Davos Donald. America’s mighty economic power has feet of clay
The Trump gang’s power to operate beyond all laws to disrupt, coerce, steal and kill comes from America’s economic and military might, but the limits of either of these are looming on the horizon, he writes Michael Pascoe.
The final act of the drama The Madness of King Donald, shown on every channel worldwide, highlighted the increasingly imaginary world in which the anti-hero lives; their fantasies are fed and pampered by a cadre of sycophants, sycophants and straight hustlers, all doing their best to get the job done.
Like a moustachioed pantomime villain who delights in the boos and hiss of the audience, Trump is oblivious to the warnings and protests of the sane world and disdainful of the lickety-eyed crowd desperately hoping to go unnoticed.
The draft dodger relies on the unrivaled military might of the United States for much of his tone, but his weapon of choice is America’s economic weight, the threat and reality of tariffs to coerce nations, individual sanctions to attack those like International Criminal Court judges and UN personnel who offend him.
A reckoning is approaching in the economy
America’s military might isn’t going away anytime soon. Even as GDP growth outpaces the rest of the west and stock markets set even higher records, a reckoning for its economic power is looming.
The truth is that the US economy is as exciting as Trump’s social media post. Second only to Japan, but in worse conditions, the “Greatest Economy in the History of the Country”, in Trump’s words, is operating on fiscal stimulus; the government spends much more than it raises in taxes, plus the AI investment bubble for extra sauce to cover the growing deficit brought to you by the mafia who claim to be cutting spending.
Remember when the Morrison/Frydenberg government threw the fiscal kitchen sink at the Australian economy when COVID hit? The annual budget deficit to GDP ratio increased to 6.5 percent; this is the highest level since World War II. It fell to zero, rose to one per cent last financial year and is hovering around 1.5 per cent this year, with all the commentators screaming doom that it won’t go back to zero.
Huge budget deficit in the USA
The US’s annual federal deficit still hovers around 6 percent of GDP and is expected to get worse. No, Virginia, Trump’s combination of tax cuts and tariffs isn’t working, and yes, when the AI investment bubble bursts, GDP growth will fall and the deficit/GDP ratio will get worse, unless you believe the tech bros’ hype about AI suddenly providing universal nirvana.
According to published data, the US GDP growth rate for the last four quarters was 2.3 percent annually, which was after the highest level in the last quarter. Digging into the $38.5 trillion national debt hole,
The USA cannot widen the exit route,
especially as we continue to dig.
Conflicts in the bond market
The tremor in the bond market, as Trump intimidated the Federal Reserve and went too far in his Greenland adventure, was merely a wobble, but it was still a warning that American exceptionalism, enabled by the power of the dollar, does indeed have its limits.
Much has been written about the US debt mountain, that the interest burden alone currently stands at around 3.2 percent of GDP, so more than half of every new dollar the US Treasury borrows goes towards debt servicing, with no plan or even foresight on Trump’s part to deal with it.
(Source: Minack Advisors)
This cannot be sustainable without the Trump gang destabilizing the world and eroding trust in the US government.
With the Trump gang, oh dear.
And now the bad news. The United States is not the only country facing a financial crisis on the horizon; The United States is simply the biggest, and therefore most worrying, culprit.
State debt crises as soon as possible
Gerard Minack, former Global Strategist at Morgan Stanley, warned in a note to international fund manager clients last month that many advanced economies were headed for public debt crises.
“Debt levels are already high, demographics will drive spending, and rising real rates will worsen debt service,” the founder and CEO of Minack Advisors wrote.
“There appears to be little appetite among political leaders or voters to change course, so a crisis seems only a matter of time, most likely within the next 3 to 5 years. History shows that most major fiscal consolidations involve a mix of budget constraints and tight bondholders.”
Minack estimates that the budget deficit would need to be reduced by 2.3 percent to stabilize U.S. debt as a percentage of GDP.
“The necessary adjustments are nothing, but they are not huge by historical standards, in part because stabilizing the debt at historically high levels is not an ambitious goal. But there appears to be little or no desire among political leaders or voters to stop the digging. In fact, many populist rivals want to dig faster.”
(Source: Minack Advisors)
Cutting spending and/or raising taxes by 2.3 percent of GDP, reducing the fiscal stimulus that keeps the U.S. humming out of tune, would be anathema to the populist Trump, but bigger cost challenges lie ahead.
We’re used to worrying about what our demographics promise for healthcare costs. The problem of the USA is in another dimension.
(Source: Minack Advisors)
US debt, who wants that?
With that said, who wants to maintain current levels of U.S. government debt? Trillions of dollars need to be parked somewhere, and players may think the game is good for now, but Minack also warns that a crisis could arise at any time; that three to five years is merely a certainty.
Considering this, perspective is the business of our government as well as individual investors. The financial crisis is quickly becoming a euphemism for a deep recession, a recession in which governments lack the ammunition to ease the pain. Ask the Greeks about 2009-2010.
But for us, what comes next goes beyond economic cycles. The promised fiscal crisis in America will mean cutting spending that is least painful to cut.
Australian MP Dawg
The cost of garrisoning the Indo-Pacific and playing the role of global military master quickly falls into this category, fulfilling Hugh White and Geoff Raby’s predictions of American withdrawal and leaving Australia as the disgraced and diminished Deputy Dawg, seemingly alone in our region.
This is in line with America’s published national security strategy, the “Donroe Doctrine,” which gives them supremacy over the Americas and everyone else.
Someone should tell the Australian Government, ever loyal to America, that money says such loyalty would be a one-way street.
Handing over an Australian citizen to Donald Trump’s corrupt regime
Michael Pascoe is an independent journalist and commentator with five decades of experience in print, television and online journalism here and abroad. His book, Summertime of Our Dreams, was published by Ultimo Press.
