Re: Macro/Geopolitics-Where Are We In The Asteroid Field?
How is Trump 2.0 navigating the treacherous Asteroid Field? It's time for a report card.
Back in March, I wrote a detailed missive about how I saw the Trump 2.0 Policy Playbook shaping up:
To revisit the Star Wars analogy:
Trump 2.0 is piloting the Millennium Falcon (the US Economy and Credibility) through an Asteroid Field of difficult policy choices.
Six months into this flight, we’ve seen a relentless barrage of Policy Initiatives, and it’s time to assess whether Trump 2.0 is navigating adeptly—or barreling “Into The Void” (had to throw in a Black Sabbath reference in homage to Ozzy!).
Old Trajectory vs. New Trajectory
In my earlier piece, I outlined the untenable Old Trajectory of the US:
7% Budget Deficit during Full Employment is unprecedented during peacetime. The Vodka Red Bull Economy—endless Fiscal Red Bull requiring endless Monetary Depressant (higher rates)—is unsustainable and is the root of ever-increasing Budget Deficits.
Treasury’s dependence on short-term issuance—Yellen left us particularly vulnerable by relying on short-term funding when rates were significantly lower.
Multiple Global Conflicts—We are stretched too thin and need to prioritize China while encouraging burden-sharing with Allies.
Fighting past wars: Waking up to China’s Unrestricted Warfare on the US for 25 years; containing China and not pursuing regime-change on foreign shores via “forever wars” should be the focus.
Border insecurity is draining Entitlements and compromising National Security.
Sticky Inflation: Again, the Vodka Red Bull Economy is a big culprit.
Critical Path Industrial Dependencies on adversaries and unstable regions (China, Taiwan, Middle East) threaten National Security.
In my piece and subsequent posts, I explained how there was/is a method to the madness behind the Trump 2.0 Playbook, however chaotic and controversial it may appear.
Let me restate my read of the New Trajectory Goals:
Targeting a 3% Budget Deficit – Key Policy Levers include DOGE, Deregulation, and Tariffs.
Longer-Term Debt Financing – Terming out the National Debt to lower the risk of short-term funding shocks.
Sustainably Lower Interest Rates – Creating Macro conditions where Rates naturally decline.
Lower Oil Prices → Lower Inflation – Cajoling Saudi Arabia to unwind its Unilateral Cuts and Spare Capacity, allowing lower Oil prices to dampen Inflationary pressures.
Redirect Fiscal Red Bull from Government to Private Capital – Decades of bloated government Government Spending giving away to more efficient Private Spending could lead to a huge Productivity Boost, which again provides a safety valve for Inflationary pressures.
Redirect Defense Fiscal Red Bull from US to Rest of World (RoW) - Force a Geopolitical Reset with burden-sharing among Allies while simultaneously isolating China by reexamining the Security Architecture built up over decades of Cold War / GWOT (Global War on Terror) mentality, given the new Geopolitical reality of China employing Unrestricted Warfare techniques.
Reshore Manufacturing / Production in Critical Path Industries - The only way to achieve Autarky and combat hostile Industrial Policies is to take a more proactive role in Industrial Policy ourselves in critical areas, coupled with Tariffs to create incentives for Reshoring.
If sequenced correctly, this could yield a “Goldilocks” Disinflationary Economic Growth boom and get the US out of the Asteroid Field while extending USD and UST Hegemony for the foreseeable future.
Four Trump 2.0 Policy Initiatives
With these New Trajectory goals in mind, let us now evaluate and rate Trump 2.0’s performance across four key Policy Initiatives during these highly consequential first six months:
Tariffs & Economic Statecraft
Redirecting the Fiscal Red Bull
Keeping Inflation Subdued/Terming Out the Debt
Containing Internal/External Threats
1. Tariffs & Economic Statecraft
Economic Statecraft vs. Economic/Trade Policy
In late March, Grant Williams and I had a particularly insightful and prescient conversation with Michael Every, Geopolitical Strategist at Rabobank.
If you have not yet listened to this episode of KAOS THEORY, I urge you to have a listen, because understanding the difference between Economic Statecraft vs. traditional Economic/Trade Policy will provide essential context for understanding the Trump 2.0 Policy Playbook:
On 4/2/25, Trump inaugurated “Liberation Day",” initiating a 10% Baseline Tariff on nearly every country and escalating Reciprocal Tariff rates to as high as 145% on Chinese imports, and 25–50% on Steel, Autos, Aluminum.
Markets cracked immediately—Equities plunged, USTs sold off, Global PMI softened, and China’s manufacturing PMI fell into contraction. A lot of hyperventilation ensued, and CEOs warned of runaway Tariff-induced Inflation and shortages within weeks.
The market chaos inspired by the initial round of Tariffs following Liberation Day indicated to me that markets were oblivious to the possibility that there might actually be an overarching plan behind the seemingly capricious rollout—one that is based on Economic Statecraft vs. traditional Economic/Trade Policy.
Here is a recent post explaining the goal of Economic Statecraft:
From an Economic Statecraft perspective, I’ve thought from the beginning that Tariff Policy would revolve around isolating China and closing Transshipment and Transmanufacturing Loopholes.
The ultimate source of leverage for the US is that the US Consumer accounts for 35% of Global Consumption—there is no getting around that math:
I summarized some of these these issues on “Making Money with Charles Payne” on Fox Business in May:
Let’s go over what’s transpired since:
In May, the UK Deal was one of the earliest deals and set 10% as the lowest baseline rate for even one of our staunchest Allies:
The Vietnam Deal in early July corroborated my initial hunch about closing off Transshipment loopholes to isolate China:
India has emerged as a diplomatic focal point: in mid-April, India agreed to waive import duties on US ethane, and by April 29, US Treasury officials had signaled India was poised to be among the first finalized bilateral trade deals.
Philippines reduced its rate to 19% from 20% in return for commitments on US purchases and market access concessions.
On 7/23/25, Japan finalized a high-profile trade deal: in exchange for reducing Tariffs from the threatened 25% to 15%, Japan committed to $550B in US Industrial Investment. Although this deal came later than I expected, it was highly asymmetric in favor of the US and is likely to set the precedent for upcoming negotiations with Canada and Mexico and China.
Sure enough, on 7/27/25, the EU and US reached a deal that looks asymmetrically beneficial to the US and similar in spirit to the US/Japan deal, sweetened by significant purchase ($750B) and investment ($600B) pledges:
I expect China to receive the most punitive treatment, and if China’s “pause” rate—by far the highest at 30%—is any indication, 30% could be the new baseline rate for China.
Actual Tariff Receipts have been increasing rapidly:
April 2025: $16.3B collected as the 10% baseline tariffs and targeted reciprocal rates began to take effect.
May 2025: $22.2B in Tariff revenue, reflecting continued escalation of reciprocal tariffs and expanded coverage.
June 2025: Record $26.6B net Tariff receipts—up fourfold year-on-year—contributing to a $27B monthly Budget Surplus.
YTD through July 20: Gross receipts exceeded $104B, nearly double last year’s pace. This was the highest customs intake in over a decade. The Urban‑Brookings Tax Policy Center projects overall Tariff Revenue of $189B in 2025, rising to $360B in 2026—assuming maintenance of current rates and country-specific protocols. This is not chump change!
Overall Grade on Tariffs & Economic Statecraft: A-
Trump 2.0’s Tariff Policy is not about “Trade Policy” in the traditional multilateral sense—it is about Economic Statecraft aimed at securing US Geopolitical goals. The 10% universal baseline tariff and reciprocal escalation up to 145% on China shocked markets, but it created undeniable leverage:
Deals closed: UK, Vietnam, Japan ($550B investment), Philippines, Indonesia (pending), and now the EU (15% cap + $750B energy + $600B investment).
Tariff revenue: $16.3B in April → $26.6B by June → >$104B YTD.
Macro impact: Tariff inflation fears? Overblown. CPI and PPI remain anchored thanks to offsetting Energy Diplomacy, Demand Elasticity, and Goods Substitutability.
Strategic lens: The US is forcing a bifurcation of global Trade Architecture—“choose Washington or Beijing.” That’s not chaos. That’s strategy.
Although the big deal with China is still forthcoming, I like what I see so far and believe that Trump has wielded leverage well. Although the optics of the initial rollout seemed chaotic, the US has achieved some significant geostrategic goals thus far. In the end, I think the sheer heft of the US Consumer will continue to determine favorable outcomes for the US.
2. Redirecting the Fiscal Red Bull
This section mainly deals with how the Trump 2.0 Policy Playbook is reducing and/or redirecting the Fiscal Red Bull—away from being shouldered by our government and shifted onto the shoulders of foreign governments and Private Industry.
I call this the Reverse Marshall Plan (on steroids).
I evaluate progress along 3 fronts:
Fiscal Red Bull Reduction via Fiscal Policy
Fiscal Red Bull Redirection
Redirection to Private Sector — via Industrial Policy and Reshoring Deals
Redirection to NATO Allies — via Geopolitical / Economic Statecraft Pressure
I think the performance here is mixed so far.
In short, I think the Admin scores poorly on Fiscal Red Bull Reduction, since Fiscal Policies via legislation have disproportionately focused on Growth initiatives vs. Spending Cuts. However, I think the Admin scores extremely well on Fiscal Red Bull Redirection.
As always, however, the devil’s in the details, and I remain far more optimistic on impacts on the future Budget Deficit trajectory than the baseline CBO estimates (which I will explain).
First, let’s address Fiscal Red Bull Reduction (or lack thereof) via Fiscal Policy:
On 7/4/25, the One Big Beautiful Bill Act (OBBBA) was passed, which has several key Pro-Growth initiatives that I applaud:
100% Bonus Depreciation for qualified production property (factories, machinery, equipment), eligible through 2032. This is a major tailwind for Reshoring Capital Investment.
Semiconductor Production Tax Credit raised to 35%, up from 25%, effective for projects placed in service after year-end 2025. I’ve advocated for Proactive Industrial Policy in Critical Path Industries for years now:
Permanent reinstatement of US R&D Expensing and retroactive treatment to 2022, boosting free cash flow across tech, AI, and biotech firms. Again, a major tailwind for Reshoring.
OBBBA also had more controversial Fiscal Additions:
Elimination of Tax Cuts and Jobs Act (TCJA) Tax Cut Sunsets—CBO had assumed $3.4T in Tax Revenues that would come back that are now canceled. I personally think the Pro-Growth nature of this outweighs the negatives.
$150B increase in Defense Spending—I had hoped to see a net reduction as a result of more NATO Burden-Sharing (more on this later).
$150B for Border Security—I think this was necessary (more later)
I am unimpressed with OBBBA’s weak focus on Fiscal Reductions:
Medicaid Cuts: Up to 12% reductions, and work requirements introduced.
SNAP & Welfare Reform: Stricter eligibility and new work mandates.
Limited Agency Consolidation: As part of DOGE, EPA canceled ~167 DEI-related contracts, saving ~$115 million; USPS agreed to fire 10,000 employees as part of efficiency efforts.
Phaseout of Green Subsidies: I am happy to see these, as I think a lot of taxpayer money has been wasted on nonsensical “Gretaverse” subsidies at the expense of supporting more reliable energy sources like Oil, Gas, and Nuclear.
DOGE has been the biggest disappointment so far:
Falling far short of Musk’s seat-of-the-pants announcement of $2T in savings, final DOGE cuts amounted to a paltry $150-$160B mainly through contract cancellations and grant cuts, with only $55B in verified cuts. This was extremely disappointing (but not surprising) and highlights how difficult it is for any politician to cut Fiscal Spending.
There have, however, been some Deregulation and Efficiency gains:
The DOGE AI Deregulation Decision Tool launched to scan ~200,000 federal rules and flagged up to 100,000 for elimination.
HUD and CFPB have already removed over 1,083 regulations, with broader ambition to slash 50% of existing regulations by January 2026. CFPB faced defunding and a staff reduction of ~1,480 employees.
By mid-2025, ~110,000 federal employees had exited via resignation or termination.
USAID and NIH grants gutted, including DEI-related programs.
I hope to see a reemphasis on Fiscal Reduction, especially as the fruits of Fiscal Red Bull Redirection materialize (next section).
While disappointing on Fiscal Reduction, Trump 2.0 has done an extraordinary job on Fiscal Red Bull Redirection.
First, consider the prolific Reshoring Investment Pledges from our Allies and Trade Partners:
From Trump’s May Middle East Tour:
Saudi Arabia pledged $600B, focused on AI, energy, and defense, including a $20B US data center investment and $142B defense package.
Qatar inked $96B in Boeing aircraft orders, plus $1.2T in economic exchange frameworks.
UAE committed $1.4T investment over 10 years, including $440B in energy sector investments alone. Deals include the largest AI campus outside the US, Nvidia chip flow, and an aluminum smelter.
Total Middle East Commitments: $3.2T
From the most recent July Trade Deals:
Japan Trade Deal: In exchange for capping tariffs at 15%, Japan pledged $550B in US sector investment, with ~90% of profits retained by US entities.
EU Trade Deal: Locked 15% mutual tariff cap; in addition, the European Union committed to $750B in energy purchases and $600B in US Industrial & infrastructure investment.
Philippines / Vietnam / India: Aggregate smaller pledges (~$50B combined), mostly in electronics and supply-chain nodes.
Total Trade Deal-Linked Reshoring Commitments: $1.95T
Let’s not forget the plethora of high-profile Corporate Reshoring Commitments:
Nvidia, in partnership with TSMC, Foxconn, and Wistron, is building over 1 million sq. ft of AI supercomputer and semiconductor infrastructure across Arizona and Texas, projected to generate up to $500B of domestic AI-related investment over the next four years.
Taiwan Semiconductor (TSMC) is committing $100B to build three new semiconductor fabs in the US, emphasizing chip capacity resilience and US supply chain sovereignty. One plant in Arizona is already producing with 3,000 employees onboard.
Apple pledged a massive $500B investment in the US over four years, including doubling its Advanced Manufacturing Fund, launching an academy in Michigan, expanding silicon fabrication and AI infrastructure across nine states, and supporting 2.9M existing US jobs.
Eli Lilly plans to invest $15B across four “mega‑sites” over five years in the US for active pharmaceutical ingredient manufacturing and injectable therapies. This initiative is forecast to create 3,000 operational jobs and 10,000 construction roles.
AstraZeneca announced a $50B US investment by 2030 in manufacturing and R&D (notably a new Virginia facility focused on metabolic and weight‑management pharmaceuticals), tied directly to US Tariff pressures.
Johnson & Johnson committed $55B for US plant construction over four years, including several large-scale manufacturing sites and thousands of jobs.
Hyundai announced a $21B investment through 2028, including $9B specifically expanding domestic auto production capacity to ~1.2M units/year; part of this includes shifting Civic Hatchback Hybrid production fully to Indiana.
GM is injecting $4B into US production to boost annual output by roughly 300,000 vehicles, via capacity expansions across Michigan, Kansas, Tennessee, and Buffalo.
GE Appliances Investing $490M to move washer and dryer production from China to Louisville, Kentucky, creating 800 new jobs and integrating advanced robotics and automation.
Total Corporate Reshoring Investments: $1.25B
Finally, let’s talk about Fiscal Red Bull Redirection to NATO Allies, specifically Defense Fiscal Red Bull.
Everyone remembers that fateful meeting Zelensky had with Trump and Vance back in March. As painful as it was to watch, something incredible materialized from that episode: EU members of NATO who have previously refused to bear their proportional share of Defense Spending “found religion” all of a sudden.
Prior to this event, NATO Allies (excluding the US) spent an average 2.2% of GDP on Defense, equating to approximately $400B/year, compared to the US spending 3.4% of its GDP on Defense, equating to approximately $997B/year. As shown below, many NATO countries didn’t even make the previous 2% guideline.
It never made sense to me (and many Americans) why a country like Germany, with Russia as an aggressor right in its backyard, refused to relax its Debt Brake and spend significantly more than the minimum ~2% of GDP on Defense. Despite repeated cajoling by many US Presidents from both sides of the aisle, Germany remained intransigent—until now.
See this table of the dramatic shift in Defense Fiscal Red Bull to be spent by our NATO Allies over the next 10 years:
Here are the big picture summary statistics:
2024 NATO (ex‑US) Spend: ~$390B/year
Projected 2035 Spend: ~$918B/year
Projected Increase by 2035: ~$530B/year
Relative Growth: +140% across major European economies.
Assuming a linear ramp over 10 years, the cumulative increase in spend over 10 years amounts to a whopping $2.9T!
Germany is the swing factor, at +$150B alone, thanks to its Debt Brake exemption and NATO pledge. France & UK combined add another $246B annually. Poland and Baltics are already near target but still see incremental increases.
This means NATO Allies will nearly triple real Defense budgets vs. 2024, creating $530B in annual Defense Fiscal Red Bull shift abroad.
European Yields widened sharply on these announcements, reflecting real budget shifts—and signaling a transfer of Defense Fiscal Red Bull away from US taxpayers. Yet ironically, European Yields dragged US Yields higher amidst widespread declarations about the “End of American Exceptionalism.”
If American Exceptionalism means subsidizing the world at the expense of the US Taxpayer, I agree that it’s ending. If American Exceptionalism means continued American Economic and Geopolitical dominance, I wholeheartedly disagree.
Over time this Defense Fiscal Red Bull Redirection should accrue to the benefit of the US one way or another; either it allows us to cut our own Defense Fiscal Red Bull, or it allows us to refocus it on more urgent Geopolitical priorities like China and the IndoPac. So while the BBB is still calling for $150B increases to our Defense Budget, I believe that the US will be able to cut its Defense Fiscal Red Bull in future years.
Note that this cumulative shift of $2.9T alone is almost the size of the sandbagged CBO estimates for Budget Deficit increases, without any upward assumptions to Productivity Growth!
The Reverse Marshall Plan
Now, let’s aggregate all of these sources of Fiscal Red Bull Redirection over 10 years and see why this matters so much.
The Aggregate Total of Fiscal Red Bull Redirection is ≈ $9.3T!!
I get that not all of this might materialize as expected, but even cutting this number in half gets you to a net Fiscal Benefit of $4.65T, which is 50% bigger than the CBO doomsday projection of $3T in Budget Deficit increases.
You might not see it in our immediate Budget Deficit yet, and certainly CBO is not taking any of this into account, but the strategic shift away from Fiscal Red Bull funded by the US government toward foreign Allies and Private Industry will give the US significant breathing room in its attempts to grow out of its Debt.
This is orders of magnitude larger than any prior Trade/Industrial Policy realignment in modern history—even relative to the post-WWII Marshall Plan ($160B in today’s dollars).
This is the Reverse Marshall Plan—on steroids!
Overall Grade on Redirecting the Fiscal Red Bull: B+ (with upside risk to A)
Here is how I break down my evaluation:
Fiscal Red Bull Reduction via Fiscal Policy: C
Fiscal Red Bull Redirection
Redirection to Private Sector via Industrial Policy and Reshoring Deals: A
Redirection to NATO Allies via Geopolitical / Economic Statecraft: A
I believe I am being harsh but fair on the Fiscal Policy grade for now, but if the rumors of “later” Spending Cuts materialize (there is already talk of that—see below) and/or even a fraction of the Redirected Fiscal Red Bull “crowds out” future government spend by way of a Reverse Marshall Plan, this category could catapult to A+ territory.
3. Keeping Inflation Subdued / Terming Out The Debt
These two goals go hand-in-hand, which is why I’ve lumped them together.
Janet Yellen did the country no favors by disproportionately funding our government with short-dated debt when Interest Rates were at all-time lows. In addition, profligate Fiscal Red Bull + an aggressively Dovish “Team Transitory” Fed in 2021 led to an aggressive bout of Inflation, which led to much higher Interest Rates and exploding Deficits—all during a peacetime, full employment economy.
Trump 2.0’s challenge is monumental: unwind the Vodka Red Bull Economy—years of Fiscal excess financed by short-dated debt—without triggering a Recession (from excessive Spending Cuts and Tariffs) and without growing too hot and causing another Inflationary spiral.
The goal is Disinflationary Growth, which is the Holy Grail because it sets the stage for sustainably Lower Rates, which in turn allows us to term out our debt.
This is the key to navigating out of the Asteroid Field.
Four Deflationary Levers
I see four Deflationary Levers at work, and taken together, I remain sanguine that there is a path to sustainably Lower Rates, which would create a virtuous circle of lowering Interest Expense, thereby reducing our Budget Deficit, thereby producing buyers of USD/USTs, thereby allowing us to term out our National Debt.
Here are the Four Deflationary Levers:
Lowering Oil Prices
Demand Rationing/Redirection From Tariffs
Achieving Productivity-Led Growth
Creating Demand for USTs
Lowering Oil Prices
I’ve litigated at length over the last several years why true Geopolitical Risk to Oil was to the downside, given Saudi Arabia trapping itself with Unilateral Cuts of 3 mmbpd (leading to record OPEC+ Spare Capacity) while facing pressure from Trump 2.0 to loosen its spigots.
Last July, I wrote this piece that detailed this thesis and why Low Oil was the key to sustainably Lower Rates and a Weaker USD:
I said back on 4/1/24 that a Q1’25 Surprise to the downside in Oil could happen if Trump won the election:
A year later, on 4/3/25, the negative surprise came as expected:
After multiple front-loaded Cut Unwinds, there is a flood of OPEC+ Oil coming, and I believe Trump 2.0 still wants to see Oil in the $50’s. This is from 7/21/25:
While Oil diplomacy with OPEC+ and Saudi Arabia has undoubtedly helped mitigate any Tariff-induced Inflation thus far, I think Trump can and will lean on the Saudis to do more in the coming weeks to months.
I believe Oil will trade into the $50’s when all is said and done, as Trump 2.0 continues to pressure the Saudis to unwind their Unilateral Cuts.
Demand Rationing/Redirection From Tariffs
Contrary to the breathless headlines, Tariffs have not unleashed material Inflation. In fact, selective Demand Destruction in Demand Elastic Goods categories has acted as a pressure valve, reinforcing Deflationary trends in Services. Pair this with Domestic Substitution, and you see why CPI prints remain tame.
I’ve had a contrarian take from the beginning of this year that Tariff-induced Inflation would not be a problem. Here is what I said in my Interview with Maggie Lake in February:
Some early corroboration of my thesis on 5/16/25:
Between lower Oil prices and the inherent Demand Destruction from higher Tariffs, I do not see runaway Tariff Inflation as a risk:
Furthermore, from an Economic Statecraft perspective, it makes sense to redirect Demand on goods with US Substitutes. This is yet another reason why I do not see widespread Tariff Inflation:
Consumers are being given a choice between buying American vs. buying foreign goods, and as long as there are good US Substitutes and/or underlying Demand Elasticity is high, there will be a safety valve.
Data thus far in July further corroborate benign Inflation:
There is still a big wildcard with how the China Trade Deal evolves and whether or not there will be Long-Term Incentive Modifier Tariffs on Critical Path Industries; if these are imposed without a ratcheting mechanism, Inflation risks will increase.
Achieving Productivity-Led Growth
This is the Big Kahuna of Deflationary Levers.
If the OBBBA (with 100% Expensing, 35% Semiconductor Credits, and permanent R&D Incentives) succeeds in catalyzing a Reshoring Capex Supercycle, and AI delivers on even half its promise, Productivity could inflect significantly higher, with US Debt/GDP improving dramatically:
CBO Baseline Assumption: 1.2% Productivity Growth → Debt/GDP explodes to 150% by 2035.
+0.5% improvement to 1.7%: Debt/GDP stabilizes near 100%.
+1.3% improvement to 2.5%: Debt/GDP trajectory improves dramatically, approaching 50-70%.
Disinflationary Growth Driven By Productivity Gains (enabled by AI and Deregulation) is the HOLY GRAIL.
All in, CBO baselines model in $4.5T in Fiscal Expansions with only $1.1T in Fiscal Reductions, resulting in net expansion of the Deficit by $3.3T in 10 years and Debt/GDP expanding to ~150% in that time.
What CBO is reticent to say is that its baseline estimates are based on a very low 1.2% Productivity Growth metric—the same stagnant rate that characterized the 1973-1994 period. I believe this assumption to be a politicized, sandbagged number.
What did the advent of the Internet herald? 2.5%-3% Productivity Growth during the 1995-2000 period! That alone allowed the US to attain a Budget Surplus by 1998.
The CBO subsequently put out this chart that admitted that just a 0.5% boost to Productivity Growth assumptions would make Debt/GDP trend lower to 100% through Disinflationary Growth.
From DB regarding this chart:
Here is my take from 7/15/25:
The bottom line on the OBBBA is that while I’m disappointed in the lack of Fiscal Reductions, I think the combination of Deregulation and targeted Pro-Growth Industrial Policies coupled with AI-driven Macro efficiencies could very likely see a resurgence in Productivity Growth, which would in turn allow the US to grow itself out of its Debt problem without causing an Inflation problem.
Indeed, the early returns on AI-driven Productivity Growth seem promising:
The St. Louis Fed (2025) thinks that industries with higher AI adoption—like information services—averaged ~5% annual Productivity Growth between 2019–2024, far above lagging sectors.
OECD and CEPR estimate AI’s contribution to Productivity Growth between 0.25–0.6%/year, depending on adoption intensity.
McKinsey projects a $4.4T Productivity Dividend globally from corporate AI deployment.
Goldman suggests AI alone could add 0.3–3.0%/year to US Productivity Growth, with a median of ~1.5%/year. That would be an addition of 1.5% to the 1.2% CBO baseline!
Here is chart from the Chicago Fed:
Creating Structural Demand for USTs
The last of my 4 Deflationary Levers has to do with creating structural incentives for institutions to hold more USTs.
On 7/18/25, the GENIUS Act established federal regulation for payment via Stablecoins:
Requires 1:1 USD or UST backing, disclosure, and state/federal oversight.
This initiative is neutral on the Fiscal Red Bull front, but it could be significant because it locks in a structural and expanding buyer base for USTs and USD-denominated Assets, countering “de-dollarization” pressures.
It remains to be seen whether this results in a net increase in Demand for USTs. The hope is that it may reduce Term Premium and improve Treasury funding resilience—a key advantage as the US moves to lengthen maturities.
I suspect this will be the first of several overt levers to create Structural Demand for USTs. In my Asteroid piece from March, I highlighted several other potential tools:
Overall Grade on Keeping Inflation Subdued/Terming Out the Debt: B (with upside risk to A)
Although Tariffs haven’t really caused the feared Inflationary Spike, Inflation is not yet subdued enough to allow for sustainably Lower Rates. No progress has been made yet on terming out the Debt, as the Yield Curve remains unattractively steep to do so.
Ironically, I believe part of the reason for elevated Term Premium is Trump’s insistence on publicly bullying Powell and threatening to fire him, even though I do not believe he will do so in order to maintain “Scapegoat Optionality”:
That all said, CBO’s gloomy outlook assumes stagnant Productivity Growth and ignores the unprecedented Fiscal Red Bull Redirection. If Deregulation, Industrial Policy/Reshoring, and AI-enhanced Productivity megatrends hit in concert, the US could easily replicate the 1995–2000 “Goldilocks” era when Productivity surged to 2.5–3%, dramatically shrinking Deficits and lowering Interest Expense dramatically. That’s the real Asteroid Field exit.
The playbook is in motion; execution will decide if this becomes the defining Fiscal turnaround of our era.
4. Containing Internal/External Threats
The fourth and final Trump 2.0 Policy Initiative employed thus far I will label broadly as Threat Containment—of both Internal and External Threats.
Here’s where Geopolitics meets Domestic Security—Trump’s “Hard Edge” policy mix has echoes of the distant past:
The Roman Empire faced almost exactly the same set of challenges we are currently facing during the Crisis of the Third Century. Only bold and drastic measures undertaken by Aurelian and Diocletian helped Rome snap out of its death spiral and live to fight another day.
For an interesting discussion of what happened to the Roman Empire in the Crisis of the Third Century, listen to KAOS THEORY 8:
Internal Threat Containment / Border Security:
Fast-track Deportations and National Guard Deployment implemented within weeks.
Mexico as buffer state: Trump leveraged Tariffs and bilateral pressure to force Mexico to crack down on transshipment of migrants.
Impact: Illegal crossings are down sharply; asylum abuse loopholes are closing. This is the most aggressive enforcement in decades, and the chart of Illegal Border Crossings is stunning:
Macro effect: TBD, but here are my thoughts again from my Interview with Maggie Lake in February:
External Threat Containment:
Iran:
Secondary Oil Sanctions reimposed, squeezing Tehran’s revenue streams, but more than offset by Saudi barrels.
Precision kinetic strikes on proxies after April flare-ups, signaling Deterrence without Escalation into a full-blown regional war.
Operation Midnight Hammer on 6/22/25 deployed B‑2 stealth bombers and Tomahawks to strike Iran’s nuclear facilities, significantly setting back Iran’s nuclear weapon aspirations.
Macro impact: Strait of Hormuz stayed open; Oil markets had very short-lived spike into the $70’s. As I’ve said over and over: this is NOT the Oil market of 1973, and real Geopolitical Risk remains to the DOWNSIDE. These spikes have been tremendous FADING opportunities over the last 2 years.
Negatives: Iran’s black-market barrels still flow via shadow fleets, Hezbollah/Hamas both remain thorns, Israel/Hamas peace remains elusive.
Positives: full-scale “forever war” escalation averted, Iran’s defanging may prove to be a catalyst for Saudis to join the Abraham Accords.
Be on the lookout for KAOS THEORY 10 in August, which will feature an outstanding Middle East author/expert who will help explain the underlying root causes of conflict in the region.
Russia:
Ukraine War remains stalemated, but Trump avoided new US Fiscal commitments beyond existing packages.
Defense Fiscal Red Bull Redirection: Shifted a significant Fiscal burden to EU members of NATO, forcing Europeans to fund and arm Ukraine in line with their new 5% GDP defense pledge.
Negatives: Ukraine/Russia peace remains elusive, US has not yet cut Defense Spending even with greatly improved NATO burden-sharing.
Positives: US influence intact without deepening Fiscal bleed.
China:
Export Controls tightened on Advanced Semis and AI tech.
Tariff discussions ongoing: 30% “pause rate” isolates Beijing and accelerates decoupling.
Transshipment Loopholes curtailed: Vietnam/Philippines so far with more on the way.
Negatives: Rare-Earth and Pharma dependencies still unresolved, have not yet refocused Defense priorities to the IndoPac, which is gravely needed imho.
Positives: Reshoring momentum, and so far key Allies like the EU and Japan have chosen to remain firmly in the US orbit, China’s Economy remains on the ropes and in Deflation.
Overall Grade on Containing Internal/External Threats: B+/A-
On the domestic front, our open Border has been significantly secured with the help of our neighbors.
Although multiple External Threats like China and Russia remain at large, Trump 2.0 has managed to redistribute Defense costs to our NATO Allies and simultaneously corralled a united Economic/Trade front against a predatory China.
In the Middle East, Trump defused Geopolitical flashpoints without igniting new “forever wars”; if defanging Iran leads to renewed promise for expanding the Abraham Accords, it would be one of the most significant Foreign Policy wins for the US in decades.
Conclusion: In the Asteroid Field—But Not Yet Out of It
Six months into Trump 2.0, we are no longer drifting on autopilot on the Old Trajectory. Instead, we’re bobbing and weaving through the Asteroid Field of high Budget and Trade Deficits, Debt Overhangs, Geopolitical Risks, Insecure Borders, Industrial Atrophy and Supply Chain Fragility. It’s been a bumpy ride, but the Trajectory has changed, and there is hope for a way out.
So far we’ve seen concerted Economic Statecraft objectives to Reshore and restore Supply Chain Autarky, an unprecedented Redirection of Fiscal Red Bull from our government to the Private Sector and our Allies and Trade Partners, Deregulation initiatives to unlock Disinflationary Productivity-led Growth, and attempts to secure our own Border while burden-sharing the defense against External Threats.
Here are my summary scores in each of the Four Key Policy Initiatives:
Tariffs & Economic Statecraft: A-
Redirecting the Fiscal Red Bull: B+
Keeping Inflation Subdued/Terming Out the Debt: B
Containing Internal/External Threats: B+/A-
Importantly, there is a method to the madness, as I posited in my March Asteroid piece. Whether it’s coaxing Saudi Arabia to loosen its Oil spigot, breaking multilateral trade orthodoxy with Bilateral Trade Deals that simultaneously address Tariffs, Reshoring Investment, and Defense Coordination, or passing Deregulatory legislation to unlock AI-led Productivity Growth, each lever is being pulled with a bigger picture in mind.
I am most excited about the Redirection of Fiscal Red Bull and what that portends for the US in the next decade. Indeed, the magnitude is so great (>$9T) that I call it the Reverse Marshall Plan on steroids.
The Trump 2.0 Playbook is by no means a clean or smooth reboot—it’s a gritty, “rough and tumble” pivot. But in a world that’s been frog-boiled to accept a doomed, but “low volatility” Old Trajectory, a hard jolt might be exactly what’s needed to force a much-needed change in trajectory. The Millennium Falcon isn’t out of the Asteroid Field yet, but for the first time in years, I think the trajectory looks promising.
Back to my Star Wars analogy, to quote our intrepid pilot steering the Millennium Falcon of the US Economy through the Asteroid Field:
“She may not look like much, but she’s got it where it counts, kid.”
Great synthesis of 6 months that have felt like decades of news flow. It calls to mind the Howard Marks quote of "Before asking where we're going, it's helpful to know clearly where we are today."
This is a valuable "bigger picture" perspective; the current backdrop is generally positive and downside risks that I (and others) have been worried about need to be considered in that context (e.g., housing, fiscal risk/"Liz Truss Moment").
Thanks as always! Hope you are having a great summer.
Thanks Michael - great insights, appreciate this 'report card'.
Would add that fiscal reductions were also made harder by judicial intervention - presumably expected by the Administration, but remain a drag nonetheless.