Congress can save the economy today, without paying the price.
Interest rates could drop by 2 percentage points immediately with a commitment to balancing the federal budget by 2035.
The deficit is an existential threat to America, but which one?
Not the trade deficit. The budget deficit.
The potential collapse in the Treasury market will make the 2008 recession look like a warm-up act. Sadly, the death of dollar sounds dramatic, but that’s only because - like the Romans before the sack of Rome - they just couldn’t imagine it. I’d like to advocate here for a BALANCED BUDGET AMENDMENT to the Constitution, but with this new argument: A 100% credible commitment to fiscal balance would cause an immediate and significant reduction in real interest rates.
If (big if) the President’s trade moves lead to a reshaping of the world economy that (1) lowers trade barriers among allied economies in Asia and Europe and North America and (2) isolates malign actors like China and Iran and Russia, then the U.S. wins big time. However, the tariffs, now mired in court cases, caused significant shockwaves that threaten an economic recession. This may be a precipitating event for the real existential threat: the national debt and the U.S. dollar. Avik Roy’s presentation at the UATX Satoshi papers has an excellent visual on the debt projection:
In times of trouble, markets tend to shift global savings toward the safest asset, U.S. Treasuries. The U.S. dollar has been the safest of all assets and the foundation currency for the global economy. But America abuses that privilege by borrowing exponentially increasing amounts via the Treasury bond markets to cover the politically-untouchable congressional budget deficits at ultra-low interest rates. It was bad a decade ago when the deficits broke the $1 trillion/year ceiling, and now we have $2 trillions per year of federal overspending.
No other country can abuse their fiscal deficits because they don’t print the dollar. We do, and seems likely that Congress will continue to skate on thinner and thinner ice until the bond markets truly break.
Personally, I don’t want to live through that. I don’t want my children to live through that. The death of the dollar is an entirely avoidable crisis, but is almost certain given the political incentives that shape national economic policy in D.C.
To be clear, this is what DOGE is trying to fix. DOGE is a noble and righteous effort, and it is doing great work. However, taking a chainsaw to the budget mess is not going to alter the fundamental game in which congressman have every incentive to lower taxes and raise spending. Senators and Congressmen have no reason to do the right thing, when they face purely short-term incentives. Absent a balanced budget constraint, deficits will get bigger. The ice will get thinner.
One Weird Trick
“The interest charged for new mortgages will drop by 2 full percentage points, same for cars, same for credit cards.”