The two chief economic policies of the second Trump administration from its earliest days have been, as I see them:

–to use ICE to remove immigrants from the domestic workforce. This is a (dubious, for me) cultural goal, with clear and substantial negative consequences for US GDP.

–the second continues, whether framed this way or not, to be to reduce the real value of government debt through creating inflation. Foreign government holders of Treasuries have recognized this from the beginning, and have been taking the sensible course for them: they sold their exposure to the dollar quickly in currency markets and have been dribbling out the bonds bit by bit since.

The worry is that Kevin Warsh will follow administration orders to lower interest rates even though Fed professionals believe that to do so would ultimately cause prices to rise. The idea is that rates that are too low reduce the incentive to save, as well as making borrowing to spend on goods and services easier and less expensive. All this results in increased demand, which causes sellers to raise prices. An inflationary spiral begins.

History says this process feeds on itself and is very hard to stop once put in motion, without sharp increases in rates. Higher rates on new Treasury bonds decrease the value of older, lower-rate issues–which is why foreign government owners of tons of Treasuries are selling.

On the other hand, holders of fixed assets like property tend to benefit, which may be why a former real estate investor desires this outcome.

oil

For almost half a century, Iran has made the point that it would close the Strait of Hormuz in the event of an attack. It has mined waters in the area in the past. It is also a supplier of drones to Russia and a host of other parties. The global issue with closing the Strait is that about 20% of the world’s oil travels to market through it.

If news reports are accurate, however, the world doesn’t seem to have planned that well for any of this happening prior to the US attacking Iran.

My guess as to how things will play out:

–the prior consensus was that peak world oil production would happen around 2030. This is a demand phenomenon, not supply. Current events, however, suggest that we’re seeing peak oil now

–if so, the oil producing countries worst affected would be Saudi Arabia and the US, with the development of Venezuelan heavy oil pretty much a non-starter without large government subsidies

–this would also imply that the oil price will tend to drift lower, until it reaches $50? a barrel, which is where the highest cost new drilling projects will no longer be profitable

–if the current situation triggers a large move toward renewable energy, which it may well, oil could follow the path into irrelevance once trod by wood and coal. Not something I’d bet on today, but a possible eventual outcome.