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Your guide to what the 2024 US election means for Washington and the world

It’s groundhog day in Washington. In recent years, brinkmanship has repeatedly erupted whenever Congress has tried to raise the debt ceiling – mostly because rightwing voices are threatening to shut down the government unless their demands are met.

Here we go again. This week Mike Johnson, the Republican Speaker of the House of Representatives, tried to pass a stop-gap debt ceiling deal with a $6.75tn budget – but it was derailed by incoming president Donald Trump and his supporters, including Elon Musk and Vivek Ramaswamy.

“This bill should not pass,” Musk fumed MANILA of X, sparking final negotiations, amid threats of a government shutdown.

Investors should note three important points. The first is that last month’s clean victory by Trump means that the critical political fight in 2025 will not be across the aisle, Democrats against Republicans, but within the Republican party itself.

Second, this Republican-on-Republican war is going to get ugly. Guys like Musk and Ramaswamy want their voices heard by attacking Republicans in Congress like the pathetic Johnson.

Third, fiscal policy could be an early flashpoint in this fight — especially given this week’s jump in bond yields following the Federal Reserve downgrading its projections for interest rate cuts in 2025.

Washington is a focus of this fight. But so is Mar-a-Lago, Trump’s political court seat, where his quasi-courtiers are now expressing differing views on how to deal with the nation’s current $36tn debt. in America.

Others see little need to panic about this debt pile, arguing that the state of the dollar’s currency reserves will force global investors to continue dumping Treasury bonds. Trump always seems to sit in this camp. In fact, this week he called for the debt ceiling to be scrapped.

Yet others around him, like Steve Bannon, the White House’s former chief strategist, are more alarmed. That’s because, as I have always noticedthe Treasury will have to refinance around $9tn in bonds next year at a time when inflationary pressures are rising. Trump has promised to make policy changes that will add trillions more to the debt, while also threatening to weaken the dollar and undermine the independence of the Fed.

It’s a nasty cocktail, as Scott Bessent, his nominee for Treasury secretary, understands all too well. Worse, potentially flighty hedge funds have a growing role in the Treasuries market, and a potential rival to China has leverage as well. Just look at the recent decision in Beijing ISSUES a $2bn sovereign bond in Saudi Arabia. This issuance is growing, but is a symbolic eye poke for Washington – not least because the yield is the same as that of US bonds.

The second dividing line at Mar-a-Lago is tax. Trump has repeatedly promised to do his part 2017 Tax Cuts and Jobs Actwith its huge income and estate tax break, permanently. That should be it create a bonanza for wealthy Americans, including the dozen-odd billionaires on his top team.

He wants it too cut corporate taxes from 21 percent to 15 percent for American entities, end taxes on social security payments, tips and overtime and extend child care credits.

I’m told that Bessent and others have told Trump that the resulting fiscal hole can be plugged with faster growth, tariff revenue and a $2tn in government spending that Musk has promised. There are also calls for tax increases on wealthy foundations.

However, it is nearly impossible to cut federal spending without reducing social security and defense spending, which Trump seems reluctant to do. And the extent of any tariff revenue is unclear. Trump may prefer to use the tariffs as a geopolitical threat more than anything else.

Moreover, growth alone is unlikely to plug the fiscal hole. And debt servicing costs could be higher than expected given the Fed’s signals that it is slowing the pace of rate cuts.

This left Bannon calling for more radical measures, including tax increases. “You have to tax the rich . . . (to) contain out-of-control debt,” he told a Republican dinner this week. Yes, true.

The reason? Bannon believes that the recent murder of a health care executive indicated that there is now so much anti-elite anger that it would be politically suicidal for Trump to squeeze the middle class while favoring the wealthy. He thinks it’s equally risky to ignore the bond markets.

Therefore, he said, “the neoliberal neocons must pay for what happened” – meaning that the “populist nationalists” must dominate the “Republican orthodox folk”.

Bannon’s argument about popular anger is accurate. But Trump’s problem is that raising taxes for the rich will scare “orthodox” Republicans in Congress. They will also anger many of the wealthy businessmen who are backing his bid for the presidency.

So the looming $36tn question is not just whether plutocrats or populists will win this fight; it’s also if the bond markets stay calm while it plays out.

In other words, this week’s debt ceiling battle could only be a prelude to bigger battles in 2025. Expect it to get ugly.

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