A financial battle is brewing in Donald Trump’s court

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It’s Groundhog Day in Washington. In recent years, brinksmanship has repeatedly erupted whenever Congress has tried to raise the budget level Debt ceiling – Usually because right-wing voices threatened to shut down the government unless their demands were met.

here we go again. This week, Republican House Speaker Mike Johnson tried to pass a stop-gap debt ceiling deal with a $6.75 trillion budget — but that deal was derailed by incoming President Donald Trump and his supporters, including Elon Musk and Vivek Ramaswamy.

“This bill should not have passed,” Musk said angrily Announce on X, leading to last-minute negotiations, amid threats of a government shutdown.

Investors should note three key points. The first is that Trump’s landslide victory last month means that the decisive political battle in 2025 will not be across the aisle, between Democrats and Republicans, but within the Republican Party itself.

Second, this battle between Republicans and Republicans will be ugly. Men like Musk and Ramaswamy want to make their voices heard by attacking congressional Republicans like the hapless Johnson.

Third, fiscal policy will be an early flashpoint in this fight – especially in light of what happened this week Jump in bond yields This is after the Federal Reserve lowered its expectations for cutting interest rates in 2025.

Washington is one of the focal points in this battle. But so is Mar-a-Lago, Trump’s political court, where Trump’s entourage now express distinctly different views on how to deal with America’s current $36 trillion national debt.

Some see little need to panic over this pile of debt, arguing that the dollar’s status as a reserve currency will force global investors to continue gobbling up Treasuries. Trump often seems to sit in this camp. In fact, this week he called for the debt ceiling to be eliminated.

But others around him, like Steve Bannon, the former White House chief strategist, are more concerned. This is because, As I often noticeThe Treasury Department must refinance about $9 trillion in bonds next year at a time of increasing inflationary pressures. Trump has pledged policy changes that would add several trillion more to the debt, while also threatening to weaken the dollar and undermine the Fed’s independence.

This is a very bad cocktail, as Scott Besent, his nominee for Treasury Secretary, understands well. Worse still, potentially volatile hedge funds are playing an increasing role in the Treasury market, and a potentially hostile China is also influential. Just look at Beijing’s recent decision problem Sovereign bonds worth $2 billion in Saudi Arabia. This issuance was trivial in size, but it was a symbolic shot in the eye for Washington – not least because the yield was similar to the yield on US bonds.

The second dividing line at Mar-a-Lago is taxes. Trump has repeatedly pledged to do so The Tax Cuts and Jobs Act of 2017with its huge permanent income and estate tax breaks. That would Wealth creation For wealthy Americans, including dozens of billionaires on his top team.

He also wants to Reducing corporate taxes From 21 percent to 15 percent for US entities, ending taxes on Social Security payments, tips and overtime, and expanding child care credits.

I’m told that Besant and others told Trump that the resulting fiscal hole could be filled through faster growth, tariff revenues, and the $2 trillion in government spending cuts promised by Musk. There are also calls to increase taxes on wealthy institutions.

However, it would be nearly impossible to significantly reduce federal spending without cutting Social Security and defense spending, which Trump appears reluctant to do. The size of any tariff revenues is unclear. Trump may prefer to use tariffs more as a geopolitical threat than anything else.

Moreover, growth alone is unlikely to be able to fill the fiscal gap. Debt servicing costs could be higher than expected given the Federal Reserve’s signals that it is slowing the pace of interest rate cuts.

This leaves Bannon calling for more radical measures, including higher taxes. “You’re going to have to raise taxes on the wealthy… (to) get out-of-control debt under control. He told the Republican Dinner this week. Yes, really.

the reason? Bannon believes that The last assassination One health care executive’s report shows that there is now so much anti-elite anger that it would be political suicide for Trump to squeeze the middle class while favoring the rich. He believes it would be equally dangerous to ignore bond markets.

Thus, he says, “neoliberal neoconservatives will have to pay for what happened” – meaning that “populist nationalists” will have to overwhelm “orthodox republican people.”

Bannon’s argument about public anger is spot on. But Trump’s problem is that raising taxes on the wealthy would terrify “hard-line” Republicans in Congress. It will also anger many wealthy businessmen who supported his presidential bid.

So the question looming at $36 trillion is not simply whether the wealthy or the populists will win this battle; It’s also about whether bond markets will remain calm while this happens.

In other words, this week’s debt ceiling skirmishes may be just a prelude to bigger fights in 2025. We expect them to get nasty.

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