Deficits don’t matter, until they do.
One person who understood that particularly well was the famous US political commentator James Carville who once quipped that in a second life he would love to come back as the bond market. Such is the power of the most liquid securities market in the world for US government debt.
Another person who knows the power of the bond market is former UK Prime Minister Liz Truss – who rather acutely discovered that you can have ambitious ideas for a country’s fiscal plans, but the market can quickly humble that.
Could the same happen to Trump? We think so.
In fact, one isn’t required to strain their imagination to envision circumstances where a re-elected President Donald Trump meets the formidable effects of the bond market. Whether for fiscal reasons that could (and should) have easily applied to his predecessor, or to disabuse Trump of tendencies to go rogue, it’s easy to imagine the moment.
According to the CBO, the US’s federal debt pile amounted to $26.2tn, or 97 per cent of gross domestic product, at the end of last year. It shot up after sweeping tax cuts by Donald Trump in 2017 and huge stimulus spending during the pandemic under both Trump and Biden. Early in his campaign Trump pledged to renew the tax cuts, due to expire next year, if he defeats Kamala Harris in this year’s presidential election.
It’s possible that even Trump is coming to terms with the constraints of the prevailing fiscal situation as he has been remarkably circumspect about the prospect of more large-scale tax cuts of late. The fiscal position could explain why, and it is reasonable to assume that this time around the negative reaction in the bond market could offset any positive impact on the stock market.
What we are mindful of however is just how over zealous the market may be in punishing Trump for even mild transgressions. It certainly starts to enter into the realm of conspiracy, however one has to consider the importance that a populist Trump 2.0 presidency is seen as a definitive reminder to the electorate as to why it can never go down that road again. In this sense, the bond market may find its way to playing a small role as an implement of democracy. Maybe.
Vernier Capital Advisors (Europe) Ltd is in no way affiliated with any of the sources or references quoted in this piece, and this article does not constitute investment advice.