Trump's $36 trillion debt, hard-line conservatives' strong dollar, Korea's loss of political self-determination, fatal wound
Since the early days of the Trump administration, the strong dollar and the stock market and bitcoin boom due to the emergence of hard-liners against China have been fatally wounded by inflation concerns and the $36 trillion national debt and fiscal deficit in the early days of the hard-line conservatives' military buildup regime, which has turned away from foreign investors.
After a week of booming stock markets in the US, with the S&P 500 index rising about 5% since Election Day, the bond market's volatility has increased, and investors have turned the stock market weaker due to the possibility that Trump's uncontrolled debt and tax cut abuse policies will further worsen the country's existing $35 trillion debt burden.
The surge in US Treasury yields is a direct problem for the government and consumers, and the average 30-year mortgage rate, which tends to match long-term Treasury yields, has surged to its highest level since July this week. Freddie Mac reported on the 8th that the average rate on the 30-year mortgage, the most popular home loan in the United States, rose to 6.79% this week, the highest since July, right after the election.
Bonds rose from 6.72% a week ago and are about 0.7% higher than they were six weeks ago.
Bond yields peaked at about 7.8% late last year and eased until early October, when stronger-than-expected economic outlook reports and bets on a Trump victory pushed bonds higher again.
The U.S. Congressional Budget Office announced on the 5th that the federal budget deficit for fiscal year 2024 has increased to $1.8 trillion from $36 trillion in national debt, the highest level in three years.
The deficit widened further from last year's $1.7 trillion deficit as tax revenues failed to keep up with rising costs of government programs and rising interest on the national debt. With the national debt at $36 trillion and the fiscal deficit system, the Trump administration, which is strengthening its tax cut policy, is adding a corporate tax cut and tariff increase based on the hard-line conservative strategy of the Republican Party to the election promise of a tax cut policy of tax cuts on tips and social security benefits, and fiscal theorists are publishing reports that are concerned about the worsening of the federal deficit and the resulting increase in inflation. As the US Treasury yield became an issue in Trump's hard-line policy toward China, the Chinese currency and currencies sensitive to the Chinese economy strengthened, and the benchmark US 10-year Treasury yield surged 12.2bp to 4.43%, slightly down from the four-month high of 4.479% recorded last week, Reuters reported on the 13th. The dollar rose 0.53% to 154.52 against the Japanese yen, while the British pound fell 0.93% to $1.2749. The yuan rose 0.18% to 7.239 against the offshore Chinese yuan, while the won, which is vulnerable to political self-determination due to the dollar's strength, fell to the weakest point, causing foreign investors to sell off, sending the KOSPI index below 2,500.
Regarding Wall Street's bond attack, veteran bond analyst Yardeni said that the "bond vigilantes" that frustrated bondholders raised in the 1980s to explain their influence over politicians and central bankers' policy agendas could pose a risk to Trump's "tax cuts and debt enhancement" agenda, the New York Times reported on the 11th.
The United States finances a significant portion of its federal budget by selling Treasury bonds and commercial paper. These auctions provide the lifeblood of the U.S. economy, and Treasury yields are seen as a real-time gauge of U.S. fiscal health, but when bond investors expect economic growth to accelerate inflation and the Fed to raise interest rates to slow the economy, yields rise, which in turn costs the federal government more money to borrow, creating a twin deficit of fiscal deficits and trade deficits.
The New York Times reported that “the spike in bond yields in 2007 signaled trouble in the housing market, and a year later, Bear Stearns, the lender, went bankrupt,” and that “the Clinton administration in the 1990s eventually abandoned its high-deficit spending policy and changed course due to the bond selloff.”
U.S. stocks rallied to record highs after the election on May 5 as investors bet on rising stocks, but cooled on May 12 as concerns about Trump’s policies “worsened inflation,” and European stocks fell 2% as European Central Bank (ECB) policymakers warned one after another that Trump’s tariff hikes would hurt global growth. “The 10-year Treasury yield is creating a headwind for the equity rally, and investors are welcoming all these growth initiatives, but there are mixed signals in the bond market,” Jack Abreen, chief investment officer at Cresset Capital, told Reuters. “The question is between tariffs, tax cuts, immigration restrictions, that creates inflationary pressures that the bond market cannot ignore.” Russell Price, chief economist at Ameriprise Financial, told Reuters that the decline in overseas markets has put some pressure on U.S. equities, along with profit-taking ahead of the inflation data.
“When we’re already in a very strong downtrend and experiencing some declines, investors tend to look for some profit-taking in case stocks continue to fall,” he told Reuters. “There is widespread expectation that Trump will cut taxes, which will increase the deficit and the national debt,” Stein Van Nieuwebere, a professor of real estate and finance at Columbia University, told the Times. “The current behavior reflects the market’s best guess as to what his policies will mean.”
The Times reported on the 7th that “the recent rise in borrowing costs is tied to President Trump’s decisive election victory,” adding that “mortgage investors tend to track the yield on the 10-year Treasury note, which jumped 0.2 percentage point on the 6th, the most in more than two years. That’s a sign that investors are worried about Trump’s proposals, from taxes and tariffs to immigration, and that they are pushing up inflation and interest rates.” The New York Times continued, “Expectations for the second Trump administration’s inflation policy have already been reflected in the surge in mortgage rates this week,” and “Analysts said that rates could continue to rise, but how much they will rise from here will depend on new information about the next Trump administration’s agenda and signs of the Fed’s rate-cutting cycle.”
The Congressional Budget Office previously reported that Trump’s tax cut plan, including tariffs, would create an additional $7.5 trillion in debt over the next 10 years from the $1.8 trillion deficit.
The Committee for a Responsible Federal Budget, a bipartisan group that addresses fiscal deficits, predicted in a report on October 8 that the plan announced during President Trump’s election campaign could cost $15 trillion over 10 years.
On the 12th, the Korean stock market surpassed the total market cap of the Korean stock market, $1.7065 trillion, with Bitcoin exceeding $88,000.
The total market cap of cryptocurrencies hit $2.95 trillion on this day, more than double the total market cap of South Korea.
During his campaign, Trump declared that he would "accept digital assets" and pledged to make the United States the "cryptocurrency capital of the world" and stockpile bitcoin nationwide, and Bitcoin, the largest cryptocurrency, donated a huge amount of money to the Trump camp.
Reuters reported on the 12th that "Tesla has risen nearly 40% since the results of the election were announced, as investors believe that Trump's friends and interest groups will do well during his term," and "Bitcoin rallied to the $90,000 level on the 12th, riding a wave of euphoria over expectations that the Trump administration will be cryptocurrency-friendly after being elected president."
Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said, "Crypto enthusiasts think there is a next president who thinks like them," and "the thing about bitcoin is that there is no anchor for valuation and it is difficult to determine fair value, so when 'sentiment' is positive, it moves much more than other asset classes," he told Reuters, calling it a 'psychological investment.'
The Bond Vigilantes responded to the Conservative government's attempts to increase fiscal deficits by selling government bonds when bond yields fell, and in September 2022, Liz Truss, the UK's shortest-serving Conservative Prime Minister at 44 days, resigned after attacking her tax cuts that were causing inflation.
On the 13th, the KOSPI index fell below 2,450 and the KOSDAQ index below 700, and on that day, foreigners sold a net 285.7 billion won in the KOSPI and 27.3 billion won in the KOSDAQ, and the won-dollar exchange rate started trading at 1,410 won per dollar, up 6.5 won from the previous day, and the U.S. 10-year Treasury yield rebounded to 4.430%.
President Yoon Seok-yeol called President-elect Trump on the 7th to congratulate him on his great victory with the slogan "Make America Great Again." On the 8th, as a condition for the meeting, he announced through Newsweek that he would give up political decision-making power, saying, "If North Korea's Kim Jong-un decides to launch a nuclear attack on South Korea, it would be a very irrational act," and that he "has a firm belief that the liberal democratic camp will win, and this is similar to a religious belief."
On September 20, 2022, President Yoon, in his speech at the UN General Assembly, said that he violated the UN Charter’s “prohibition of recommendations to member states” and the prohibition of mobilization outside of international organizations by “recommending the spread of freedom” to member states, and that he violated the Constitution’s “imposition of the liberal democratic order” and destroyed the right to political self-determination by “recommending international freedom.”
President Yoon said, “When the freedom of any citizen or country in the world is threatened, the international community must unite to protect that freedom,” and “The Republic of Korea will fulfill its responsibility together with the UN to protect and expand the freedom of the world’s citizens and to achieve peace and prosperity,” and recommended “recommended the spread of freedom to member states.”
See <President Yoon violated the UN Charter’s “prohibition of recommendations to member states” by “recommended the spread of freedom,” September 21, 2022>
See <Yoon Seok-yeol's 'Anti-state Movement to Spread Freedom to North Korea', A Sharp Turn to 'Freedom is Religious Belief and Anti-Reform', November 12, 2024>