this is more random-ish thoughts than a coherent thesis, but. for what it’s worth…

bonds

–the current administration believes generally in the “trickle-down” economics of Ronald Reagan and Margaret Thatcher–that is, the idea that if the government puts more money in the hands of the ultra-wealthy, their extra spending will create a ripple effect that makes the entire population better off. So, the key piece of legislation for the administration is to extend the temporary individual tax cuts for the wealthy that were enacted during the first Trump term. Letting them expire would bring in about $350 billion a year to the federal government. That’s a lot, especially because…

government spending

…overall, Washington is spending about $2 trillion more each year than it takes in. It borrows the difference. At present, the central government has about $30 trillion in Treasury bonds outstanding, which is about the same as the GDP the country generates yearly. About a third of that is held by foreigners, including foreign central banks.

…GDP is growing at something less than 3%. Outstanding government debt is expanding at about twice that. At some point, probably not today, holders and potential buyers–especially foreigners–will begin to worry about whether they’re going to be paid back. So reducing deficit spending is a legitimate government concern.

Washington’s largest two sources of income by far are individual income taxes and payroll taxes (FICA). The biggest outlays are for Social Security, Medicare and Medicaid.

Balancing the budget without reducing spending would require something like doubling individual income taxes.

Hence, DOGE.

foreign holdings of Treasuries

Of the $30 trillion, about $8 trillion is held by foreigners, the largest amounts being $1.1 trillion in Japan, $760 billion in China (which is apparently selling) and $740 billion in the UK. Arguably–and also in fact, I think–foreign hands are weaker holders than domestic.

leveraged holders

I think this is a major worry. Think Archegos and Long Term Capital Management. In both cases, the firms were doing relatively straightforward arbitrage, but in highly illiquid markets and without any of their (many) their lenders able to assess the overall risk the firms were taking.

At least part of the bond market ructions this week seem to me to be based on fears of other similar implosions in the private equity sphere.

more on Monday