The City woke to a transatlantic spat this morning as President Biden took aim at Donald Trump’s ‘vanity projects’, prompting an unusually sharp warning from His Majesty’s Treasury about the dangers of US fiscal distraction. For those of us who have watched the dollar’s dominance erode over gilt yields and capital flight, this is not merely political theatre. It is a signal that the world’s largest economy is losing its grip on fiscal discipline.
Biden’s remarks, delivered during a campaign stop in Pennsylvania, accused his predecessor of prioritising ‘gold-plated golf courses and Trump-branded towers’ over the nation’s crumbling infrastructure. ‘The man built a wall with borrowed money and called it a monument to himself,’ Biden said, referring to the border wall that cost taxpayers billions. ‘Now he wants to cut taxes for the rich again. That is not leadership. That is a vanity project.’
Meanwhile, the UK Treasury issued a discreet but pointed statement expressing ‘concern over the potential for further US fiscal expansion without corresponding revenue measures’. This is Treasury-speak for: they are worried the Americans are about to torch their credit rating again. The statement, attributed to a senior official, noted that ‘prolonged fiscal distraction in a major economy can spill over into global markets, particularly through gilt yields and capital flows’.
Let us be clear about what is at stake. The US budget deficit is already running at over 6% of GDP, and the national debt has surpassed $34 trillion. When a former president proposes additional tax cuts without offsets, he is effectively betting that the bond market will not punish him. But the bond market is not a forgiving institution. Ask Liz Truss. The UK’s own flirtation with unfunded tax cuts in 2022 sent gilt yields soaring and the pound plunging. The Treasury has not forgotten that lesson.
The backdrop to all this is the persistent creep of inflation. US core CPI is still above 3%, and the Fed has signalled it will hold rates higher for longer. Any additional fiscal stimulus, even if it is just a promise on the campaign trail, risks reigniting price pressures. That would force the Fed to tighten further, sucking capital out of emerging markets and putting upward pressure on UK borrowing costs.
What does this mean for the savvy investor? First, watch the 10-year Treasury yield. If it breaks above 5%, we have a problem. Second, keep an eye on the dollar. A strong dollar is good for UK importers but bad for our exporters and for sterling itself. Third, understand that political risk is now a major factor in fixed income markets. The days of ‘whatever it takes’ central banking are over. We are back to the old-fashioned discipline of fiscal credibility.
The irony is that both Biden and Trump are guilty of fiscal profligacy. Biden’s Inflation Reduction Act and Chips Act throw money at green energy and semiconductors, with no clear path to repayment. Trump’s tax cuts and infrastructure fantasies are no better. The difference is one of style: Biden calls it investment; Trump calls it winning. The market calls it debt.
For now, the UK Treasury’s warning is a canary in the goldmine. If the US continues to treat fiscal responsibility as an afterthought, expect gilt yields to rise, the pound to weaken, and the cost of servicing our own debt to climb. That is the bottom line. No amount of political theatre can change it.
