Trump's Fiscal Hole: An Emperor In A Financial Straight-Jacket

Biden and his predecessors delivered a stinking fiscal and monetary mess to Trump

Getty AP/Salon

During the COVID-19 pandemic, the fiscal and monetary spigots were opened wide to both offset the effects of repeated economic shutdowns (due to the US not following the Chinese much more effective approach) AND to drive a hidden bailout for US corporations and the financial system. In the previous decade US corporations and financiers had splurged on debt provided at ridiculously low interest rates, and spent more than the profits they made on share buybacks and dividends to enrich shareholders and corporate executives. At the end of 2019, when a small rise in interest rates from the previously ridiculously low levels combined with a very small amount of quantitative tightening (QT) threatened a new Global Financial Crisis (GFC), the Fed had quickly taken measures to offset the worst symptoms. This involved colossal amounts of reverse repos (the Fed lending money to the big banks to provide liquidity), mostly to only six banks (Nomura, JP Morgan Chase, Goldman Sachs, Barclays, Citigroup and Deutsche Bank).

Those six banks were of course at the centre of the 2008 GFC and have repeatedly been at the core of financial crises and have had to be repeatedly bailed out by the US state and others; going all the way back to the 1980s Latin American lending crises. Instead of being shut down as the reckless and feckless institutions that they are, they have been repeatedly bailed out and allowed to grow to become financial behemoths; concentrating risk within the global financial system. But just providing liquidity did not provide a more medium term solution, that was through the massive corporate giveaways hidden beneath the COVID-19 measures of 2020. One that both Democrats and Republicans worked hard to make sure was never audited, and the details never made public. Over US$3 trillion was spent by the US federal government, with little real oversight. This was targeted mostly toward big businesses, and very much at the expense of small businesses; an approach seen in other nations. And of course there was a new massive level of money printing (QE) pushed through the banking system. Much of which flowed into the stock market and other assets such as houses, helped by many corporations using all the extra cash to drive even more share buybacks.

From late 2021, far, far too late, the Federal Reserve tried to at last take the punch bowl away after 15 years of largesse by raising short term interest rates relatively quickly. By the middle of 2022 it was obvious that the US economy was tipping into recession and that financial stress was rising as share prices fell significantly. With mid-terms in 2022 and a presidential election in 2024, the Democrats were looking at a quite probable deep recession. The Federal Reserve had also started a small quantitative tightening (QT) to start to reduce its colossal US$9 trillion balance sheet that had ballooned massively during the COVID-19 pandemic. With the levels of government, corporate and personal debt such that a new GFC could easily be triggered.

So, even with US debt to GDP still at 110% and the government deficit at 5.5% of GDP, they turned the fiscal spigots back on. And the economy and stock market responded; there would be no recession. US GDP growth recovered to be 1.9% for all of 2022 and then 2.5% in 2023. That growth delivered more tax revenues, but the fiscal spigot was running a lot faster than those revenues; with a deficit growing faster than nominal GDP. In 2023, the government deficit was 6.3%. Also in 2023 the Fed blinked and stopped raising interest rates, and then faced with a possible run on regional banks (who had stupidly invested massively in government debt when long term interest rates were unsustainably low) launched a full blown depositor bailout and new liquidity spigots were put in place. That bailout included many politically well connected companies and rich individuals who had deposits well over the federally-insured limit; rather than send a lesson to investors about taking into account risk, the Fed showed once again that they would be bailed out from their mistakes. The socialization of losses for the rich, while the rest are generally left to eat their losses.

Only in early 2024 were the regional bank bailout monetary support structures closed. QT continued, with the Federal Reserve balance sheet being reduced from US$9 trillion to US$6.8 trillion; still well above the pre-COVID period and seven times that of the pre-2018 GFC period. Showing how fragile the US financial sector is, dependent on so much Fed liquidity. The major US banks are sitting on very large unrealized losses on their massive bond portfolios that they were stupid enough to invest in at nearly zero percent interest rates. They would have been much better off holding cash and very short term bonds; the utter morons that did not see this are still running those major banks. These bonds are held in a “not for sale” portfolio that means that the banks do not have to declare these losses against profits; they are assumed to be able to slowly work off the losses helped by falling interest rates. But interest rates are not falling the way they were supposed to due to inflation.

As the US entered 2024 the fiscal spigots were opened even wider, and the federal government deficit increased to 6.5% of GDP even as that GDP grew 2.8% (and a nominal 4.96%!). While the Federal Reserve played the “see no massive new spending, hear of no massive new spending, talk of no massive new spending” game. The federal government debt level kept growing, with that growth accelerated by the much higher long term interest rates that new borrowing, and old debt refinancing, was subject to; at 123% of GDP in 2024. This is in a country that had a current account deficit of about 4% of GDP in 2024. Only the reserve status of the US$ saves the US from the enforced structural adjustment program that so many other nations would be subject to in such circumstances. Then the Fed went and reduced short term interest rates in the dying months of the Biden administration, completely against any actual evidence that such cuts were warranted. The bond market smelt the rat, and long term interest rates responded by increasing; seeing the lack of any real commitment from the Fed to fight inflation.

The CNBC piece below laughably calls current mortgage rates as “expensive” when in fact mortgage rates are more in the normal range that was in place before the monetary insanity of the past two decades. It’s just that the US now has so much debt that those levels of interest rates cause much more of a problem for over-stretched borrowers.

The Fed knows that it is sitting on top of a financial volcano, given the massive indebtedness of the US state, corporations and individuals; much of that debt taken on at much lower interest rates than the current ones. The US economy is a bit like the cartoon character Wily E. Coyote, with constant liquidity and new government debt financed spending needed to keep it from falling. And even then, gravity regularly raises its ugly head requiring yet another bailout.

This is the fiscal and monetary mess that Trump is faced with, the result of two and a half decades of funding foreign wars with debt (instead of higher taxes), tax cuts predominantly for the rich, the socialization of private losses, inappropriately low interest rates, massive money printing, and then the during and post COVID-19 pandemic fiscal and monetary splurge. The stock market is also in full bubble territory as inflation threatens to re-ignite and the government is running very large deficits. For more than the past two decades inflation has not been a big issue in the US as the “China price” and massive levels of illegal immigration stopped prices and wages from rising; with the result of transferring significant income from workers to to the rich and their courtier class. The “China price” is no longer there to keep prices down, especially with Trump’s tariff war against China and the world, and Trump’s own policies will significantly reduce the net influx of immigrants. The economic effects of widespread “long COVID” and COVID “vaccine” (it’s not a vaccine, its an mRNA therapy no matter how much they lie about it) injuries are also inflationary. In addition of course, the working population was decreased through the related deaths of working adults.

So any new move to very low interest rates will be inflationary, as shown by the uptick in inflation in early 2025; even after only a small drop in interest rates and with QT still in place. Loose monetary policy is no longer the easy option, and also threatens the stability of the US$.

The US combination of high government debt to GDP (and very high overall public and private debt to GDP), a high government deficit even with a growing economy, and a 4% of GDP current account deficit places it in the worst position relative to other Western nations; only excepting a Japan that went into full on debt monetization many years ago. It is also at a very major disadvantage to both Russia and China that are running strong current account surpluses as well as growing faster than the US (4% for Russia and 5% for China in 2025).

• US: 123% government debt to GDP, 6.5% government deficit to GDP

• Italy: 137% government debt to GDP, 4% government deficit to GDP

• France: 112% government debt to GDP, 6% government deficit to GDP

• Canada: 108% government debt to GDP, 1.5% government deficit to GDP

• Spain: 108% government debt to GDP, 3% government deficit to GDP

• UK: 99% government debt to GDP, 4.5% government deficit to GDP

• Germany: 63% government debt to GDP, 2.2% government deficit to GDP

• Poland: 50% government debt to GDP, 6% government deficit to GDP

• Australia: 38% government debt to GDP, 2.6% government deficit to GDP

• Japan: 255% government debt to GDP, 6% government deficit to GDP

• Russia: 19% government debt to GDP, 2% government deficit to GDP

• China: 84% government debt to GDP, 4% government deficit to GDP

Rating agencies estimate a 7.5% of GDP US deficit in both 2025 and 2026, given Trump’s stated plan to renew his expiring tax cuts and provide more for the rich oligarchs, and the small majority that the Republicans have in the Congress. Hence the emergence of DOGE under Elon Musk tasked with rapidly reducing expenditures. With the immediate focus on reducing the government expenditures which are generally spent abroad, such as the aid to Ukraine and the spending of USAID and the National Endowment for Democracy (NED); these can be cut with a muted impact on the domestic economy. Another area would be to get foreign nations to pay more for the upkeep of foreign bases, something that Trump is pushing for. But these are all still relatively small potatoes, the whole budget of USAID in 2024 was US$63.1 billion and the NED US$330 million. The 2024 fiscal deficit was US$1.8 trillion. Extra tariffs could raise an extra few US$100 billion, but would be inflationary and hit the poorest citizen’s hardest; taking from the poor to give to the rich.

But it is possible that all Trump is looking to do is dump more taxes on poorer people, somewhat hidden by using tariffs, so that he can keep the tax cuts that overwhelmingly benefit the rich. And even add a few more tax breaks for the oligarchy. He has no intention of fixing the fiscal mess, just keep things going. Since the 1980s the Republican extremists have wanted to create a fiscal crisis through underfunding the state during which they can slash and/or privatize the “entitlements” that benefit the many; social security (pensions), medicare (retiree health care), medicaid (poor people health care) and unemployment benefits etc. But after decades of this approach, the oligarchy has not just loaded up federal government deficits and debt, but also driven private debt levels to astonishing heights.

Only the socialization of losses in 2008 from the oligarchy to the state, and the pushing down of losses onto the poorer citizenry, saved the economyoligarchy during and after the GFC. Then extremely low interest rates for the next decade and a half, with inflation kept in check by China (and other offshore suppliers) and mass immigration, kept the US economy afloat. With the state fully debt and deficit loaded, and the inflation smothering mechanisms gone, the 2008 and 2020 options are no longer available. In addition, any new tariffs will be inflationary, and the loss of millions of immigrants that provide cheap labour will also be inflationary. The country was also aided in the 2010s by the fracking revolution that helped keep oil and gas prices down, while removing the US oil trade deficit and providing LNG export revenues.

As well as becoming massively indebted, the US has become increasingly de-industrialized and resultantly more and more dependent upon raw materials exports and manufactured imports. In 2023, the US exported US$1.86 trillion, of which the major areas were:

Raw materials and simple processing

• US$388.05 billion was mineral fuels and oils, and LNG

• US$174 billion was agricultural products

• US$7.4 billion metals

• US$6.2 billion precious metals

• US$51 billion for organic chemicals

• US$43.6 billion plastics and resins

More complex products

• US$125 billion aerospace products

• US$91.7 billion pharmaceuticals

• US$81.6 billion navigational and medical instruments

• US$69.3 billion gas turbines

• US$65.8 billion vehicles

• US$30.6 billion computers

• US$21.6 machinery and mechanical appliances

• US$8.1 billion machine tools

27.6% of those exports go to Canada and Mexico, with a significant amount representing intermediate goods shipped to US plants in those countries. 9.67% go to China (including Hong Kong), predominantly raw materials, agricultural products and intellectual property licensing; with higher complexity exports being hurt by US export controls on high technology products. 25.5% of exports go to Europe, which are predominantly professional services, oil & gas, intellectual property licensing, finance, pharmaceuticals and aerospace parts.

With the US quite possibly reaching a new long term peak in oil and gas production, there is not much room for expansion there. The same for the rest of the raw materials and simple processing sectors. With China leaping up the manufacturing value and complexity curves, the US may be challenged to maintain its levels of these exports, let alone increase them. The US issue can therefore be seen as one of a lack of a long-term development state, and the profiteering offshoring of so much of the complex products manufacturing, together with regular demand pump priming through corporate and rich people state giveaways. Tariffs can be used to restrict imports, but these will be both inflationary and stop the use of better products from abroad (e.g. Chinese-made EVs). Tariffs will hit the poorest the worst, and they have the highest propensity to spend extra dollars and also the greatest propensity to cut consumption when some of their basic items become more expensive. So tariffs could in fact be stagflationary in impact.

Given the US domestic cost structures (due to rentier profiteering) and loss of much of its manufacturing infrastructure and even generations of specialist knowledge, any US manufacturing turn around would take decades with the best of state management. In many ways, the US has gone down the same path as Argentina with a significant loss of local manufacturing (not as bad as Argentina) combined with a huge increase in debt (much worse than Argentina). The reason that the US is not suffering like Argentina is that its debts are denominated in its own currency, and foreign nations accept that currency for payment for US imports and as a general payments mechanism. Without that, the US would already be experiencing a colossal financial and economic crisis.

Trump senses this, as shown by his repeated threats to retaliate with very high tariffs against those moving away from the US$. Such threats though may have the opposite effect, pushing nations to diversify their trade (and foreign debt holdings) away from the US and to quietly explore alternative payment mechanisms. But Trump in no way wants to right the US government fiscal house, especially through tax rises on his fellow oligarchs and their rich courtiers; which would also lead to a reduction in US consumption (less than if the tax raises were much more aimed at poor people, as with tariffs) and therefore the current account deficit; the rich tend to consume a lot of expensive imports. What he also knows is that the US is in no financial position to fight another major foreign war, even on the scale of Iraq. Any such attempt will put the US$ reserve currency status at risk. Once the US is forced to finance itself using foreign-currency denominated loans, and pay for imports with foreign currency, its international power will shrink and it will experience a very major domestic financial and economic crisis. So without an oligarchy willing to take some limited pain to right the homeland that underlies the US ship of state and their own wealth and power, the unsustainable will be continued until it cannot.

Whether or not that day of reckoning happens under Trump or a later president will be up to circumstances and dumb luck. The last thing the US needs is an economic recession which will rapidly grow the already outsized deficits. The GFC-bloated 10% of GDP deficit of 2009 may be quickly surpassed given a starting level of 7.5%. And that would be with a starting federal debt to GDP ratio of about 130%, not the 55% of 2009. Failing and increasingly extractive elites and overwhelming debt are both symptoms of the end of an Imperial era. Post-WW2, the massively indebted UK had to bend to the will of its much larger creditor the US; a sad reality lubricated by the shared Anglo-Saxon ethnicity of the rulers of both nations. There will be no such lubrication for the next transfer of power, but that transfer is coming; with the US Empire increasingly running on fumes. And so utterly dependent upon Chinese manufacturing exports across all parts of its economy, and even in the military, that it can in no way go to war with China; economically or militarily. There may be a lot of shadow boxing, but no real fisticuffs.

The Pentagon is even dependent upon China for some of the strategic metals and minerals that the Military Industrial Complex utilizes to produce its weapons and munitions: