“DOGE has and will do great work to postpone the day of bankruptcy of America, but the profligacy of government means that only radical improvements in productivity can save our country.” — Elon Musk, May 23, 2025
In narrative-world, the House passage of the Big Beautiful Bill and Elon Musk stepping back from DOGE and the White House have had a clear result: no one believes that this administration has any ability (and probably not any real desire) to control explosive growth in the federal deficit. No one is pretending otherwise any longer, not the White House, not Elon, not Bessent, not House Republicans, not the social media MAGA crew.
The Narrative strategy going forward — such as one exists — is to say that continued and accelerating fiscal deficits are awkshually a good thing, as all this government ‘stimulus’ will keep a recession at bay and prevent the deficit from going totally parabolic. “Run it hot” is the phrase du jour, and once we get the Big Beautiful Bill through the Senate and the debt ceiling lifted by $4 trillion, why then we can push through all sorts of pro-growth deregulation initiatives and rescission bills and we can ‘grow our way out’ of the deficit over time. The Golden Age may be delayed, but not denied!
How long will it take for these pro-growth initiatives to start bending the curve of uncontrollable federal deficits? Well, according to Elon Musk, the ‘radical improvements in productivity’ that are necessary to save the country (and by which Musk means widespread use of humanoid robotics) are at least four to five years out. And Elon Musk is the most optimistic man alive.
This is a Common Knowledge moment for the global financial system — everyone now knows that everyone now knows that the US deficit cannot be controlled, much less reversed, over the remainder of Trump’s term — and it puts us on a pretty straightforward path to a sovereign debt crisis.
The crisis begins as governments like the US (and also Japan, Italy, France and the UK) are forced to issue more and more debt to fewer and fewer voluntary buyers of that debt. I mean, would YOU lock-up your money in a loan to the US government for the next 10 years for a 4.5% annual interest payment with zero protection against inflation, knowing full well that the US government is going to issue trillions of dollars in new debt over those 10 years? Of course you wouldn’t. No, the only buyers of long-dated US sovereign debt today (and ditto for the sovereign debt of Japan, Italy, France and the UK) are either forced buyers like life insurers and pension funds or artificial buyers like central banks and quasi-central banks, all of whom can be more or less required by the government to buy and hold (i.e. monetize) the debt.
The crisis emerges as non-forced and non-artificial buyers of that sovereign debt decide that a) they’re not going to buy any new debt offerings, and b) they’re going to sell the sovereign debt they already own before it goes down in value any further. This ‘buyer’s strike’ and ‘seller’s hair-trigger’ behavior is accelerated enormously if you’re a non-US, non-forced buyer of US Treasuries, because you are hit by the double whammy of declining value in your Treasuries as interest rates go up AND as the US dollar goes down. Even for a non-US but forced buyer of sovereign debt, say a Japanese life insurer, if you’re gonna be stuck owning long-dated bonds you’re now thinking that you’re better off owning the bonds issued by your own government to avoid the currency risk. For decades now, US sovereign debt has enjoyed the privilege of being ‘the best house in a bad neighborhood’, so that if you wanted ‘duration’ for whatever reason in your portfolio, you preferred long-dated US Treasuries to any other nation’s sovereign debt, all other things being equal. THAT is the narrative that has been shattered, and it’s at the heart of this emerging sovereign debt crisis.
But it’s still an emerging crisis. We’re not there yet, and everyone on Wall Street is waiting and watching to see how it develops, mostly by watching the dollar and 10-year interest rates. None of this is lost on the White House, of course. To postpone the day of reckoning so that this becomes the next administration’s problem (and who knows, maybe a productivity miracle or, more likely, a bigger problem will crop up in the meantime!) Scott Bessent and the US Treasury are engaged in a concerted policy effort to create more forced and/or artificial buying of US Treasuries.
“Stablecoins could create $2 trillion of demand for US Treasuries.” — Scott Bessent, May 23, 2025
Most of these policy initiatives, like a central bank digital currency (CBDC) stablecoin issued by the big banks or the elimination of supplemental leverage ratios on big bank ownership of long-dated Treasuries, are attempts to monetize the debt through the balance sheets of JP Morgan, Bank of America, Citi and Wells Fargo. We are literally going to do the Weimar thing, but – haha! – no one will be wise to our clever ruse because it will be through our giant, centralized banks rather than the giant central bank.
Now when I say ‘the Weimar thing’, I’m referring to the Weimar Republic of Germany in the early 1920s. The German government owed reparation payments to ...
Having looked at the bullet points of the Big Beautiful Bill the one thing that stood out the most wasn’t the most costly, rather it was the one that told the entire story of the last 25 years in one proposal.
An additional $4,000 on top of the existing standard deduction for Americans 65+ was an actual thing that was written into this bill, voted on, and passed. And nobody raised their hands and said “uh, guys…”
Yes, the long suffering Boomers have finally gotten a break.
This sums up the whole game. Four decades of these people having every single goddamn wish fulfilled, every whimsical desire granted, and as one final ‘fuck you’ to their kids and grandkids they get another tax cut.
But don’t you even think about means testing Social Security. You better get your damn gubernmint hands off my Medicare. (Never mind that their kids are paying for Medicare to cover greens fees and day passes to ski resorts, you Millennials are just so entitled, aren’t you?)
The SALT deduction debate, as crushingly stupid as it was, and least had regional significance to certain members of Congress. It was absurd, but you could understand it. But this? This is just the pedestrian sort of corruption that has become necessary in order to stay in office now. A cohort that complains endlessly about health insurance companies would be absolutely apoplectic if you dared to take away a dollar of their health care benefits (all of which flow through one of the handful of huge insurance companies that they hate). “Our life saving drugs are too expensive, can’t we make some much more productive but far less wealthy 33 year old pay for them?” I’m starting to wonder if those Obama death panels weren’t such a bad idea after all.
The more comments I see on Twitter from this endlessly whiny generation the more I’m convinced that I’m going to become the Joker. These people think because they helped create this economy that they’re somehow honor bound to destroy it on their way out. Lucky for them no elected official within a 5,000 mile radius has any intention of cutting a penny off government largesse, so the good times can keep rolling well into these people’s 80’s, just long enough for them to realize that they relegated their grandchildren to living in Greece c. 2005.
Makes Biden’s continuance in office with the glaring age issues almost an advert, a political stance that supports there being no consequence to that type of mental decline. Society must be able to support only so much “socialism”, when redistribution through the power of the State crystallises in its current structure. It is society that breaks first.
Econometrically speaking, the higher the degree of resentment felt generally amongst a society the greater the aggregate political will for all qualities of policy.
I read Musk’s post and immediately had a strange sense that this is one for the history books.
However, my mind went to quite different places than those outlined in your article. I don’t disagree…I absolutely concur about the possibility of a sovereign debt crisis, but also…
Musk’s post was a extremly powerful example of someone saying “the quiet part out loud”. If we want to be cynical about Musk, we would say that DOGE failure was likely always on the cards. Partly because
As you point out, we will likely now see a wave of de-regulation to facilitate the emergency-radical-productivity needed to save America.
But this is where my mind wanders in a different direction than yours. Yes long term treasuries are in trouble, yes there will be shenanigans involving stablecoins and trade/defense deals…but also…
If we unleash the full innovation power of technology, do we not also BREAK THE DEBT/GDP BASED ECONOMIC SYSTEM/PARADIGM?
The traditional model for economic productivity = GDP/Labour.
Or Productivity = GDP/ Hours Worked.
Labour is the input, GDP is the output - and this underpins taxation, wages and monetary policy.
Musk vision is basically to traverse the hurdle between “innovation” to “automation” - the hurdle being regulation that has so far protected human labour.
If the world is stil debating whether or not technology is deflationary by nature it is only because regulation and government intervention has delayed this evoluation of innovation into automation.
If “widespread use of humanoid robotics” is only 4-5 years out, and any political will to slow this trajectory down has just been obliterated - then I think we have bigger problems than a “stagflationary slog”.
The kind of automation needed to fulfill the growth miracle needed to outrun the deficit will by a conservative measure collapse labour input Which will lower overall demand. Insatiable US consumer demand is in one of Trump’s tariff negotiation “trump cards” - so that can’t be good?
What about taxation base? In this scenario, really, what parts of the current system remains?
In my mind, a government would only inch towards this particular cliff edge if it was planning on changing the current system away from a fiat/debt based system. Call me an optimist, but you would only allow the dam holding back exponential technological deflation (or radical productivity) to collapse, if you had an partially built liferaft ready to go.
And the life raft in this convoluted metaphor is a monetary system built to handle deflation, rather than rely on continous inflation. A hard money system.
The core paradox in all of this is that deflation is what we should all, in theory, want. Abundance over time, prices falling, purchasing power going up rather than down over time. You only don’t want this if you are up to your eyeballs in debt…
I wrote the below as a reply to a post about Labour Shortages in Sept 2021, and I think I stand by all of it.
So, what does it mean for investors? I know as little as the next person, but
Generally, wealth creation in this type of paradigm is no longer about labour or people really - but about owning the systems that eliminate it/them.
From an investors point of view a deflationary growth regime is great tasting dish. But it comes with a pinch of monetary-system-breakdown and a generous side of civil-war-inducing-inequality…
I thank you for your post, it’s definitely an enlightening and fresh perspective.
However, it could be that as colonisation lead to the completely abhorrent historical circumstances around the world to create the world of abundance for the western hegemony- We are now entering an epoch where the 1% by luck or will, not so much bound by their skin colour or culture, becomes the chosen and the rest are the unlucky ones for lack of a better word.
Arpatheid economy here we come!
^This comment was valuable. I never considered this perspective.
I agree with the overall conclusion that sovereign debt is trash, foreigners will dump it and the government will engage in financial repression to force buyers into it. But I came across a figure a few days ago that frankly shocked me, and I wonder how it fits into the overall dynamic. This comes from John Mauldin’s weekly letter, and he is quoting David Rosenberg that only 8% of US Household financial assets are in bonds (20% are in cash, and 71% in equities). Baby boomers are also massively OW equities (60% of financial assets) and UW bonds based on the traditionally recommended portfolio for their age. It is not surprising that few people actually follow the industry recommended 60/40 weightings, but 71/8 seems extreme, even considering the (justifiable) disdain for bonds. Can anyone here - especially any FA’s - add color to this? Confirm or deny? The source (David Rosenberg) is normally impeccable, so I do not doubt the data. But basically the conclusion seems to be that there will be little fuel for a bond selling inferno coming from US households, and possibly even some demand as yields above 5% become attractive, especially for boomers whose FA’s are theoretically supposed to be telling them to invest more in bonds. It’s easy to ignore them at 3%, but 5%+?
Em, as always, great points!
I have been pondering the deflationary vector of technology more seriously ever since you raised it to my/our consciousness back in 2021. The primary issue I have with a segue into that, besides the societal breakdown risk, is energy and related infrastructure. The tremendous investment needed just to keep and grow the global energy platform pushes against deflationary impulses. The hundreds of billions heading toward AI just accentuates the problem. The power grid, generation capacity, and fuel sources all need concomitant upgrades. I can see deregulated grids and their power lines ripping through neighborhoods all over the US while consumer power prices rise and entry level white collar jobs fall away to the AI productivity. We literally can’t flip a switch.
“We are on a road to a permanently lower ‘sticking point’ for growth, productivity, wealth, standard of living … because that’s what the America First competition game brings …”
I would definitely agree that this is probably the big picture of what has and will happen.
But I’m speculating that a finer grained picture would see the America First policies as an attempt at using America’s remaining commercial, financial, military, diplomatic and media powers to coerce other countries into footing the bill in one fashion or another.
So recent events are looking like our eventual stabilization is going to lean more on inflating away the debt (Ben’s picture) than on making others pay (my picture,) but IMO events are always going to be a combination of opposing forces and tides, with perhaps one of them dominating.
Believe it or not, I think Xi Jinping might be the actual deciding factor here. He has charted a steadfast middle course, never seeming to overplay his hand nor back down, and I believe this has ultimately made top American policymakers realize that imperialism is a less useful tool than inflation at this point.
A few observations from the Rosenberg data:
I love every word of this.