Do it yourself

The script in the US is playing mostly on the expected lines (see here and here).

Department of Government Efficiency (DOGE) – crash landing

Department of Government Efficiency (DOGE) is apparently on its way to crash land, with the pilot (Elon Musk) ejecting himself out shortly after taking off.

DOGE’s actions have faced multiple lawsuits, with critics arguing that Musk and his team have violated federal laws, union agreements, and civil service protections. A federal judge halted parts of USAID’s shutdown, and courts have restricted DOGE’s access to payment systems.

Despite Musk’s goal to cut $2 trillion from the federal budget, 2025 spending is slightly up from 2024, per Brookings Institution data.

Mandatory spending (e.g., Social Security, Medicare) limits achievable cuts. Over two million federal employees were offered buyout deals, with some agencies facing mass layoffs. However, some fired staff have been rehired, indicating implementation challenges.

Though DOGE has made a significant promise, the actual delivery has been materially lower, primarily due to legal, ethical, and practical challenges; mixed public support and limited measurable impact. With Musk virtually leaving the initiative, its future appears uncertain.

Fiscal deficit – continues to rise

The U.S. fiscal deficit is on an upward trajectory, driven by increased spending, rising interest costs, and insufficient revenue growth.

For the first seven months of fiscal year 2025 (through April 2025), the cumulative deficit was $194 billion higher than the same period in the previous year. Total outlays for this period were $4.2 trillion, up $340 billion from the previous year, driven by increases in Social Security ($70 billion), net interest ($65 billion), and Medicare ($41 billion)

The Congressional Budget Office (CBO) projects the federal budget deficit to be $1.9 trillion in fiscal year 2025, equivalent to 6.2% of GDP. By 2034, the deficit is expected to grow to $2.8 trillion (6.9% of GDP) if current policies remain unchanged.

Recent legislative proposals, such as the tax and spending bill passed by the House in May 2025, could add $3.3–$3.8 trillion to the federal debt over the next few years, further exacerbating the deficit. Federal debt held by the public is projected to rise from 100% of GDP in 2025 to 118% by 2035, surpassing the historical high of 106% set in 1946.

The US sovereign credit rating has been cut by Moody’s Aa1 from AAA earlier.

Tariff Tantrums – More pain than gains

The tariff war initiated by the Trump 2.0 administration in February 2025, has mostly been counterproductive so far.

New tariffs have generated a short-term revenue ($16 billion in April alone) but at a significant cost - A 6–8% GDP reduction in the long run as per The Penn Wharton Budget Model (PWBM); 2.3% higher consumer prices; losses to the US households; global trade contraction by 5%; U.S.-China trade nearly collapsing; retaliatory tariffs and supply chain disruptions exacerbating economic strain, particularly for U.S. consumers and export-heavy sectors.

The net effect is a significant economic burden on the U.S., with global ripple effects, though temporary truces (e.g., U.S.-China) and exemptions (e.g., USMCA) mitigate some damage.

Seemingly unconventional approach of the President may be turning the US strategic allies into adversaries. Frequent and unpredictable tariff tantrums of President Trump, have widened the trust deficit between traditional trade partners of the US (e.g., the EU, Britain and Japan), making the relationships purely transactional.

USD weaker, yield higher

The tariff war has imposed significant duties (e.g., 20–145% on Chinese imports, 25% on steel, aluminum, and autos from Canada and Mexico). These tariffs raise the cost of imported goods, increasing inflationary pressures. For example, the two-year breakeven inflation rate rose from 2.54% at the end of 2024 to 3.36% by April 8, 2025, reflecting market expectations of higher short-term inflation.

Rising inflationary expectations, fiscal debt and debt sustainability concerns (rating downgrade) have prompted the bond investors to demand higher yields. As Minneapolis Fed President Neel Kashkari noted, rising yields and a falling U.S. dollar suggest investors may be viewing the U.S. as less attractive due to trade war escalation and fiscal concerns, reducing demand for Treasuries as a safe-haven asset.

The US Fed is also sounding more hawkish in its recent statements, impacting the traders’ and investors’ sentiments.

The U.S. dollar (USD) has also been weakening in 2025, with the Dollar Index (DXY) dropping from 108.2 in late December 2024 to around 100, a decline of approximately 7%. This weakening of the USD is driven by multiple interconnected factors, e.g., the rising U.S. fiscal deficit, the tariff war, rising U.S. Treasury bond yields, and failure of the Department of Government Efficiency (DOGE) to implement material spending cuts.

I still believe that the conventional wisdom will prevail, tempers will cool down and President Trump will eventually return to the path of reconciliation and cooperation. Nonetheless, it is still uncertain how much damage would have already been caused by then.

Also read

“MAGA” – Keeping it simple

The master failing the first test

View from the Mars

View from the Mars - 2

Tariff Tantrums

“Trade” over “War”

 There are lots of events happening in global markets which cannot be full explained through conventional wisdom or empirical evidence. In my view, lot of these events are unintended consequences of policy actions, geopolitics and trade conflicts.

For example, there is a massive rally in the global commodity prices, despite poor demand and growth outlook for next few years at least. The recovery to pre Covid level may not entirely explain the rise in commodity prices much beyond the 2019 levels. Popularization of electric mobility etc. can explain gains in some commodities, but not in steel, coal, crude etc.

The forecasts of a commodity super cycle sound mostly unconvincing, given (i) worsening demographics of the world; (b) restricted mobility; (c) seriously impeded purchasing power of people; (d) already stretched limits and diminishing marginal utility of fiscal and monetary stimulus; (e) technology evolution focusing on reversal of trends in labor migration; and (f) diminishing chances of a full-fledged physical war amongst large countries; etc.

Material changes technologies related to construction, manufacturing and transportation etc. also leading to material changes in the demand matrix for various commodities like steel, cement, copper, coal etc.

The outrageous rise in economic inequalities globally also mean that investment rate in poor countries will continue to decline for next many years, as the economic power gets more and more concentrated in the hands of few rich nations.

I therefore feel that the price trends in the global markets are deeply influenced by the factors other than economics. Even though the defeat of Donald Trump in US presidential elections has taken the trade conflicts away from headlines and front pages; the trade war that started few years ago is far from over. Besides, geopolitics is also playing a large role in global markets.

In past two years, China has been making conscious efforts to reduce its holdings of US Treasuries and building large reserves of physical industrial commodities. The global investors appear selling Chinese assets (leading to massive tech rout in China) and buying other emerging markets, in line with the global enterprises’ China+1 policy.

The unintended consequences are that world is facing shortages of rare earths, semi-conductors, and shipping containers and struggling with the rising prices of commodities. China which had been exporting deflation to the world for the past 10years has suddenly become exporter of inflation to the world.

The markets focusing more on US yields and USD cross rates, might be missing the point that Chinese aggression on commodities can derail the entire AI led Tech revolution for at least 4-5yrs, if it continues to choke supply of rare earths and semi-conductors. This derailment of global trade and therefore growth is a bigger worry than inflation at this point in time.

It is pertinent to note in this context that today China is hosting its annual gathering of National People’s Congress, its biggest political meeting, to approve the plan to propel Chinese economy to the top of the world, ahead of US. At the center of the new plan will be Beijing’s push to develop new technologies and cut the nation’s reliance on geopolitical rivals such as the U.S. for components like microchips. As per some experts, that should mean allocating more resources to science and technology, with spending on research and development targeted at around 3.5% of GDP over the period

Another case in point is the sharp rise in the price of sugar in global markets. This rise has occurred despite the higher than expected production in India and over 10.6MT carry over stock. But for MSP of Rs31/kg mandated by the government, the glut should have resulted in domestic prices falling to much below the cost of production. Also, but for export limitations and logistic constraints, Indian supplies could bring down the global prices to much lower levels. Visualizing this as signs of impending global food inflation cycle may not be appropriate.

The semi-conductor shortages are hurting manufacturing of white goods, electronic items and automobile, etc. This could have meaningful second round impact on other sectors of economy. Thankfully, the border conflicts and political rhetoric have not impacted the Indo-China trade materially. But India gaining advantage at the expense of China due to China+1 policy could have some repercussions in the short to medium term. The capacity building in India needs to take place now. A delay of even one year could potentially render much of this capacity redundant as global enterprises find alternatives or reconcile with China.

The short point is that US bond yields and USD exchange rate, etc. are least of the worries for our markets and economy, presently. Laying too much focus on these may only distract us from bigger threats and even bigger opportunities.