How the Trump tax cut is going to cannibalise itself

As the Fed is slows US Treasury bond purchases, and doggedly pursues its policy of tapering, thus driving up interest rates, 58% of Treasury securities held by the public will be maturing over the next four years.

This means that the US Treasury will be rolling over a huge amount of debt into a higher-interest rate environment. The benchmark 10-year U.S. Treasury Note has moved from a yield of 2.06% (November 9, 2016) to over 3% now.

Mortgage rates correlate to the 10-year Treasury and they have moved up significantly since last September, causing a slowdown in home sales with knock on effects on consumer spending on durable goods. This will impact Treasury revenues.

Meanwhile, Trump’s trade war with China will at least put a dampener on East Asiatic demand for Treasuries for the foreseeable future, and there will be little promise of respite from those quarters for Treasury securities markets, ensuring upward pressures on rates and yields.

All this has to be understood in the context of what the May 3, 2017 General Accountability Office (GAO) report on the U.S. government’s fiscal outlook said about the impact of interest rates on the Federal Budget:

“While health care spending is a key programmatic and policy driver of the long-term outlook on the spending side of the budget, eventually, spending on net interest becomes the largest category of spending in both the 2016 Financial Report’s long-term fiscal projections and GAO’s simulations.”

While it has been clear since 2011 that the Fed has been aiming at a programme of tapering its quantitative easing programme and reversing it in order to “normalise” its balance sheet, the Trump tax plan itself will make it impossible for the Fed to respond counter-cyclically  to worsening economic performance, in view of the historically unprecedented fiscal deficits that will result from this plan.

The irony of this situation is that the Trump tax plan was in part intended to disguise and offset the effects of Fed tightening. But it clear from the above that it will consume itself. It is remarkable that the US Treasury, unlike Trump officials and GOP luminaries, stayed silent on this policy, unwilling to issue any reports or statements whatsoever on one of the biggest tax giveaways in history.

The joke continues to be on the average American citizen.