Money For Nothing

The Credit Strategist - June 2025

Excerpts from the June issue of The Credit Strategist

Tax and Budget Bill

There is widespread agreement that the fiscal 2026 budget and tax bill passed by the House of Representatives is extremely disappointing with respect to deficit reduction. Even President Trump’s allies are unhappy. As noted above, the lack of deficit reduction adds to the pressure on bond markets. Term premiums in the U.S. are moving higher on U.S. Treasuries with 10- and 30- year yields topping 4.5% and 5.0%, up 0.3% and 0.5%, respectively, since April 2^nd when President Trump unveiled his first tariff proposal. The term premium reached 90 basis points on May 22^nd; to place that in context, it was negative from 2006 through 2014 according to the New York Fed. These are not crisis levels but they are clearly moving in the wrong direction. But the real problem – real as in existential – is that the U.S. is facing a fiscal time bomb and the fiscal 2026 budget and tax bill shortens the fuse.

While there are parts of the bill designed to promote economic growth, they are unlikely to overcome the mounting burden of debt on the economy. There is very little in the bill that addresses the unsustainable spending trajectory of the federal government. One can point fingers in various directions but the real culprits are voters who refuse to elect anyone willing to make the hard decisions necessary to deal with the problem. No politician can keep his job by doing the right thing; job security demands doing the wrong thing. DOGE produced less than it promised not because of its own shortcomings but because of Congressional resistance to meaningful spending cuts. Elon Musk and his team learned what students of government already knew – every government program is supported by political constituencies prepared to fight to the death to defend it. Threatening these constituencies unleashes vicious personal attacks against those trying to do the right thing. DOGE might have benefitted from a subtler approach (Elon Musk is many things but subtle is not one of them) but still would have run into the Washington buzzsaw that cuts to pieces anyone challenging its prerogatives. DOGE reportedly cut $175 billion of unnecessary programs and expenses (that number has yet to be confirmed), a respectable number, but there is much more fraud and waste in entitlement and other protected fiefdoms squandering taxpayers’ money that Congress and a bloated bureaucracy are fully complicit in protecting. The limited number of Senators and Representatives willing to hold out for larger spending cuts deserve credit but are unlikely to block final passage of a bill because the alternative is a massive tax increase that nobody wants (except maybe Bernie Sanders and AOC). The 2026 midterms will deliver the verdict on whether taxpayers will continue to commit financial harikari or try for better in the future. My money is on harikari.

The Congressional Budget Office (CBO) reported in March that if current law remained unchanged, the 2017 tax cuts would expire at the end of 2025 and discretionary spending would shrink as a share of GDP. This would trigger a $4+ trillion tax hike and still leave the 2035 annual deficit at about 6% of GDP while adding approximately $20 trillion to publicly held debt, increasing the debt-to-GDP ratio from 100% to 118% (excluding off-balance sheet items). But rather than take that report as a warning, Congress is unwilling to take an axe to spending. According to the bipartisan Committee for a Responsible Federal Budget, the House bill would add more than $3.3 trillion to the CBO’s deficit numbers over the next decade and hike the debt-to-GDP ratio to 125% (and if so-called “temporary” measures in the bill are made permanent, add $5.2 trillion to the deficit and raises the debt-to-GDP ratio to 129%). Without boring readers with all the gory details, suffice it to say that claims that the bill will stimulate enough economic growth to solve the deficit are unpersuasive. Elon Musk, in leaving DOGE, argued that we can solve the problem through higher productivity and growth through use of AI and robots. To that I say, “From your mouth, Elon, to God’s ears.” Musk’s aspiration is echoed by other technology bulls like the hosts of the All-In Podcast (who also argue that higher growth will require massive expansion of electricity and other power supplies in the United States). While I believe in technological change, I am not as optimistic that technology will save us before we experience another financial crisis. We simply can’t wait for robots and LLMs to save us. And any crisis will delay technology development along with everything else. Those like Ray Dalio who argue we need to cut the annual deficit in half (from 6% to 3% of GDP, from over $2 trillion to $1 trillion) are on the right track. But instead of doing that, Congress is growing the deficit in dollar and percentage terms. We aren’t shooting ourselves in the foot; we are shooting ourselves in the head.

Some interesting ideas are floating around to address the deficit. One proposal is to cancel the roughly $7 trillion of intragovernmental debt on the books. That would cover roughly three years of deficit spending but wouldn’t dramatically change the trajectory of government indebtedness. Another idea posed by Chamath Palihapitiya on the May 17^th All-In Podcast is to monetize some of the $100-200 trillion of off-balance sheet assets (land, oil, etc.) owned by the United States. But unless I missed it, Mr. Palihapitiya failed to include in his suggestion that the United States also owes an equal amount of off-balance sheet liabilities (future entitlement payments, etc.). The Cato Institute estimated these obligations at $70 trillion in 2012.[2] It is certainly much higher today. While it might make sense to use some assets to secure long-maturity Treasury bonds as suggested above, selling the silverware to bail us out of years of reckless spending would just enable more reckless spending. In order to make the tough policy changes needed, we are going to need to change our political DNA. Maybe AI can help us with that.

Geopolitics

Iran

According to the International Atomic Energy Agency, Iran now has enough highly enriched uranium for ten nuclear bombs. As of May 17^th, Iran had amassed 408.6 kilograms (900.8 lbs.) of uranium enriched up to 60%, an increase of 133.8 kilograms (294.9 lbs.) since February. The 60%-enriched uranium is a small technical step away from 90%-enriched weapons-grade material. Iran’s overall stockpile of enriched uranium was 9,247.6 kilograms in May (20,387.4 lbs.), an increase of 953.2 kilograms (2,101.4 lbs.) since February. Iran is the only non-nuclear weapons state producing such material. Iran claims that its nuclear program is for peaceful purposes but that is flatly contradicted by its actions. With evidence like this staring the world in the face, the United States needs to act now. While it is admirable for President Trump to seek a peaceful end to Iran’s nuclear ambitions, it is no longer realistic to follow that approach. There is no evidence that Iran will stop enriching weapons-grade uranium unless forced to do so. Iran’s behavior assures it will breach any agreement it enters. Iran is not entitled to the benefit of the doubt. Military action is the only alternative. Doing so would also deliver a severe strategic setback for Russia and China in the Middle East while boosting Saudi Arabia and Israel. The United States and Israel have a once-in-a-generation opportunity to destroy Iran’s military and nuclear capabilities. Squandering that opportunity would be an historic blunder.

Russia/Ukraine

Ukraine launched a massive drone attack on four Russian airfields today that housed strategic bombers used for air raids. Forty aircraft were reportedly hit at these airfields which are thousands of kilometers away from the front line. No doubt Putin will respond, most likely with more attacks on civilian in Ukraine. This war will keep escalating and killing more people on both sides until the parties can no longer bear the pain. Putin has no interest in ending the war on terms acceptable to the West. The way in which he started and fought the war is a stain on humanity. Even those who (wrongly) blame the West for the war can’t formulate a moral justification for Putin’s escalating war crimes. At least Ukraine is targeting military sites in response, but the cycle of violence is escalating with no end in sight. The United States can only do so much but it must do something to preserve its role at the leader of the free world, a role that still matters. The United States must immediately join with Europe to block Russia’s remaining access to the global banking system (especially exemptions that permit sales of Russian oil). The U.S. Senate must pass the pending veto-proof bill sponsored by Senator Lindsey Graham imposing 500% tariffs on countries buying Russian oil. And the West must send more military aid (money and equipment) to Ukraine unless it wants to see Russia intensify the war over the summer. President Trump has to understand that he has no relationship with Putin. Now he has to show Putin what real power looks like.