More On Inflation and Yields
You would think that the 10-year Treasury yield would pull back given that the pace of fiscal spending can only slow from the Biden Administration’s record deficit levels. That expectation would be a mistake.
The Trump Administration’s effort to end the Russia/Ukraine War and to reduce wasteful and fraudulent spending is a fiscal positive that ought to shrink the deficit (not enough to eliminate the deficit, but it is a start), slow the pace of growth in Public Debt ($36 Trillion and growing), and thereby reduce price inflation and lower yields. In addition, the high cost of goods and services in itself can help mitigate further price inflation as demand softens (we saw that with Walmart’s WMT 0.00%↑ outlook).
However, as those factors work to bring prices and yields down, the banks are expanding credit and growing the money supply, which creates upward pressure on prices and therefore yields.
Further, while I expect fiscal spending to slow 15-20% under the Trump Administration, pet projects such as a U.S. Sovereign Wealth Fund (SWF) and paying a portion of DOGE cost savings to Americans as a “dividend” (there is no fiscal surplus, so technically the Federal Government can’t pay a “dividend”), are not fiscally responsible policies and will put upward pressure on prices and yields. The U.S. is in a deep Net Debt position. SWFs and Dividends are for entities that are operating from a Net Cash/surplus position. The Federal Government is creating moral hazard with its various deficit-funded welfare programs and handouts in an effort to buy votes (both parties do it).
The answer to raising the standard of living for Americans is to eliminate income taxes, payroll taxes, and their associated Entitlement programs, which account for approximately 65-70 cents for every $1 of fiscal spending. That leaves $2-3 Trillion in Discretionary spending, of which my guess is that 50% of it is nonsense. The U.S. could be run at a cost of $2 Trillion per year, and that money could be raised with a national Sales tax, which would give people and companies discretion over what they would be taxed on. GDP is approximately $30 Trillion, which means a 7% national Sales tax would cover all fiscal expenses.
Back to yields. The Trump Administration is taking two steps forward and one step back as it relates to fiscal spending, while the Fed and the Banks are growing the money supply and expanding access to credit. Therefore, I do not expect prices nor the 10-year yield to come down anytime soon. Unless of course a healthy recession is allowed to occur.