2025-06-21 05:25:00 Sat ET
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We describe, discuss, and delve into how President Trump refreshes American fiscal fears, worries, and concerns through the One Big Beautiful Bill Act. In recent years, American fiscal fears, worries, and concerns have substantially surged in light of the Trump administration’s One Big Beautiful Bill Act. The Congressional Budget Office (CBO) estimates that such fiscal legislation increases American fiscal deficits by more than $2.3 trillion over the next 10 years. These fresh fiscal strains take place at a time when the American public debt reaches almost 120% of annual total GDP economic output. These annual American fiscal deficit and public debt are already at their highest levels outside of crisis episodes such as the Global Financial Crisis of 2008-2009 and the recent rampant Covid pandemic crisis of 2020-2022 worldwide. While these recent American fiscal fears, worries, and concerns lead one of the major credit risk agencies, Moody’s Investors Services, to downgrade Treasury bonds from the top-notch triple-A default status, some foreign financial institutions combine to launch a sharp, sudden, and pervasive Treasury bond selloff worldwide. Is this time different?
The U.S. is now near an unsustainable inflection point in the public debt cycle. In this public debt cycle, a demand-supply imbalance for American government debt can cause significant American government debt service costs in the form of hefty interest and principal payments on Treasury bonds. For the foreseeable future, the American government debt service would inevitably force the ultimate constriction of fiscal expenditures at the margin through further Treasury bond issuances. This time may be different for the American government because the substantially higher real interest rates can cause further fiscal strains on sky-high public debt levels. American government debt service costs start to exceed defense expenditures for the first time since the modern era of global trade isolationism about a century ago before the First and Second World Wars.
American exceptionalism tends to turn out to be the best heuristic rule of thumb for economic growth, global asset market valuation, and modern fiscal-monetary policy coordination. The American dollar continues to be the dominant global reserve currency for global trade, cross-border foreign exchange, and asset market settlement worldwide. As a result, many macro-economists believe the American economy is substantially less vulnerable to sovereign debt crises. However, we can expect to see substantial asset market fluctuations due to American fiscal fears, worries, and concerns in the next few years. Macro-financial market fluctuations may involve some form of high inflation, American dollar devaluation, weak economic output growth, suboptimal domestic employment, and so forth. Over the longer run, American tariff revenues may help offset the adverse impact of tax cuts as part of the One Big Beautiful Bill Act. As a result, the slightly smaller annual fiscal deficit combines with weaker output growth to evolve on substantially more volatile trajectories of both fiscal deficits and debt strains in the next couple of decades. In accordance with global macro-financial history, the American government would probably continue to run hefty fiscal deficits and public debt service costs even before the next recession hits in due course.
In this broader macro context, most macro economists seem to rule out an outright American government debt default. Instead, such economists expect the next financial crisis to involve a surge in inflation in association with a pervasive economic growth shock. This new inflation would likely be more painful than the Covid pandemic inflation shock. As a result, the current fiscal-monetary policy coordination requires a broader Treasury bond market adjustment for the American government to address the sovereign debt situation. Financial repression may be another possible macro policy outcome. Financial repression often involves shorter-term zero or even negative interest rates for the government to restrict further fiscal fears, worries, and concerns due to substantially lower interest and principal payments on sovereign bonds for the foreseeable future. In the past 5 decades, the macro policy lessons from Europe and Japan show that financial repression might help relieve the American sovereign debt burden at the expense of economic growth. At the same time, such financial repression would likely cause global asset market distortions, lower returns for both savers and investors, and even stagflationary rare events in some different parts and regions of the world. In the worst-case scenario, the next American government debt-driven economic heart attack may lead to the complete breakdown of the modern postwar American monetary order worldwide. In human history, sovereign debt debacles and currency crises led to the complete breakdowns of all previous monetary orders before the American dollar replaced the gold standard to arise as the dominant global reserve currency after World War II. Almost all prior global superpowers lost their global macro-financial prowess when some rare economic crisis took the form of a military conflict, confrontation, or challenge from another superpower. As the American fiscal deficits and sovereign debt service costs both now exceed defense expenditures, a military conflict, confrontation, or challenge from China, Russia, Iran, and North Korea might cause adverse impacts, ripple effects, and negative chain reactions in global macro asset markets. Geopolitical alignment often remakes, reshapes, and reinforces asset market fragmentation in the broader business context of financial deglobalization.
In order to avoid a public debt-driven global financial crisis, the American government would need to significantly reduce the prevalent fiscal budget deficits in the next couple of decades. Further, the American government would need to complement these fiscal deficit reductions with gradual interest rate cuts toward the zero lower bound. However, many American voters and politicians lack motivation to make these radical changes in fiscal expenditures. Greater fiscal discipline may be the key element of any significant economic reform for the American government in the next few years. However, there is no obvious economic policy catalyst on the modern horizon that would force macro policymakers to grapple with fiscal fears, worries, and concerns within the American government. In practice, we can draw some macro policy lessons from fiscal dynamism outside America. In recent modern history, these macro policy lessons arise from the South European countries such as Portugal, Italy, Greece, and Spain (PIGS), the Asian heavy sovereign debtors such as China and Japan, and some other asset markets with some similar fiscal fears in different parts and regions of the world.
Recent empirical studies show that external trade imbalances seem to have better predicted public debt-driven financial crises than baseline fiscal deficits and public debt burdens on a standalone basis. The American government may not experience a Gilt-style crisis in Britain in September 2022. In the latter case, a rapid increase in British government bond yields led to pervasive asset market fluctuations and short-term liquidity issues, especially for pension funds and life insurers with substantial liability-driven investments worldwide. These broader asset market fluctuations and short-term liquidity issues were particularly severe when many mega banks, insurers, and other financial institutions were vulnerable to British interest rate hikes, high inflation rates, and some further fiscal strains due to many mini-budgets for better British social welfare programs. However, many macro-economists expect the long-maturity Treasury bond yields to remain high. At the same time, these economists further expect the greenback to weaken in the next few years as American exceptionalism continues to corrode in due course. In addition to higher real interest rates, we believe global macro asset markets would experience substantially more volatile asset prices, returns, and yields in the next few years. Many major countries from America, Britain, and Canada to China and Japan would need to deal with a sovereign debt-driven currency devaluation process over the next couple of decades. For this reason, we believe global macro investors should further diversify their investments in many different asset classes, countries, and regions with strong, steady, and robust fiscal deficit and sovereign debt positions. Specifically, global macro investors should underweight Treasury bonds, cryptocurrencies, and several precious metals such as Bitcoin, gold, silver, and platinum etc. These global macro investors should overweight value stocks and high-tech stocks, especially Gen AI tech titans with global cloud data centers worldwide: Meta, Apple, Microsoft, Google, Amazon, Nvidia, and Tesla (MAMGANT also known as the Magnificent 7). In recent years, these substantially more attractive investments represent a significant portion of American stock market concentration.
Today, the new Trump administration refreshes American fiscal fears, worries, and concerns through the One Big Beautiful Bill Act. The CBO estimates that this new legislation increases American fiscal deficits by more than $2.3 trillion over the next 10 years. Such new additional fiscal strains take place at a time when the American sovereign debt reaches 120% of annual GDP economic output in America. This time may or may not be so different for the American economy to escape high inflation, slow economic growth, sovereign debt service costs, and other sovereign debt-driven macro-financial ramifications.
In his recent book on sovereign debt-driven business cycles, How Countries Go Broke: The Big Debt Cycle, the global macro hedge fund Bridgewater founder and investment strategist Ray Dalio explains why the Trump administration’s One Big Beautiful Bill Act can exacerbate fiscal fears, worries, and concerns in America. Substantial sovereign debt cycles occur and recur through global macro history. We can measure sovereign debt in terms of (1) the ratio of government debt service to government revenue per annum, (2) the ratio of total Treasury bond issuance to global macro demand for Treasury bonds, and (3) the amount of fiat money for the American government to print to purchase additional Treasury bonds to make up for the shortfall in the global macro demand for these Treasury bonds. As Dalio suggests, all of these measures tend to increase in a longer-run and multi-decade sovereign debt cycle until they cannot anymore because sovereign debt service costs inevitably crowd out all the other fiscal expenditures; because real interest rates increase substantially to clear the imbalance in both the demand for and supply of Treasury bonds; and further, because the central bank prints substantially more fiat money to buy up Treasury bonds at the margin to make up for the shortfall in the global demand for Treasury bonds. As a result, these fundamental forces, factors, and reasons combine to reduce the real purchasing power of the domestic currency. In light of the recent fiscal fears, worries, and concerns due to the One Big Beautiful Bill Act under the second Trump administration, the American dollar would depreciate double-digits to re-anchor inflationary price pressures in response to global macro fluctuations in both the demand for and supply of Treasury bonds. At any pace, Treasury bond returns continue to be subpar until such bonds become so cost-effective that they can attract substantially more global demand. Alternatively, the American government seeks to restructure these Treasury bonds when real interest rates persist below the zero lower bound for the foreseeable future. We can measure all these small subtle signs of Treasury bond market deterioration to better gauge broader movements toward the sovereign debt-driven crisis in the American financial market. In the worst-case scenario, the American sovereign debt-driven crisis may inevitably result in the complete breakdown of the American monetary order worldwide. This American public debt-driven crisis would lead to the ultimate constriction of fiscal expenditures through Treasury bonds. Dalio, his financial advisors, and several other global investment strategists use, apply, and leverage these diagnostic tools to assess whether the American government debt-driven crisis would likely evolve into another global financial crisis in the next couple of decades.
In his recent book, How Countries Go Broke: The Big Debt Cycle, Dalio describes, discusses, and delves into the 35 most recent cases of sovereign debt cycles worldwide. The American fiscal situation today has hundreds of historical analogies, and these historical analogies go back as far as human history. In fact, almost all countries have gone through such sovereign debt cycle. These historical analogies sometimes repeat to cause the complete breakdowns of all previous monetary orders worldwide. These complete breakdowns include all the prior global reserve currencies such as the British Pound and Dutch Guilder. This sovereign debt cycle sometimes happens only once in one lifetime. For this reason, most macro-economists cannot understand well this long-run multi-decade sovereign debt cycle. Understanding well the sovereign debt cycle sometimes turns out to be a major competitive advantage for many macro-economists such as Ray Dalio, Kenneth Rogoff, Carmen Reinhart, and some of their co-authors. This competitive advantage helps these economists better navigate through the recent Global Financial Crisis of 2008-2009, European sovereign debt debacle of 2010-2015, and Covid pandemic crisis of 2020-2022.
As the 3 major measures of American sovereign debt levels show, the current fiscal situation points to the next U.S. sovereign debt crisis, especially if the American government cannot exercise sound and prudent fiscal discipline to cut some social welfare programs in the next couple of decades. Meanwhile, American sovereign debt amounts to almost 120% of annual total GDP economic output. At the same time, American fiscal deficits now exceed defense expenditures to hover around 5% to 9% of total GDP economic output per annum in the next few years. In modern global macro history, several premature indicators of a sovereign debt crisis have led to complacency. This time may or may not be so different for American fiscal fears, worries, and concerns after the eventual congressional passage of the second Trump administration’s One Big Beautiful Bill Act in both Senate and the House of Representatives over the next few weeks.
If the American government reduces fiscal deficits to only 3% of total GDP economic output per annum, instead of the upper range of 5% to 9%, the hypothetical radical economic reform would go a long way toward avoiding a new American sovereign debt crisis and its attendant fiscal risks, threats, and challenges for the American economy. In effect, the American dollar and sovereign debt should serve as steady stores of value. Otherwise, these sovereign debt and American dollar assets would probably face the imminent risk of substantial devaluation soon. This devaluation completes the Dalio sovereign debt cycle. In practice, this substantial currency devaluation has happened with all the previous global reserve currencies such as the British Pound and Dutch Guilder.
In addition to keeping a 3% to 4% upper limit on the American fiscal deficit-to-GDP ratio, the American government should better balance taxes and fiscal expenditures for social welfare programs by gradually reducing the real interest rate to almost 1.5% to 2% in the next couple of decades. In effect, this fresh fiscal-monetary policy coordination can reduce the American sovereign debt service costs for the American government for the foreseeable future. For all practical purposes, the American sovereign debt service costs include interest and principal payments on Treasury bonds. These public debt service costs should not exceed 2% of total GDP economic output per annum. If the American government keeps fiscal deficits and debt service costs within 5% of total GDP economic output each year, this radical fiscal-monetary policy coordination can help substantially improve American economic growth, employment, and asset market valuation over the next couple of decades.
Japan continues to exemplify the theoretical Dalio sovereign debt cycle in practice. In recent decades, the Japanese government’s sovereign debt position has made Japanese Treasury bonds and other debt assets terrible capital investments. To make up for a shortage of global macro demand for these Japanese debt assets at ultra-low interest rates, the Bank of Japan printed a lot of fiat money, bought a lot of Treasury debt, and attempted to prevent deflation in the first place. This long prevalent monetary policy stance with ultra-low interest rates led to 45%-55% substantial depreciation of Japanese Treasury bonds over the past couple of decades. At the same time, the typical real wages of a Japanese worker have fallen by about 55% in both common currency terms and real purchasing power terms by comparison to the real wages of an American worker over the past couple of decades. In time, the Dalio debt-driven cycle appears to predict an imminent sovereign debt crisis in Japan over the next few years. At any pace, the substantial devaluation of the Japanese Yen seems to complete the Dalio sovereign debt-driven cycle for Japan, even though there has been no sovereign debt crisis in this part of East Asia.
The resultant higher public-sector debt can constrain the room for monetary policy maneuver by worsening the trade-offs among price stability, maximum sustainable employment, asset market stabilization, and macro-financial resilience. High sovereign debt burdens often raise the likely sensitivity of fiscal positions to short-term interest rates. The new classical Sargent-Wallace unpleasant monetarist arithmetic analysis shows that high inflation inevitably arises from incremental increases in money supply growth when the central bank continues to fund fiscal expenditures with Treasury bonds as part of the government budget constraint. In the extreme, if increasingly higher sovereign debt eventually cripples Treasury creditworthiness and subsequent credible fiscal policy actions, the current sovereign debt burden would likely lead to substantially higher inflation through exchange rate depreciation in an open economy. In the worst-case scenario, the central bank cannot maintain price stability, lower and steady inflation, as part of the macro mandate. If the American government has little fiscal discipline, blind, reckless, and incessant expansionary fiscal policy actions turn out to be unsustainable in the long run. In due time, the American sovereign debt burden inexorably derails the core trade-offs between economic growth, inflation, and asset market valuation.
Harvard macro-finance professors Carmen Reinhart and Kenneth Rogoff analyze more than 800 years of bank crises, inflation crises, currency crises, and sovereign debt crises in global macro-financial history from the Middle Ages to the modern era. Reinhart and Rogoff launch their panoramic analysis by defining the basis of financial crises in all their varieties. Inflation crises refer to the rare cases of at least 20% persistent and general price increases per year. This definition serves as a rather low bar for postwar fiat money episodes, but this definition suitably calibrates inflation bursts in the earlier metallic eras. Currency crashes refer to more than 15% fluctuations in exchange rates. Also, the currency debasement event threshold for metallic eras targets 5% or more exchange rate fluctuations. In many fiat money eras, these rare events relate to currency control reforms from currency pegs to flexible exchange rates. Bank crises are rare unique binary episodes of substantial debt default events in the financial system. Ubiquitous bank runs, failures, open recapitalizations, mergers, acquisitions, large-scale government bailouts, and so on often turn out to be the norms in these bank crises. In these rare events, banks, insurers, and other non-bank financial institutions lose substantial principal and interest loan payments. Reinhart and Rogoff further contribute to the long-term study of bank crises by including a deeper chronology of not only external bank defaults but also narrative details on many domestic debt defaults.
Reinhart and Rogoff introduce the rare unique concept of debt intolerance. This basic thesis rests on the empirical relation between sovereign debt levels and bank defaults. This relation structurally differs between OECD countries and non-OECD countries. For OECD countries, the national debt-to-GDP ratios often tend to land in the reasonable range of 125% to 150%. However, bank crises can recur at much lower levels of national debt-to-GDP ratios in many non-OECD countries. The East Asian financial crisis of 1997-1998 and subsequent currency crises in Argentina and Russia serve as good examples of the differentiation between OECD and non-OECD countries. Reinhart and Rogoff further contribute to the longer-run empirical study of the new root causes of economic growth. For both OECD and non-OECD countries, there is a robust negative relation between real GDP economic growth and national debt-to-GDP, especially when the national debt-to-GDP ratio exceeds 90%. This important empirical result suggests that there should be some optimal range of public debt-to-GDP ratios for the productive uses of both fiscal deficits and sovereign debt levels to promote economic growth, price stability, and asset market valuation in the long run. This result poses a new conceptual challenge to the naïve view that most countries can continue to fund large-scale government expenditures with incessant fiscal deficits in support of long-term economic growth. At some point, economic growth deteriorates with general price inflation risks as fiscal deficits add to national debt levels in due course. Overall, Reinhart and Rogoff offer a negative determinant of cross-country economic growth by shining new light on the adverse impact of increasingly higher sovereign debt-to-GDP ratios on real GDP economic growth. In this fundamental view, fiscal policies, fiscal stimulus programs, and other government expenditures cannot rise with no broader repercussions on economic growth, price stability, and asset market valuation in the long run.
In his new book, Our Dollar, Your Problem: An Insider’s View of 70 Turbulent Years of Global Finance, and the Road Ahead, Harvard macro-finance professor Kenneth Rogoff suggests that American fiscal strains are not sustainable in light of the recent rise in real interest rates worldwide. In this new light, this time may be different. The American economy may run into a global macro public debt crisis in the next few years, especially if the American government cannot develop a significant adjustment in the global market for Treasury debt assets in time. Rogoff further regards the recent rise in real interest rates worldwide as part of the prevalent global monetary policy normalization, not a statistical aberration in global macro history. The Trump administration’s One Big Beautiful Bill Act seems to exacerbate American fiscal fears, worries, and concerns at the margin.
We can expect the fundamental forces, factors, and reasons for high interest rates to persist in the next few quarters. These fundamental forces, factors, and reasons include high global sovereign debt levels, extra fiscal demands, geopolitical risks, and green renewable energy transitions worldwide. The vast majority of these fundamental resources help accommodate new global technological advancements in some strategic sectors such as AI large language models (Gen AI LLM), semiconductor microchips, graphics processing units (GPU), virtual reality (VR) headsets, cloud services, telecoms, quantum computers, high-speed broadband networks, electric vehicles (EV), autonomous robotaxis (AR), AI-driven healthcare solutions, and pharmaceutical medications, treatments, and therapies. Today, President Trump seeks to substantially reduce American trade deficits through hefty tariffs, quotas, embargoes, and even comprehensive bans and restrictions on foreign investments in these strategic sectors. The second Trump administration’s tariff policies may inadvertently reduce American capital inflows. In effect, these capital inflows historically combine to put downward pressure on U.S. interest rates in the global market for Treasury bonds. In time, all of these fundamental forces, factors, and reasons now pose a new conceptual challenge to the American government in light of both the increasingly higher fiscal deficits and sovereign debt levels.
High interest rates now serve as the primary reason why the current American fiscal situation seems so unsustainable for the foreseeable future. Should the Federal Reserve System cut the federal funds rate substantially toward the zero lower bound in the next few years, many macro-economists would regard American fiscal fears, worries, and concerns as secondary to the current tariff measures specifically, and the new fair trade policy stance more generally under the second Trump administration. In recent decades, U.S. sovereign debt levels have risen from 30% of total GDP economic output in 1980 to almost 120% of total GDP economic output today. Historically, large sovereign debtors like America face serious macro-financial repercussions when global interest rates rise significantly. The second Trump administration continues to further increase American fiscal deficits and sovereign debt levels with the new landmark One Big Beautiful Bill Act. In the next few years, an American sovereign debt crisis would probably heighten geopolitical risks, tensions, and frictions, higher inflation rates, and adverse economic growth shocks.
Most economists expect the American government not to experience a major sovereign debt default debacle in the next few years. In reality, it is more likely for the American government to resort to financial repression. Financial repression requires keeping artificially low interest rates near the zero lower bound such that interest rate caps would combine with higher bank reserve requirements to impose strict restrictions on capital flows in support of relatively high American sovereign debt levels. On the one hand, financial repression helps better manage American government debt because this extreme policy measure restricts further fiscal fears, worries, and concerns due to substantially lower public debt service costs, both interest and principal payments on Treasury bonds in due time. On the other hand, however, this extreme policy measure would take place at the expense of subpar economic output growth because financial repression would likely cause global asset market distortions, lower returns for both savers and investors, and even stagflationary events in many different parts and regions of the world. In the worst-case scenario, the next American sovereign debt-driven crisis might lead to the complete breakdown of the modern postwar American monetary order worldwide. In recent decades, Japan has gone down this route with the rare unique Treasury bond yield curve control policy. In due time, this stringent policy measure has empowered the Japanese government to forestall a sovereign debt default debacle despite the sky-high 250% ratio of public debt-to-GDP. At the same time, this stringent policy measure has further mired Japan in a 20-year sluggish economic growth malaise. Also, Europe has resorted to some form of financial repression in the subsequent years after the Global Financial Crisis of 2008-2009 and the European sovereign debt crisis of 2010-2015. In a similar vein, such stringent policy measure helps relieve increasingly higher European fiscal deficits and sovereign debt levels, especially for South European countries Portugal, Italy, Greece, and Spain (PIGS). However, this stringent policy measure has contributed to the sluggish economic growth woes of such South European countries in the past couple of decades. In this new light, we can draw vital macro-financial policy lessons from both Japan and Europe to help better inform American fiscal-monetary policy coordination in response to a potential U.S. sovereign debt crisis.
The American dollar continues to serve as the dominant global reserve currency for regional trade, finance, and technology. In effect, this dominance offers some safeguard for American fiscal fears, worries, and concerns despite substantially more sovereign debt burdens today. In recent years, foreign demand for Treasury bonds seems to reach the main inflection point of saturation. In the past 25 years, the regional trade bloc for the American dollar has already begun to splinter as China, Russia, India, and Indonesia have proactively moved away from the American dollar in recent years. Also, the vital distrust of the American government has further prompted Latin American, East Asian, and African countries to seek some alternative reserve currencies such as the Chinese Renminbi, Japanese Yen, Euro, British Pound, and Deutsche Mark for regional trade, finance, and infrastructure. Although the American dollar continues to be the dominant global reserve currency for the foreseeable future, we expect to see a more tripolar currency landscape with the American dollar, Chinese Renminbi, and Euro in support of global trade, finance, infrastructure, and even technology. American fiscal fears, worries, and concerns combine with the increasingly higher sovereign debt thresholds to undermine investor confidence in the American dollar. Even if the American fiscal strains may not snowball into a potential sovereign debt default debacle in the next few years, we would expect to see substantial adjustments to American fiscal-monetary policy coordination to help lessen the current American fiscal fears, worries, and concerns. In this new light, the Federal Reserve System would likely continue to reduce the shorter-run interest rate toward the zero lower bound in the next few years. At any pace, this expansionary monetary policy stance helps reduce American fiscal strains in the form of sovereign debt service costs such as interest and principal payments on Treasury bonds. In practice, this better fiscal-monetary policy coordination pivots and persists in response to President Trump’s recent criticisms of Fed Chair Jerome Powell’s monetary policy independence from the Supreme Court’s 1935 landmark precedent on Humphrey’s Executor.
The second Trump administration’s Big Beautiful Bill Act spans 5 major components. These 5 major components serve as carrots, tax breaks, and several other incentives for American consumers and businesses. These 5 major components include American personal tax cuts, further tax pledges, business investment incentives, new fiscal expenditures in defense and immigration enforcement etc, and substantially fewer fiscal expenditures in public healthcare and green energy programs. In this negative light, the current American fiscal situation looks unsustainable in the long run.
The second Trump administration’s One Big Beautiful Bill Act would pass both chambers of Congress, Senate and the House of Representatives, in the next few weeks from early-July to August 2025. This new landmark legislation would further increase American fiscal deficits by more than $2.3 trillion in the next 10 years in accordance with the Congressional Budget Office’s (CBO) new fiscal forecasts. President Trump’s new tariffs would help better balance the American fiscal deficits in the next few years. Such macro policy coordination looks likely to result in some slight reductions in American fiscal deficits. In effect, the current American fiscal-monetary policy coordination would likely lead to a mild economic growth shock in the next few years. Although these American macro-financial policies combine to help avoid any substantial increases in U.S. fiscal deficits and sovereign debt thresholds for the foreseeable future, the current American fiscal situation remains unsustainable over the long run.
The first major component of the One Big Beautiful Bill Act pertains to more than $3.3 trillion personal tax cuts over the next 10 years. The second Trump administration seeks to extend these personal tax cuts from late-2025 to the next few years. In combination, these personal tax cuts represent 1% of total GDP economic output. The One Big Beautiful Bill Act expands some of these personal tax cuts. As a result, this legislation reduces taxes by $60 billion per annum in the next few years.
The second major component of the One Big Beautiful Bill Act pertains to Trump campaign tax pledges. This legislation would remove taxes on all tips and overtime salaries with some limits. At the same time, this legislation would allow auto loan interest deductions as well as larger standard deductions to senior citizens in America. Further, state and local tax (SALT) deductions would expand incrementally. In combination, these deductions would reduce U.S. personal taxes by $75 billion per annum over the next few years.
The third major component of the One Big Beautiful Bill Act pertains to business investment incentives. This new legislation would reinstate 3 these prior business investment incentives: full expenses for American capital equipment investments, full expenses for R&D outlays on U.S. soil, and slightly more generous interest deductions for all American businesses. Also, the legislation would introduce another incentive for American businesses: full expenses for factories, chemical plants, and refineries on U.S. soil. These new business incentives would boost U.S. fiscal deficits by more than $100 billion in the fiscal years 2025-2026. The longer-term annual costs would be substantially smaller from 2027 onward.
The fourth major component of the One Big Beautiful Bill Act represents another $400 billion public funds for immigration enforcement ($180 billion per annum), defense ($150 billion per annum), farm subsidization ($60 billion per year), and air traffic control ($15 billion per year). These public funds would spend at a pace of $65 billion per annum in the next few years. In effect, these new public funds further fulfill President Trump’s election campaign pledges for better border control, defense, and immigration enforcement.
The fifth major component of the One Big Beautiful Bill Act relates to significantly lower fiscal expenditures in healthcare, green energy, and so on by almost $1.6 trillion over the next 10 years. The legislation would limit personal eligibility for Medicare, Medicaid, and food stamps with some alternative state programs. Some smaller fiscal cuts span American student loans, federal employee benefits, and green energy subsidies with almost $600 billion fiscal deficit reductions over the next 10 years.
Today, we can expect the prior personal tax cuts from the first Trump administration to expire on schedule. The new legislation would increase U.S. fiscal deficits by more than $2.3 trillion in the next 10 years. When Congress extends temporary tax cuts beyond the second Trump administration in 2028-2029, this new legislation would add another $400 billion to American fiscal deficits over the next 10 years. At this stage, we believe it would be relatively easy and smooth for both chambers of American Congress, Senate and the House of Representatives, to pass the second Trump administration’s One Big Beautiful Bill as new fiscal legislation in the next few weeks from early-July to August 2025.
Although this new legislation would worsen American fiscal deficits over the next few years, we would expect the second Trump administration to raise new tariff revenues from multiple bilateral trade deals to offset the incremental hikes in American fiscal deficits and sovereign debt levels. The second Trump administration’s bilateral trade deals would likely amount to $400 billion tariff revenues per annum for the American government. On balance, however, we would reduce American economic growth expectations as these new bilateral trade deals and tariff policies would likely lead to a mild adverse American output growth shock over the next few years.
On balance, we believe the American sovereign debt burden remains more than $33 trillion, or approximately 120% of total GDP economic output per annum, in the next 10 years. On average, American fiscal policies have historically tightened in response to substantial hikes in the American sovereign debt burden through a mixture of tax hikes and reductions in fiscal expenditures for social welfare programs. In recent American administrations, however, the fiscal response has moved in the other direction. With no obvious policy event on the horizon for American lawmakers to evaluate the current fiscal strains and sovereign debt levels, the next adverse American asset market response might ultimately be the fundamental force for more meaningful macro policy changes, reforms, and even reversals in America.
In his recent book on sovereign debt-driven fiscal strains, Doom: The Politics of Catastrophe, Sir Niall Ferguson describes the historically common pervasive tendency of former empires, or global superpowers, to gradually then suddenly decline due to excessive sovereign debt accumulation. At some inflection point, the sovereign debt service costs, mainly interest and principal payments on Treasury bonds, started to exceed national defense expenditures for each of the former empires. As a result, each of these former empires faced fiscal strains to engage in an arms race against another superpower. In this broader context, each of these former empires ultimately declined due to some subsequent war, conflict, confrontation, or military challenge from another superpower.
Sir Niall Ferguson refers to this historically common tendency as Ferguson’s Law. He uses, applies, and leverages Ferguson’s Law to shine new skeptical light on the fiscal implications of the second Trump administration’s One Big Beautiful Bill Act. As Ferguson’s Law shows, the current American sovereign debt service costs, primarily interest and principal payments on Treasury bonds, have begun to exceed American defense expenditures. For this reason, the current American fiscal situation may not be sustainable in the longer run. In addition to the Russia-Ukraine war in Eastern Europe as well as the relentless military warfare, conflict, and retaliation between Israel and Iran, Lebanon, Hamas, and the Palestinians in the Middle East, another new military conflict, confrontation, or challenge from some superpowers, such as China’s aggression against Taiwan and North Korea’s potential invasion over the Korean Peninsula, might weaken the extant American balance of power in many different parts and regions of the world.
Ferguson draws many historical analogies to support his central thesis of geopolitical decline. Specifically, Ferguson’s Law broadly applies to the Spanish Empire in decline from 1590 to 1652, Dutch Republic in decline from 1705 to 1795, French Empire in decline from 1756 to 1789, Ottoman Empire in decline from 1828 to the early-1900s, Austro-Hungarian Empire in decline from 1867 to 1918, and British Empire in decline from the 1930s to 1960s. Ferguson further argues that American is currently at a similar historical juncture. Although Ferguson’s Law is not formal in the scientific sense, this concept provides a richer geopolitical framework for us to better understand the cyclical nature of each former empire. Ferguson’s Law further highlights the potential pitfalls of excessive sovereign debt accumulation, as well as the fiscal policy implications for military defense on the global stage.
Today, America faces fiscal fears, worries, concerns, strains, and constraints on its broader dynamic capability to safeguard global peace, prosperity, and financial market stabilization. In recent years, China, Russia, Iran, and North Korea have become serious military powers, contenders, and challengers to the American balance of power in different parts and regions of the world. America now keeps its precarious position as the dominant global superpower at a time when these geopolitical rivals and adversaries continue to shift increasingly toward the next-generation, more cost-effective, and even disposable warfare hardware. In the next few years, the American government spends more on sovereign debt service than defense. In recent times, the second Trump administration’s One Big Beautiful Bill Act would worsen the American sovereign debt and fiscal deficit trajectories in the next couple of decades.
In recent decades, the 3 major global superpowers, America, China, and Europe, face fiscal fears, strains, and constraints on top of excessive sovereign debt burdens. The superpowers struggle to muster the fiscal resources for a more meaningful arms race in due course. None of these 3 superpowers is powerful enough to control some steady-state sphere of influence. This bleak fiscal situation provides economically weaker countries such as Russia, Iran, and North Korea with the rare unique opportunity to pose more meaningful military threats. Even today, the world still continues to confront the brutal facts of geopolitical risks, tensions, and frictions, as well as less stable and more volatile asset market fluctuations, primarily due to fiscal fears, strains, and constraints on the 3 dominant major global superpowers. American fiscal deficits and sovereign debt service costs now both exceed defense expenditures. Any military conflict, confrontation, or challenge from China, Russia, Iran, and North Korea might cause adverse impacts, ripple effects, and negative chain reactions in global asset markets. Geopolitical alignment often remakes, reshapes, and reinforces asset market fragmentation in the broader business context of financial deglobalization.
Recent empirical studies show that external trade imbalances seem to have better predicted public debt-driven financial crises than baseline fiscal deficits and public debt burdens on a standalone basis. The American government may not experience a Gilt-style crisis in Britain in September 2022. In the latter case, a rapid increase in British government bond yields led to pervasive asset market fluctuations and short-term liquidity issues, especially for pension funds and life insurers with substantial liability-driven investments worldwide. These broader asset market fluctuations and short-term liquidity issues were particularly severe when many mega banks, insurers, and other financial institutions were vulnerable to British interest rate hikes, high inflation rates, and some further fiscal strains due to many mini-budgets for better British social welfare programs. However, many macro-economists expect the long-maturity Treasury bond yields to remain high. At the same time, these economists further expect the greenback to weaken in the next few years as American exceptionalism continues to corrode in due course. In addition to higher real interest rates, we believe global macro asset markets would experience substantially more volatile asset prices, returns, and yields in the next few years. Many major countries from America, Britain, and Canada to China and Japan would need to deal with a sovereign debt-driven currency devaluation process over the next couple of decades. For this reason, we believe global macro investors should further diversify their investments in many different asset classes, countries, and regions with strong, steady, and robust fiscal deficit and sovereign debt positions. Specifically, global macro investors should underweight Treasury bonds, cryptocurrencies, and several precious metals such as Bitcoin, gold, silver, and platinum etc. These global macro investors should overweight value stocks and high-tech stocks, especially Gen AI tech titans with global cloud data centers worldwide: Meta, Apple, Microsoft, Google, Amazon, Nvidia, and Tesla (MAMGANT also known as the Magnificent 7). In recent years, these substantially more attractive investments represent a significant portion of American stock market concentration.
As President Donald Trump won his second presidential bid to return to the White House in November 2024, Republicans further won the majority seats in both Senate and the House of Representatives. At this stage, we believe it would be relatively easy and smooth for both chambers of American Congress, Senate and House of Representatives, to pass the second Trump administration’s One Big Beautiful Bill as new fiscal legislation in the next few weeks from early-July to August 2025. In the meantime, the primary obstacles to solving the current American fiscal problems are political in nature. The long prevalent American 2-party system often produces bigger budgets for congressional passage, approval, and oversight in recent decades. This new political-economy feature has arisen as a bizarre aspect of the American democratic government. In due time, American politicians should act together to deploy new technological solutions to help better ensure the sound, stable, and robust provision of public goods. The key public goods span defense, healthcare, scientific research, law enforcement, infrastructure, immigration, energy, education, and so on. In the next couple of decades, the American government should combine interest rate cuts with fresh fiscal deficits, tariffs, and broader macro-financial deregulations to help the American economy grow out of the current sovereign debt problems in the long run.
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Brass Ring International Density Enterprise (BRIDE) ©
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