Fiscal dominance can be a powerful stimulant
My blogg short index
https://englundmacro.blogspot.com/2025/07/my-blogg-short-index.html
US debt is now $37tn – should we be worried?
Trump's tax-cutting budget bill is expected to add at least $3 trillion to the US's already eye-watering $37tn debt pile.
There is no shortage of critics of the plan, not least Trump's former ally Elon Musk, who has called it a "disgusting abomination".
Although US borrowing costs have been steady overall, the difference between the interest rates paid on longer-term loans versus shorter-term loans - what's known as the yield curve - has increased, or steepened, signalling increased doubts about the long-term sustainability of US borrowing.
And that is despite the fact that the US has lowered interest rates more slowly than the EU and the UK, which would normally make the dollar stronger .
The founder of the world's biggest hedge fund, Ray Dalio, believes that US borrowing is at a crossroads.
BBC 6 July 2025
https://www.bbc.com/news/articles/c1lj8rmyn5eo
The president is pressuring the Fed to lower rates to make deficits easier to finance. This could end badly, but for now investors are on board.
In recent weeks, he has intensified his demands that Federal Reserve Chair Jerome Powell cut rates, or step aside for someone who will.
“Fiscal dominance” is usually associated with emerging markets that have weak central banks, such as Argentina. The result is typically some combination of inflation, crisis and stagnation. Getting to that point, though, can take years.
Meanwhile, fiscal dominance can be a powerful stimulant. Lower interest rates, aided in part by the prospect of a change in Fed leadership, coupled with deficit-financed tax cuts, have helped the stock market romp to new records.
Greg Ip Wall Street Journal 5 July 2025
https://www.wsj.com/economy/central-banking/trump-federal-reserve-fiscal-dominance-1b74cd09
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