We are about a month into President Trump’s second administration. What a difference!
In “Trumponics”, author Steve Moore and Arthur Laffer detail their 2016 guidance with Donald Trump in developing his campaign’s economic policies and messaging. The plan showed the absolute need for America to reorient towards “pro-growth” policies that would build on our strengths. America’s economic policies would be restructured to encourage competition, rather than resign itself to a structure that did not advance American exceptionalism. Trump wanted dominance in areas such as energy and agriculture so we could set our own course, rather than be constrained by others placing their economic, military, and political interests first. Other items tackled included the tax code, ensuring businesses operating in the US would be competitive with the rest of the world. Trade deals would be redone to establish reciprocity where US originated products and services were effectively not allowed.
Much was accomplished… but then the horrific polices of President Biden took away so much of our luster.
A forty-year high inflation was created by both Biden’s fiscal irresponsibility, and most notably the Federal Reserve’s creation of ten years’ worth growth in the money supply over a mere two years. Too much money chasing too few assets drove up the cost of practically everything. Biden and his team first denied inflation they created, then passed off the inflation as merely transitory. Their next mantra was “supply chain disruptions,” ultimately passing measures hurting our most vulnerable, and did not fix the problems its was advertised to address. Some “Inflation Reduction Act.”
Trumponomics 2.0 restores our need to compete as a nation. If we are unable to grow our economy the way we should, we cannot help the rest of the world grow as our trading partners.
“Animal spirits” are returning. Companies and nations want to get to the negotiating tables again. President Trump met with Prime Minister Modi who wants to “Make India Great Again”. Sam Altman, Larry Ellison, and Elon Musk met with President Trump to start a $500 Billion Stargate joint venture to build out the physical data structure to support generative AI. Apple recently announced a $500 billion investment in the USA, dwarfing what any single company has ever bet on its future. Eli Lilly followed, announcing a huge investment in American manufacturing.
The “pro-growth” Trump policies are a seismic shift not seen since Reagan’s 1980s. Rather than insisting on economic growth to support our children’s futures, we’ve been content to merely not be in recession. The tax cuts of the Reagan years kicked in during the last six years of his administration, resulting in an average annual growth in GDP of 4.5%. For his entire eight years, the US experienced its highest average annual GDP growth for any full-term president since 1960. If Presidents Obama and Biden had simply maintained the average GDP growth, our GDP would be at least 12% higher now. A great deal of pressure on both our US Treasury and Social Security deficits would be alleviated.
We are so fortunate to have Treasury Secretary Scott Bessent on the job. He looks to provide a macro-economic voice separate from the Federal Reserve, so badly needed as the Fed rarely leads from a position of strength, as it often must play catch-up for its own unforced errors.
Much of what Secretary Bessent must immediately face head-on are severe hangovers from the Biden Administration.
At Biden’s exit, doubts about retaining the US dollar as the world’s reserve currency were spreading across the globe. Any move from the US Dollar to a “Euro”-style international currency, the Chinese Yuan, or a Crypto-based value would create unparalleled uncertainty in world financial markets and lessen our capability to compete. The emerging market countries are making noises of developing their own “Euro”-style currency as pushing Russia out of the international payment system forced another approach to be developed. Saudi Arabia has resisted their overtures to price oil in such a currency. If we see oil priced in a currency other than the US Dollar, it is no longer the reserve currency.
Our already too-high interest rates would likely go even higher, perhaps creating an avalanche on our mountain of debt. We could be unable to take our traditional lead to backstop international financial crises such as the Long-Term Capital Management implosion in the 1990s or the worldwide liquidity crunch of 2008. At 5%, interest rates become a headwind inhibiting investment by the private sector.
One third of the US Treasury’s bonds will be refinanced this year. The amount of short-term debt issued by prior Secretary Janet Yellen to finance the Biden spending spree was at historical proportions. As short-term debt is typically at lower interest rates than longer term debt, the move was ostensibly to keep interest costs low and within targeted expense and debt ceilings. However, just as we mortgage borrowers like to “lock in” our personal future interest expenses, our budget leaders should not be unnecessarily handcuffed with such a huge risk to the “family budget.” Our federal interest expense is a bigger budget hit than our national defense budget. Moreover, other public debt and private sector debt are often at rates pegged to rates for Treasury issued debt. Any volatility in the Treasury debt markets will be felt throughout our economy. For those wanting comfort in equity investments, bond markets are about three times larger than the stock market. When bonds catch a sniffle; equities then get pneumonia.
The Department of Government Efficiency’s (DOGE) achievements in cutting waste, fraud, and abuse will be vital to bringing our fiscal house to a semblance of order. The risk of higher interest expenses creates an absolute need for DOGE to cut our costs. We must grow our GDP faster than the deficit, or we face a perpetual vicious cycle, completely unable to keep up with mounting interest expenses. Nothing will crimp our leadership more than needing to increase the debt ceiling to pay for interest on our debt, particularly as bond buyers will want even higher rates to cover the risk. A government shutdown could be strongly considered but would require Congress to change its views on their effectiveness.
Let’s expect the big spenders to push back. Compliant media will be produce many “human interest” stories and testimonials of those who lose jobs through no direct fault of their own. Expect the emotional word “fired” extensively proffered. It’s a dig at “The Apprentice” when we can no longer afford many positions. Treating every federal job as a lifetime entitlement regardless of its current value is most insulting to those who work in for-profit organizations.
Tax cuts will get the economy to grow. Many key provisions of 2017’s Tax Cuts and Job Act are scheduled to expire in 2025. Without Congressional support for renewal, we will effectively have the largest tax increase in history, as Secretary Bessent has testified to Congress. DOGE is a big help as money not flat-out wasted is available for use in the private sector, helping keep both interest rates and inflation in check.
Tariffs are the great unknown, with Commerce Secretary Howard Lutnick as the point person for international trade negotiations. Secretary Lutnick’s experience is CEO of Cantor Fitzgerald, a New York City firm specializing in US government fixed income trading and commercial real estate brokerage.
President Trump’s plans to utilize tariffs towards reinvigorating the US manufacturing base. Rather than set a flat tax rate to raise revenues from all imports, he plans to strategically negotiate with nations individually and assessing tariff rates that would enhance America’s competitiveness in vital markets. Ideally, this will encourage jobs in the United States as producers’ onshore operations here, regardless of the nation of ownership. Business income tax rates are to be cut to be competitive with the rest of the world, another enticement to have both US and Internationally domiciled companies place their operations in the US.
Certainly, Mexico and Canada have been willing to negotiate tariffs as our largest trading partners. China is less willing to do so. The professional economists and financial experts claim tariffs are inflationary, but somehow did not seem to share those views when European countries and various US states charge double digit sales taxes to raise tax revenues. Onshoring will also drop transport costs, encourage investment in the most innovative and cost-effective practices, and encourage competition. With President Trump, expect negotiations to be ongoing and at the highest levels of international leadership.
The Artificial Intelligence battle with China is for all the marbles. Both a “US Standard” and a “China Standard” are in development. China followed the $500 billion Stargate AI investment announcement just days later with its own AI investment, DeepSeek. DeepSeek claims that within a year and at less than 10% of ChatGPT’s cost, it provides similar capabilities.
This competition is the core at the US-China trade negotiations. One approach with Western intelligence, one Eastern. One is proprietary, the other open sourced. In 2022 China mandated is AI modelers to align with the core values of socialism and avoid spread of “illegal content” and “misinformation.” Expect differing AI answers to the same questions.
The risks go far beyond TikTok. It’s not hard to imagine a “Wuhan lab” using AI in gain of function research, looking for mind control of the human body. Expect military applications also on the horizon.
At the crux is a semiconductor company serving as contract manufacturer for NVIDIA’s AI chips… Taiwan Semiconductor Manufacturing Company. Yes, its plants are physically in Taiwan: on China’s doorstep. Taiwan Semi has capacity issues that are constraining AI implementation for NVIDIA and ultimately its customers applications. Other Taiwan Semi customers include Apple, Qualcomm, and reportedly Huawei. A Commerce Department undersecretary nominee testified this report as a “huge concern,” particularly as agreements with Taiwan preclude shipments to China companies.
Although we may hate the corporate welfare of Biden’s CHIPS and Science Act, (and hate Intel’s plant opening delay from 2026 to 2030 even more), the need for other US-based options in vital to ensure we win. This is the battle we will be watching the most.
