So… now what?

One of the most mysterious villains in the history of cinema was the fictitious character ‘Keyser Söze’ from the movie The Usual Suspects.

No spoilers here, but there’s a scene where they describe his rise in the criminal underworld. According to the story, Keyser Söze realized that “to be in power, you didn’t need guns or money or even numbers. You just needed the will to do what the other guy wouldn’t.”

I’ve written before that there may have been some grand strategy behind “Liberation Day”.

Perhaps the past several weeks were part of a deliberate effort by Donald Trump to prove that he has the will to do what nobody else (including China) would do… namely, cause a major worldwide recession that would even hurt his own country.

It’s possible that everything was part of a ‘Keyser Söze’ negotiation tactic– as the movie goes, “to show those men of will what will really was…” And that maybe, just maybe, this was a masterclass in the Art of the Deal.

It’s also possible that none of those things is true, and instead the President is trying to undo the damage of his Liberation Day ‘unforced error’ before the US economy careens into recession.

Few people really know the truth. But what clearly is true is that there’s a level of economic excitement again that we haven’t seen since late February. The general consensus has flipped, practically overnight, and people once again believe that everything is going to be OK.

Investment banks and their chief economists immediately began boosting their economic growth forecasts and slashing the odds of a recession. The stock market roared with approval.

More importantly, there are serious catalysts on the horizon to potentially boost this momentum and economic optimism.

I’d expect that we’ll soon hear the administration start hyping up its “Big, Beautiful” tax cut legislation, alongside more bonanza infrastructure spending. There’s also a supersized National Defense bill as a cherry on top.

All of that government money should almost certainly keep up the enthusiasm over the next few months.

Moreover, the President is– at this very moment– in the Middle East inking deals with Saudi Arabia, Qatar, and the United Arab Emirates. They’ll tout major investments in the US that are so large as to be unbelievable, like the UAE’s pledge of investing $1.4 trillion.

But it doesn’t matter if the numbers are real. It only matters that there’s enough hype to maintain the economic optimism.

There’s also the very real possibility of peace in Ukraine soon, which would likely create even greater lift for the stock market. Plus, energy markets would stabilize, likely benefiting consumers and helping keep prices down in the short-term.

With key inflation drivers (tariffs and war) out of the way, the Fed would have a pretty clear path to start cutting rates, as just about every major central bank in the world– Europe, the UK, China, Canada, India, etc.– has already done.

Frankly, it doesn’t even matter whether or not the Fed cuts rates. It only matters that markets believe the Fed is likely to do so; this perception alone should provide yet another buoyant short-term lift to asset prices.

All of that seems great– higher asset prices, lower inflation, more trade, more prosperity. In fact, it almost sounds like that ‘New Golden Age’ we were promised in January.

There’s just one problem: spending is still out of control.

Just in the first six months of the fiscal year (which started October 1, 2024), the US budget deficit reached $1.3 trillion. And we can’t just blame Joe Biden; $600 billion of that $1.3 trillion deficit came since January.

In other words, despite all the DOGE efforts, despite all the hard talk on budget cuts and responsible spending, they’re on track to post an astonishing $2.5+ trillion budget deficit for Fiscal Year 2025.

Interest payments on the national debt are also skyrocketing. Last year’s interest bill was $1.15 trillion, and the Treasury Department already anticipates exceeding that amount this fiscal year.

Bottom line, absolutely nothing has changed with respect to budget deficits and irresponsible spending… and it’s important to be intellectually honest about that.

So even if the ‘economic war’ between the US and China is over– and who knows if that’s really true– the debt and deficit problem still poses a gargantuan risk to the US economy.

This matters, because reckless US spending was a key driver that pushed so many foreign governments and central banks to start diversifying their US dollar reserves back in 2023.

Sure, there were other factors which also caused a loss of confidence in the US– including the humiliating withdrawal from Afghanistan, Joe Biden shaking hands with thin air, and 9% inflation.

But it is the US government’s inability to even acknowledge an obvious financial crisis of its own making– let alone deal with it in a rational and professional manner– that led foreign governments and central banks to start diversifying away from the US dollar.

Sadly, this trend has not changed.

So, again, perhaps Liberation Day is firmly in the rear-view mirror. Perhaps it was all a masterful ploy to push other countries to capitulate to America’s iron will. Perhaps the US economy may even be better off as a result…

But the real problem that America faces, i.e. overspending, is still a five-alarm fire. Congress and the White House may be ignoring it, but foreign governments and central banks are not.

So, while I expect a short-term pause over the next few months, Project “Find a New Global Reserve Currency” will likely restart in earnest later this year.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/so-now-what-152779/