He's Not Serious!
- Bob O'Brien
- 11 minutes ago
- 5 min read
President Trump is not serious about cutting the budget deficit. To be more accurate, he does not wish to reduce the deficit by sharply cutting spending. Instead, he believes that “the way you take care of debt is with growth, and we have tremendous growth.” To paraphrase the President, it really doesn’t matter if you have a lot of debt, as long as you have the income to pay the interest and (hopefully) some principal of that debt. In addition, if and when you do pay the debt off later on, you are doing so with inflated dollars.
I think that’s the philosophy behind his economic program. First and foremost, his Big Beautiful Bill (BBB) cut the income tax rate at every income level. Trump knows that two thirds of GDP is driven by consumer spending, and that consumers will spend more money and grow the economy if their taxes are lower. Secondly, the BBB reduced the corporate tax rate, and that, along with increased tariffs, were designed to incentivize U.S. and foreign companies to expand and/or relocate their business operations here in the United States, instead of using cheaper foreign labor to produce overseas.
To a certain extent, that strategy has worked. The unemployment rate is historically low at 4.1%. Despite the tax cuts, individual income tax receipts are up 3% this year. Although corporate income tax revenue has declined marginally, a good portion of that is due to smaller-than-expected collections of tariff duties after the Supreme Court struck down tariffs imposed by President Donald Trump in February.
Unfortunately, the sad fact is that despite the growth in total federal tax revenues, the federal deficit has ballooned. This past month, the total federal deficit has passed the $40 Trillion level. The deficit for this fiscal year ending this October will most likely top $2 Trillion, and the Congressional Budget Office (CBO) predicts it will top $2.1 trillion next year. Treasury Secretary Bessent is not worried, saying: “There’s nothing magic about the $40 trillion number, and we can grow our way out of that.”
We don’t agree. The central point of our blog is that the real threat to our country is “an over-leveraged economy that is burdened by a huge and growing debt, one which is increasing likely to lead to runaway inflation or to a debilitating deflation.” The problem, as we see it, is runaway federal spending. It is great that federal revenues are up close to 3% this year, but the growth in revenue is being overwhelmed, according to the CBO, by a 5% increase in federal spending.
We think the level of federal debt is at a critical level, and we’d like to see more leadership from the President to reduce the growth in federal spending. He did dally with DOGE early in his second term, but nothing significant seems to have come from that effort. We think a far more promising area for spending cuts is the current effort of the U.S. Justice Department to prosecute perpetrators of fraud in federal and state social services. By many accounts, the amount of fraud is staggering. However, any spending reductions achieved by attacking “waste and fraud,” will likely be more than offset by increased military spending. The cost of the war with Iran has already reached $41 Billion, and the President has proposed doubling the military budget for fiscal year 2027.
Another problem is the interest being paid on the rising national debt level, which has increased by 14% compared to last year. The CBO projects net federal interest costs will exceed $1 trillion in 2026 and rise to $2.1 trillion by 2036. No wonder that the President wants lower interest rates! We don’t see that happening, for we think there is simply too much debt out there. According to a recent WSJ article entitled Foreign Bonds Are Under Heavy Pressure, global debt has surpassed $350 Trillion, and governments in advanced economies alone are expected to borrow $18 Trillion this year. Long term rates are going up all over the world.
To make matters worse for the United States, consider the implication of the Barron’s recent article entitled Foreign Countries Shrink Their Share of Treasuries. Foreigners own about 40% of ‘marketable” Treasury bonds, and they are selling our bonds, taking the money and issuing their own debt. China, for instance, has reduced its treasury holding by 13% from a year ago. Japan’s holdings remain around the same level as a year ago, which means they bought nothing of our $2 Trillion debt increase from a year ago. That means the U.S. has to increasingly borrow money from inside the United States, and while it is doing that, it has to compete with the immense borrowing being done by the mega tech companies who are raising money for their artificial intelligence efforts.
Meanwhile, neither the President, nor both parties in Congress, have taken any leadership in doing anything to slow the mandatory, entitlement spending for Social Security and Medicare, which constitute the largest amounts, by far and away, of total U.S. government spending. However, Trump’s Big Beautiful Bill did mandate work requirements for certain adults aged 19–64 under the Affordable Care Act expansion. These rules require at least 80 hours per month of work, education, or community service to maintain Medicaid eligibility, with exemptions for pregnancy, disability, caregiving, and other qualifying circumstances. However, this modest reform is not enough.
Social Security is a train wreck we are all watching in slow motion. It is well known in Washington that the Old‑Age and Survivors Insurance (OASI) Trust Fund — which pays most retirement and survivor benefits — is projected to run dry by late 2032 or early 2033. At that point, only about 77–78% of scheduled benefits would be payable without a reduction in benefits or an increase in taxation.
Medicare is not in much better shape. Its Hospital Insurance (HI) trust fund, which funds Part A (inpatient hospital care), is projected to be depleted by 2033, three years earlier than previous estimates due to rising healthcare costs and increased spending on hospital care, hospice services, and physician-administered drugs. After depletion, the HI trust fund would only be able to pay about 89% of hospital insurance costs. I think the future is even more bleak than that. What if the progressive wing of the Democratic party gets its wish of Medicare for all? (Presumably that includes Migrants/illegal aliens). How much will the United States have to borrow to pay for a bigger Medicare shortfall?
To sum it all up, we think the federal deficit is already too large for an easy fix. You could try to solve the problem by significantly raising taxes and/or sharply reducing federal spending and benefits, but we think such a heavy dose of fiscal discipline would push the economy into a deep recession. The easy way out will be the road to higher inflation – print money and pay of the debt with dollars that don’t buy that much anymore.
Until we are proven wrong, that’s the way we see it going. An inflated dollar should lead to inflated financial assets, including equities, gold and home values. Both short-term and long-term rates would also tend to be pushed higher.
Happy Days!
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