MARKET PERSPECTIVE

By J Mulraj

June 7-13, 2025

Over indebtedness and aggressive posturing causes a downward spiral

Image created by Bing

It is only in the English Dictionary that pride comes after a fall; in the real world it precedes it. President Trump’s aggressive posturing against other countries is based on pride of being the leader of the world’s leading economy. Albeit one whose whose GDP of $ 30 trillion (China’s is $ 19 trillion) is propped up by a $ 36 trillion national debt. The build up of this $36 trillion debt has been contributed mainly by the past three Presidents, by Obama (who added $8 trillion), Trump (another $8 t) and Biden ($ 7t).

As a result, the interest bill exceeds $1 trillion per annum, (more than the spend on defense, social security and Medicare). This is unsustainable. Debt can be lowered either by increasing revenue or cutting expenditure. Trump, indeed all Presidents, don’t want to increase taxes, which would lose them the next election, so they fund their profligacy through debt. Trump, in fact,  wants to pass the  Big Beautiful Bill to reduce taxes, an issue that led to a spat in his bromance with Elon Musk, the genius inventor and the world’s richest man. Elected politicians are, similarly, loath to cut entitlements, for fear of losing electoral goodwill, and so continue with unviable legacy systems of social security and medicaid.

Trying to get himself out of this chakravayuha (a military formation easy to enter but difficult to exit) by levying high import tariffs. He wrongly called them ‘reciprocal’ tariffs. They were not. The rates were arbitrarily computed so as to nullify US trade deficit with that country. China, for example, was slapped with a 145% import tariff rate, insanely and illogically high, as no business in the world has such profit margins.

Trump’s pride, viz. that the size of the US market would lead to other nations to kowtow to him to end his tariff wars, would, as illustrated, lead to a fall.

Firstly because, as mentioned, it is predicated upon borrowing. The extraordinary privilege enjoyed by the US $ as the globally accepted currency, has allowed the shopping of its citizens to be paid for by others. The US, which paid its debt on time, enjoyed a AAA rating, and the bonds, issued by its Treasury, were considered safe assets. However, all rating agencies have now  lowered US Sovereign rating, and yields on its 30 year bonds are over 5%. If interest outgo on a $ 36 trillion debt is $ 1 t. it implies an average interest rate of 2.7%, so raising of 30 year money will increase debt servicing costs. Given this, will other countries continue to fund US indulgences? Moreover, with $ 9 trillion debt due for redemption of US T Bills in 2025, can Trump afford tax cuts proposed in the Big Beautiful Bill?

Pride comes before a fall.

Trump’s assumption that other nations would genuflect because of the size of the US market, and seek to negotiate lower rates, is also being proved wrong. Instead of bending their knees in genuflection, countries, led by China, are strengthening their backbones. China restricted exports of rare earth minerals and rare earth magnets, needed for various industries, crucially defence and EVs. One of the indispensable one is samarium, for which China is the sole supplier in the world, and without which military aircraft cannot operate at high temperatures.

Xi Jinping just told Trump that it takes two to tango.

As per this report in CNN Business on June 11, US and China have agreed to a framework for a trade deal, under which China would lift the ban on rare earth minerals/magnets exports and UDA would ease sanctions on chip exports and would allow Chinese students to continue their studies. On the other hand, as per this video, China says that claims of a trade deal having been reached are groundless. One doesn’t know which is true. But yes, it does take two to tango. Unilateral demands, based on pride, will lead to a fall.

Perhaps Trump has realised that access to the large US market which he provides, is more than matched by China’s dominance in manufacture and its control over rare earth minerals/magnets.

This false pride was also seen in an unseemly public spat between Trump and Elon Musk. The spat emanated from opposition by Musk, who had done much work in DOGE (Department Of Government Efficiency) to cut wasteful/unnecessary expenditure. Social Security, eg, was sending monthly pension cheques to people who were, supposedly, 100, 200 and even 300 years old. He was thus, averse to a bill to lower taxes for (supposedly) crony capitalists. Trump doesn’t like to be challenged. He reacted by peevishly cancelling Biden’s EV mandate. Under this, high standards were set for Multi-Pollutant Standards for medium and heavy duty vehicles,  and it was mandated that, by 2032, 56% of car sales would be electric. Trump removed the pollution standards, indicating that nursing his hurt pride mattered more than the environment, removed the mandate for EV adoption, and cancelled subsidies. Pride comes before a fall.

By doing this he handed over leadership in Electric Vehicle manufacture to China! Is it not folly to concede defeat to your leading competitor in order to demonstrate your power?

It becomes even more foolish when one considers that Elon’s Tesla will contribute much more to US economic growth than electric vehicles. Tesla has superior technology for full self driving, FSD, vehicles aka autonomous vehicles, by virtue of better AI,  Grok, and significantly higher compute than all rivals. FSD, combined with TASS, or transport as a service, reduces the cost per ride by half or more.  Tesla has also produced a humanoid robot, which is highly scalable, and will do several industrial, and household, tasks, at a fraction of the cost of human labor. US labor costs of $17/ hour can drop to $1 per hour in a decade. Besides, Elon, through SpaceX, can launch reusable rockets in space exploration, the ultimate frontier in military technologies. And Starlink, for satellite based  communication networks.

Trump probably realized that he needs to tango, not only with Xi, but also with Musk. He announced that Musk is a friend, and Musk, in turn, admitted he may have gone too far in some of his comments.

Hopefully, there may be more pie to go around.

A potentially huge discovery of oil reserves in Andaman Islands is good news for India, which imports 88% of oil consumption. Crude oil prices have risen from $ 65/barrel to $ 70.44 after an Israeli air strike on Iranian oil and nuclear infrastructure. Yet another conflict is the last thing the world needs.

Last week the BSE Sensex dropped 1070  points to end at 81118.

It is perplexing that stock markets aren’t reacting to continuing wars, and new conflicts breaking out. The tariff war between US and China may be ongoing, because a ‘framework’ for further negotiations is all that appears to have been achieved, and not a trade deal. The global polity needs to hear age old Indian wisdom of Vasudaiva Kutumbakam – the world is one family, and concentrate on cooperation rather than on the destruction propagated by the deep state.

A stock market correction is due.

Comments may be sent to jmulraj@asiaconverge.com