TRUMP AND GOLD / MACLEOD FINANCE

Trump and gold

If Trump’s trade and fiscal policies are carried through, Federal finances will be utterly destroyed, and the dollar with it. This article explains why.

ALASDAIR MACLEOD

Following President-elect Trump’s successful election, the dollar has rallied, and US equities have registered new highs. 

Clearly, on first cut US investors are expecting a business-friendly environment under Trump. 

And his nomination of Scott Bessent as Treasury Secretary has also been well received by markets.

Bessent has been a successful hedge fund manager having worked with George Soros in forcing sterling off the ERM in the 1990s, and similarly profiting from shorting the yen in 2013. 

He is an experienced market man, rather than as an intellectual. 

But on the economics of trade and by his statements, he is ignorant.

Bessent is said to favour higher trade tariffs and lower income taxes, which rhymes with statements by Trump. 

As a matter of practicalities, we have yet to discover how he intends to evolve to the former from the latter. 

His position on the budget deficit is not clear. 

That matter is seen as a matter for a new office, the to-be-created Department of Government Efficiency (DOGE) headed by Elon Musk and Vivek Ramaswamy.

DOGE is intended to work with the Office of Management and Budget to cut government waste and unnecessary regulation. 

Musk has hinted that he wants to close whole departments, while Ramaswamy has said he wants to cut 75% of the Federal workforce.

This combination of hope, impracticality, and ignorance of the economics of US and global trade will determine the future of the dollar and its value in gold. 

How will that turn out?

The president-elect does not have a mandate like Javier Milei’s in Argentina. 

If the bureaucrats in Buenos Aries resisted his chainsaw, Milei could always threaten them with a new general election, which would almost certainly back him more strongly. 

In other words, Millei is cutting spending with the wholehearted support of the people. 

That is not the position with Trump, and the US’s establishment knows it. 

Furthermore, Musk and Ramaswamy are not running a business but entering an alien field of politics in which they lack experience. 

They may be exceptional geniuses in the private sector but will soon find that they are out of their depth reforming the public sector.

It is worth noting that Margaret Thatcher only succeeded in her reforms because Galtieri invaded the Falklands and made her a heroine — if that hadn’t happened, she would have undoubtedly lost the subsequent general election.

Hopes of a Musk-Ramaswamy chainsaw massacre of government departments and spending are wholly illogical in the reality of politics. 

This means that all else being equal the budget deficit will persist. 

We could find that Trump and Bessent having to raise trade tariffs more than income and corporation taxes to contain the budget deficit. 

But all else will not be equal because of the destructive consequences of trade tariffs themselves.

Trade tariffs are not the panacea Trump & Bessent appear to believe. 

They are always met with retaliatory tariffs from other nations. 

The experience of Smoot-Hawley in 1930 was that exports of American goods suffered, and their manufacturing costs were increased on everything from imported raw materials, through semi-manufactured items, to consumer goods. 

The accelerated closing down of global supply chains, a trend already started, will cause additional damage this time round, hitting America’s global brands and even its high-tech industries as the entire world goes into trade protection mode.

Smoot- Hawley 1930s was an under-recognised factor behind the 1930s depression. 

Trump-Bessent 2025 trade tariffs promise to be even more destructive. 

It is beyond reason to expect Trump’s intended tariffs not to have a similar or even worse effect than that of Smoot-Hawley on not just the American economy, but of the entire world.

A further complication is that today the fiat dollar has replaced the 1930s gold standard, which was blamed by the establishment of the day for the depression, leading FDR to devalue the dollar by 40% in 1934. 

Similarly, we should expect the purchasing power of the dollar to give way, reflected in both higher dollar prices and driving soaring unemployment. 

Some call this stagflation. 

But the consequences for the Fed’s interest rate policies and for those of every other central bank will be to drive them higher.

We are already at the top of the greatest credit bubble in history. 

And with Federal debt growth already outpacing the growth in GDP, Bessent will find his Treasury is already in a debt trap. 

Trump-Bessent Tariffs 2025 will further the imbalance between the supply of dollar credit and the demand for it, particularly from foreigners who already possess far more dollars than they need in a world of contracting trade. 

It is a recipe for soaring interest rates, or a dollar collapse as Bessent and the Fed struggle to balance the books by printing dollars — it will almost certainly involve both.

Bursting the bubble

For the moment, US investors appear mesmerised by the prospect of a business-friendly administration with promises yet to be implemented. 

After the initial euphoria, markets are bound to make a more sober assessment of the outcome of Trump’s economic policies. 

The depressionary consequences of higher tariffs will then heave into view, as will the destructive consequences for the dollar’s value.

To add to Trump and Bessent’s misjudgements, the Fed will have no option but to tighten interest rate policy to stop the dollar collapsing and to discourage foreign holders from selling both their dollars and underlying financial assets. 

Furthermore, with US tariffs leading to contracting global supply chains and trade, foreigners will have less reason to retain dollars for trade settlement liquidity.

The largest credit bubble in history will implode, taking all credit values down with it. 

It was additionally fuelled by zero-dollar interest rates and even negative rates in Japan and the Eurozone. 

It marks the end of a forty-year trend, exemplified by the yield on the 10-year US Treasury note:

For now, the investing public is ignoring these realities. 

But equities are even more overvalued than bonds, as my next chart shows:

The chart inverts the long bond yield to show its normally close negative corelation with the S&P 500 Index. 

Its diversion from this corelation marks the bubbles indicated in the first chart. 

The current bubble was additionally fuelled by the Fed’s QE, which drove the long bond yield to 1.2%. 

A further rise from the current 4.45% is set to collapse the S&P.

Can it be avoided? 

The short answer is no: financial crisis management by governments depends on resolving a credit collapse with a new bubble. 

Marked by ZIRP and NIRP elsewhere, it has been a policy which has now run out of road.

They say that the road to hell is paved with good intentions, an aphorism which seems appropriate here. 

Trump’s business friendly, half-baked MAGA approach to economic conditions will simply accelerate the dollar’s collapse, and with it the credibility of all fiat currencies. 

And as they plunge, so will gold appear to rise, along with silver and every other commodity priced in dollars and priced in every other fiat currency in the dollar-based currency reserve system. 

It will be no surprise to America’s enemies who are a) not stupid, and b) entirely cynical about US monetary policy.

They are increasingly already getting out of dollars, which is credit, into real money which is gold.