Trump has also campaigned on delivering large tax cuts.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
OPINION
Donald Trump’s political victory is absolute, but now he faces a showdown with themost powerful institution in the world – the bond market.
The what ...? Nobody sane starts a column talking about the bond market. So let’s come back to that.
For now, let’s just saythatTrump’s campaign promises around taxes and tariffs will make my job a lot more interesting in the next four years than it might have otherwise been.
The big win
It’s like deja vu ... all over again. Trump won. In a landslide as it turns out. But there are some differences this time around. Not least is the fact that this win was widely expected. Markets picked it weeks ago. Even I picked it.
It wasn’t rocket science. There is clearly a desire in middle America for serious structural change. Americans who feel poorer than they were four years ago didn’t respond to being told the economy was all good.
The famous words of former Bill Clinton strategist James Carville - “It’s the economy, stupid” - still hold up despite what the data says.
Inflation has been squeezed back into its box. But prices remain high and it will take time for wages to catch up. People are still feeling it.
But it is more than that this time. Trump’s win confirms that the wave of anti-establishment, anti-elite, anti-woke anger isn’t an aberration.
It runs deep. Democrats have failed to grasp that for eight years, obsessively focusing on Trump as if he were the cause of the anger rather than a symptom of it.
To win, Harris needed to offer a real vision of change. She needed to talk about sweeping out the deadwood and overturning the establishment. But she remained bound to that establishment, overly deferential to her predecessor.
Ironically Joe Biden didn’t do a bad job with the mess he inherited mid-Covid. But that is the reality of the situation. Something else that Democrats failed to grasp, is that reality doesn’t matter in US politics.
Donald Trump’s win confirms that the wave of anti-establishment, anti-elite, anti-woke anger isn’t an aberration. Photo / AFP
What does it all mean to us here on the other side of the world?
Well, this morning we’ve woken up to a Trump bump. Share markets surged overnight – up about 3%.
If it’s any consolation to those who feel down about his win – your KiwiSaver is looking better today.
Wall Street appreciates not facing the new taxes and regulations the Democrats had threatened.
But bond yields surged too. That means higher interest rates.
Trump’s tax cuts – if he delivers what he has promised – would by some estimates require $3 trillion more in US Government borrowing over the next 10 years.
Yahoo Finance counted 12 different tax cut promises made on the campaign trail – from corporate tax to credits for the armed services and first responders like police, fire and ambulance workers.
It’s not clear how many he’ll follow through on but corporate tax cuts would surely be the bottom line.
That means more bond issues and higher interest rates. Interest rates are also up on expectations Trump tariffs will boost inflation.
Regular business readers will recognise that there’s normally an inverse relationship between equity markets and bond yields. For both to rise at once defies conventional wisdom.
But conventional wisdom left the conversation a long time ago.
Trump says his tariffs will pay for the tax cuts. Nobody seriously seems to believe that is possible. So we’re likely to see a fascinating showdown over the US deficit in the coming months.
Republicans control the Senate and may yet control the rest of Congress. That, in theory, gives the President full control to implement his policies.
But Trump faces a more powerful adversary now. He’s going to crash up against bond markets.
When it comes to the deep state or the establishment or whatever you want to call the powerful forces that really control the world, it doesn’t get much bigger than bond markets.
There’s military might, but even an army needs cash.
Bond markets control the world’s debt because they represent the bulk of traded debt. And the world runs on debt.
With a value of more than US$130 trillion, bond markets represent more money than actually exists in the world. They’re roughly twice as big as global share markets, depending on how you do the counting.
And because these markets control the price of borrowing for nations, they can effectively sink an economy if the world’s traders turn against it.
We saw them sink British Prime Minister Liz Truss when she tried to defy them by cutting taxes in the face of a large deficit.
Some might argue (I’m sure Trump would) that as the world’s largest economy, the US is different. Perhaps it does have an infinite well of credit it can draw on. Who knows? We’ll find out.
It was James Carville again who made the point with a now-famous line back in 1993:
“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. Now I would want to come back as the bond market. You can intimidate everybody.”
It’s going to be a lively four years.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
