No escape

The OBBB has passed the House and it’s now on its way to the Senate. Pending any additional amendments before it’s sent to the resolute desk, the plan will add half a trillion dollar per year to the budget deficit over the next 4 years (see chart below). But we’re told we shouldn’t worry because tariffs from China will offset that, and we’ll be ok. Let’s do some simple math: China’s total exports to the US amounted on 2024 to $438Bn. Only a tariff above 100% will offset the INCREASE in the deficit (not the deficit itself), and we’re trying to negotiate with them to avoid tariffs between both economies. The US needs to find more ways to shrink the deficit, otherwise bond yields are going to go parabolic a la Japan. Perhaps that’s why the President said yesterday he’s thinking about a FNMA IPO. But that could bring $250Bn. He’s also mulling on the revaluation of the gold reserves, from $42 to $3,300 which could bring $800Bn to the Treasury’s book, BUT that revaluation would increase the Federal Reserve’s balance sheet, equivalent to quantitative easing, as the Fed would need to create new money to credit the Treasury. And that’s inflationary, which could push bond yields higher, which will worsen the problem. It’s getting more and more difficult to get out of this mouse trap.

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