One big slow descent to the foggy bottom

Donald Trump's One Big Beautiful Bill Act (OBBBA) - which he signed into law, unsurprisingly as part of the 4th     of July ceremony at the White House on Friday - will push the US economy into a debt spiral, which will squeeze credit available to much faster-growing emerging economies. US fiscal profligacy will also reduce the agency of global monetary authorities to rein in inflation that Washington is exporting through tax giveaways and military overspending. Taken together with Trump-tariffs, the effects of US policy-induced shocks to the world economy are considerable, affecting both growth and inflation. US lawmakers do not appear inclined to step off the debt treadmill. So, the countervailing pressure will have to emerge from foreign creditors. Their action is, however, constrained by world trade's dependence on the dollar.

Hardening treasury yields could force the US to issue more short-term debt, as bond buyers demand a higher debt-servicing premium. The average yield on long-term US treasuries, and issuance of short-term debt, have been on an upward trajectory. That's likely to become steeper now. The Fed may have to create demand for additional borrowing through quantitative easing, which would mean surrendering gains over inflation. This could exert pressure on currencies of trading partners that are adjusting to higher US tariffs.

The US descent into debt is distinct from the experience of other economies, which are held accountable by financial markets. No other economy has the absorptive capacity for capital that could put a brake on American politicians' spendthrift ways. This makes growth more inequitable in parts of the world where it matters. Trump's welfare cuts are mirrored in the developing world. Fiscal imprudence is, thus, transmitted abroad. It will take decades of rising inequality in the US for politics to polarise around the issue. Rest of the world will have to use this period to wean itself off US debt. The US economy doesn't present an immediate crisis. Rather, a slow descent to the bottom.