on edge.
Consumption
Despite what the trickle-down “economists” still somehow tell you half a century into its authoritarian lurch into our lives, giving rich people more money is not the most efficient way to run an economy. In fact, it’s one of the most inefficient ways to do it, because rich people don’t spend like normal people do. They stick their money in money market accounts and other financial assets while it just sits there and accumulates wealth from the rising tide lifting all boats. That rising tide is consumption, comprising roughly 70 percent of the American economy.
The fear you can literally see on the charts of treasury bonds is that between tariff-driven inflation and **gestures everywhere**, Trump and his co-president will stunt growth through inflationary policies and create a negative feedback loop into slowing consumption amid increased uncertainty around a future where Republicans are saying they don’t give a shit about the constitution when Trump is in charge.
Investment
This is centered around what Republicans say they want to do: invest in America. That’s what Biden actually did with the Inflation Reduction Act, as construction projects for various purposes popped up across the economy. This doesn’t have to be government-aided, as overall investment is a very useful indicator for how businesses feel about the future. If you are certain about it, you will take on more capital expenditures (and thus, debt) to invest in the long-term outlook of your business. If the future is uncertain, or if interest rates are elevated and making debt more expensive, then large investments will be put on hold until there is more certainty or debt is cheaper.
Exports Minus Imports
Welcome to the origin of the Trump Trade! The Tariff Man is determined to warp this simple equation around his ego and corruption, as he plans to issue broad-based tax increases on all of Americans purchasing goods from our largest trade partners. It’s anyone’s guess what happens to this part of GDP because the trade wars will hit both variables in unpredictable ways, but ultimately, life will get more expensive for Americans.
Government Spending
This is the dirty secret that no Republican wants you to know. Their precious GDP that must go up at all costs? It needs government spending to do that. Like, in the equation. The federal government is America’s largest employer, and keeping people employed in it boosts GDP. Elon wants to fire everyone and run the government like Twitter and make GDP fall like the value of Twitter. The net effect of this entire cockamamie DOGE effort will be to reduce government’s ability to make investments that help grow the economy through the multiplier effect while getting rid of the specific components from government spending that go directly into GDP, all so he can park more money in the inefficient coffers of the superrich. What a genius economist!
How the Economy Could Crash
Uncertainty, the Fed’s favorite new buzzword, is anathema to markets, as they are forward-looking in nature. Uncertainty on its own restricts investment, as people hoard cash to protect themselves against the unknown. Apply this principle to a bank and this impacts how many loans they give out. If banks change their risk profile to guard against heightened risk, which is the simplest explanation of what is happening in the bond markets right now, then less folks will receive fewer loans. This means that fewer businesses will be launched, and some communities with worse job prospects will be exponentially impacted. This is the spiral that helps create recessions as credit and investment gets cut back along with the rising uncertainty they bring.
Trump and Elon are bumbling gales of uncertainty.
But it’s not all Trump that has some markets spooked. Climate change has fundamentally altered the business of home insurance, especially in areas at increased climate risk, but in a world where everywhere has increased climate risk, that has existential implications for the business of home insurance. You cannot get a mortgage without home insurance, and if companies won’t insure homes in entire areas or will make prices prohibitively expensive to the point where normal people can’t afford it, then home prices in those areas will fall. We saw the kind of chain reaction that can create in our corrupt and heavily securitized world in 2008. Stubbornly high mortgage rates driven by a bond market tiptoeing around Trump right now are not helping this dynamic either.
Between the tepid jobs market, rising interest rates as the 30-year and 10-year Treasury Note auctions recently drew the highest yields since 2007, the weakest housing market in 30 years, one of the most expensive stock markets of all time that just had the entire theoretical basis of the “moat” around America’s AI companies destroyed by China with $6 million and some open-source code, plus the general precarity felt by at least half of the population, the conditions for the economy to get bad are in place. The Sahm rule was activated in August by a very weak jobs report, which to date has a perfect record in predicting recessions. The much-maligned two-year/ten-year Treasury Note yield curve inverted during Biden’s term, an (overrated) indicator of a recession, but in previous recessions where it inverted ahead of them, it marched upwards into the recession, which is what it is doing right now. What happens if we go into a recession we were already destined for, and Trump makes it worse?
All the economy needs is a catalyst to push it in a direction where growth is hampered, and to keep pushing growth down, and these existing issues can become exacerbated. Trump and Elon already tried to shatter the economy yesterday before backing down and promising this fight is not over, and we better hope that their inherent cowardice is the norm for how these battles will play out, because one thing is clear after this OMB saga: if Trump and Elon do what they want to do, they are the catalysts that can crash the economy.
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