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The federal budget debate has big implications for the economy. Businesses are betting that tax cuts will be extended and the math will work out.Even by Washington standards, the second Trump presidency has begun in frenetic fashion: mass firings at federal agencies, tariff threats against allies and foes alike, and haggling over how to get a Republican budget through a narrowly divided Congress.Business leaders and corporate investors are confident that things will turn out fine, at least for them. “Markets aren’t showing all that much concern,” Jason Pride, chief of investment strategy and research at the Glenmede Trust Company, noted.But that could change, with high-stakes implications for the markets and the U.S. economic outlook.Investors fully expect the tax cuts from President Trump’s first term, which mostly benefited businesses and the wealthy, to be fully extended before the end of the year. Trade groups including the Business Roundtable and the National Association of Wholesaler-Distributors are confident the extension will be taken care of — especially since not doing so “would impose, effectively, a tax increase,” Mr. Pride added.Still, the arithmetic remains tenuous. The cost of extending the tax cuts may total $4 trillion over 10 years. That means Congress is being left to barter over what else can save or raise money, and whose federal benefits might be cut.The bond market — where traders price the risk of both inflation and an economic downturn — has, for its part, shimmied off moments of worry brought on by Mr. Trump’s boomeranging style of negotiation over tariffs. The bet is that the threats of an import tax are more a geopolitical tool than a key revenue raiser, as the administration has portrayed the tariffs in budget discussions.Some of the underlying calm stems from Wall Street’s confidence in Treasury Secretary Scott Bessent. A billionaire hedge fund manager before assuming his new position, he has convinced many analysts that the ultimate suite of policies coming from the White House will be beneficial once it coalesces, and he “has also added to some optimism around lower deficits” in future budgets, according to Matt Luzzetti, the chief economist at Deutsche Bank.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More
Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldFour years ago, the Bank for International Settlements (BIS) — the central bankers’ central bank — unveiled an innovation project that carried the ugly moniker “mBridge”.This aimed to create a cross-border central bank digital currency linking the central banks of China, Hong Kong, Thailand, UAE and (latterly) Saudi Arabia.You might think this is arcane. If so, think again: the geeky project symbolises a bigger battle that could matter deeply under US President Donald Trump.More specifically, last autumn, just before the US election, the BIS unexpectedly pulled out of mBridge, in effect ceding control to China and the rest. BIS claimed this was just because it had reached “minimal viable product” stage. But few believe this. “The Americans demanded [the BIS] stop because it’s a threat,” one participant tells me, explaining that Washington worried that “it might be used to evade [dollar] sanctions”.And while Agustín Carstens, BIS head, publicly denied that, speculation bubbles on — not least because Trump is undeniably on the monetary warpath: on Truth Social last month he repeated threats to impose “100% Tariffs” on countries trying to “replace the mighty U.S. Dollar” with new currencies or payments systems.So investors should watch what happens next. For while it is Trump’s threats around trade tariffs that have been grabbing headlines recently, this less-visible fight around money matters deeply. After all (as I have noted before), it is the dollar-based global financial system that is the real source of America’s hegemonic power today, and which Washington wants to defend.On paper, Trump has no reason to worry. Recent data from the IMF shows that the dollar accounts for about 58 per cent of central bank reserves. This is slightly lower than at the start of the century, but recent diversification has mostly involved smaller currencies — not rivals such as the euro or renminbi.More striking, Swift data suggests that 49.1 per cent of all payments were in dollars last year, a 12-year high. But there are three crucial caveats. First, central banks are hoovering up gold “at an eye-watering pace”, as the World Gold Council recently noted. That suggests a desire to hedge their fiat dollar exposure.Second, the Swift data may be a little misleading since activity is swelling outside western platforms. China is building its own Cross-Border Interbank Payment System. This is small and rudimentary, but it has 160 members and transaction volume has jumped 80 per cent since 2022. Third, Washington’s financial weaponisation seems to be fuelling — not halting — efforts by others to imagine alternatives. Hence why mBridge matters: if those digital pipes ever work at speed and scale (a big “if”), this would challenge the “hub and spoke” system centred on the US Federal Reserve.So how will Washington respond? Chris Giancarlo, head of the Commodity Futures Trading Commission during the first Trump administration, hopes it will use carrots — ie policies that make dollar usage utterly compelling for non-Americans. That means championing good economic “values”, he tells me, and embracing more cyber innovation. A “digital dollar project” he co-leads will outline how to do this next week. This is eminently sensible. But Trump seems minded to use sticks. Last month he issued an executive order banning any central bank digital currency usage in America, since they “threaten the stability of the financial system, individual privacy, and the sovereignty of the United States”.Instead, he championed bitcoin (never mind that this is viewed as a fiat dollar hedge). More significantly, he also backed the “growth of lawful and legitimate dollar-backed stablecoins worldwide”.This might seem odd, not least because it is diametrically opposed to the European Central Bank. Some cynics will undoubtedly attribute it to the fact that Howard Lutnick, commerce secretary, helped to build tether, the biggest existing coin. But, there is another factor, too: Trump’s team think stablecoins might be a secret weapon to promote more — not less — dollarisation. “It’s very good for us,” one tells me. That is because 21st-century stablecoins — like the 20th-century eurodollar market — enable transactions in offshore dollars that are free from onerous onshore regulations. This appeals to many financiers grappling with geopolitical risk (even if stablecoins, unlike eurodollars, do not pay returns). In practice, the current market cap of stablecoins — about $220bn — is still piddling compared with eurodollars, let alone the $6tn-odd US capital markets.But the key point is this: as Trump keeps trying to remake — or smash up — the postwar geopolitical order, it is not just tariffs and tanks that matter; financial plumbing does too. These nascent battles about CBDC and stablecoins could well “take centre stage this year”, as the Atlantic Council notes. Anyone know how to parse mBridge in Chinese? [email protected] More
Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldDonald Trump is considering tariffs on countries that levy digital services taxes against American companies and tightening rules on Chinese investment in the US as he widens the scope of his global trade war.The president signed a memo on Friday ordering the US trade representative to look into reopening investigations begun during his first term into digital services taxes imposed by a host of EU countries as well as the UK and Turkey. It also assesses potential new probes into other countries including Canada. “My administration will not allow American companies and workers and American economic and national security interests to be compromised by one-sided, anti-competitive policies and practices of foreign governments,” the president wrote in the memo. Since retaking office Trump has sought to reshape the country’s trading relationships with the world, threatening and executing a range of tariffs against various countries and sectors.He had already signalled digital services taxes would be in his sights as he looks to unshackle the nation’s Big Tech groups operating abroad and overhaul the global tax regime. Under the memo, Washington will look into taxes imposed by foreign governments on US companies and also any regulations or policies that “inhibit the growth” or “jeopardise [the] intellectual property” of American corporations operating abroad. The memo mentions digital service taxes in France and the UK, whose leaders are set to visit Washington for talks with the president in the coming days. “What they’re doing to us in other countries is terrible with digital,” Trump said on Friday ahead of the signing.The president also signed a memorandum aimed at boosting foreign investment into the country while protecting national security from China and other adversaries. It said the administration would create a “fast-track” process to enable investment from US allies and partners.The memo added that the Committee on Foreign Investment in the United States (Cfius), which vets inward-bound transactions for security risks, would be used to “restrict Chinese investments in strategic US sectors like technology, critical infrastructure, healthcare, agriculture, energy, raw materials, and others”. Former president Joe Biden ordered Cfius to take a tougher approach on China in a range of similar sectors, including technology.The White House said it would protect farmland and real estate near sensitive military facilities and would strengthen Cfius’s authority over “greenfield” investments, where companies build or expand new facilities and operations in a foreign country.It said the administration would consider new or expanded restrictions on American outbound investment to China in sensitive technologies, including chips, artificial intelligence, quantum and biotechnology, to prevent capital from being used to support China’s “military-civil fusion” strategy, which forces Chinese companies to share technology with the People’s Liberation Army. “We will also adopt new rules to stop US companies from pouring investments into China, and to stop China from buying up America, allowing all of those investments that clearly serve American interests,” Trump said in a statement.China’s commerce ministry criticised the Trump administration move as an “arbitrary expansion of national security” and indicated Beijing might retaliate.A ministry spokesperson said the proposals would “undermine the confidence of Chinese enterprises in investing in the US” and called any further restrictions on investing in China “highly unreasonable”. Additional reporting by Steff Chávez in Washington and Ryan McMorrow in Beijing More
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