Thread by @dampedspring

Taking a step back 101 part 2. Policymaker tweaks - gasoline and fire extinguishers are both at play like during a crisis.

In part 1 of this thread I made a case that an excellent outcome would be a stabilization of NGDP at 4%.

https://twitter.com/dampedspring/status/1944021252575838625

4% achieved via inflation at target of 2%. Population growth at roughly 50bp and production growth at a robust but not historic high of 1.5% would be Goldilocks.

You may quibble at productictity being too low because of AI and deregulation but because of both of those being

Deflationary any bigger number for productivity may make holding inflation at 2% harder without monetary stimulus which means NGDP may stay at 4% anyway.

4% stability with a credible inflation target would almost certainly generate a lower marginal interest costs for the

government and adding the actual current cost of debt would generate a headwind to debt growth which if primary deficits were to go to zero would result in a slow decrease in the outstanding national debt.

This all sounds pretty damn good tbh. BUT.

Never in my career besides during economic crises have policymaker tweaks been so impactful.

Policy tweaks can be made by the executive branch unilaterally without legislative approval, by the legislature if signed by the president, and by the Federal Reserve.

The Legislature

and the Fed have done very little since election. The Fed has paused rate changes for 6 months. The legislature has passed one bill (The OBBB) which is limited to taxes and mandatory spending. The OBBB is really not much of a tweak. All it did is essentially set a flat

budget deficit for the next decade.

The "Nobody stops this train camp" say this is expansionary to NGDP which is false. Expansionary tax and spending policy requires a budget deficit growth above private sector GDP growth to be expansionary. Flat YoY budget deficits are

contractionary. The OBBB timing makes 2025 and 2026 less contractionary but in aggregate if enforced over the Trump term the net impact is a modest contractionary tweak. Next step for the legislature is discretionary spending. The Trump budget for 2026 is contractionary

It has no chance of passing as Dems will be needed. The recession package from Doge is yet to be passed and it's small. Net net the congress isn't doing much at all.

Which brings us to the executive office tweaks

As I said never in my career outside of crises have tweaks being considered been so impactful. Furthermore the Administration is both throwing gasoline on NGDP while also using massive policy levers for fire suppression. This is all happening as NGDP is declining but slower

And remains well above 4%. The economy is smoldering and a gas can can set it off or a fire extinguisher over applied can cause it to die

First let's look at the Fire extinguishers being set off

Population control through immigration policy is negative to real GDP and

Positive to inflation. Is it a fire extinguisher or a gas can? Hard to say. What's interesting is it's both and unpredictable

Doge never happened and was unlikely to happen. Still true.

Which comes to tariffs. tariffs are unequivocally bad for Global NGDP. It's a tax

It's a withdrawal of private sector resources which are burned by the public sector. Who pays? Someone for sure. If the U.S. pays its NGDP suffers if the ROW pays the U.S. NGDP doesn't go up it just goes down less. My leaning given wealth, employment, private sector low

Leverage, and currency weakness is the U.S. pays the lion share but we don't know yet.

As mentioned OBBB is modestly contractionary over the Trump term.

One last fire suppressant is industrial deregulation which has yet to be announced but is alleged to be gigantic.

Great for non inflationary real growth which stabilizes current NGDP without creating inflation

One last NGDP suppressant is the whipsaw impact of refilling the TGA but that is extremely short term

Gasoline
While simultaneously implementing NGDP suppressing policy mentioned

above the administration, its predecessor, and the fed are pursuing or may pursue tweaks that throw unprecedented gasoline on the smoldering fire.

Bills issuance of 50% of all debt issued since QT started muted QT and shielded private sector investors from duration risk forcing

them into stimulative risky asset buying.

Bank deregulation will not in itself do much to stimulate the economy BUT it increase the size of the gasoline that could be thrown on the fire when private sector animal spirits deem it time to leverage up.

Up until last week the

TGA spenddown has perhaps trickled gasoline on the financial markets and been stimulative.

BUT by far the biggest two factors that could throw massive quantities of gasoline on the fire are

1. Trump attacking the Fed and Powell and with almost 💯 certainty nominating a Fed

chairman to replace Powell in May 2026 who will cut rates far in excess of what's necessary. Will that destroy Fed independence. Hard to say but the rate cuts themselves will do a hell of a job if the New Chair can move the committee to where his boss wants him to go

2. On 7/30 the Bessent Treasury could meaningfully reduce coupon issuance and increase the funding of the deficit and the refinancing of the national debt toward bills. How much gasoline is this? A 25% decrease in gross coupons issued would be equivalent to the largest

Ongoing QE in history. That's game changer gas imho so quite focused on that possibility

Despite some members of the FOMC calling for adjustments to balance sheet policy the current Fed reinvestment policy continues to throw gas on the fire by sheltering the private sector

from duration and complicity allowing the treasury to maintain is treasury WAM at higher levels but for the Fed.

In addition the Fed's QT taper despite clearly ample reserves has been uncalled for gasoline.

The Fed has also been complicit in bank deregulation filling the

gas tank for greater impact if the private sector animal spirits ignite.

Lastly the Stable coin nonsense is mostly noise except for the not insignificant gasoline provided to the economy from converting physical currency in foreign savings from useless paper into domestic

spending potential.

So Trump is suppressing NGDP with policies and simultaneously throwing or planning on throwing gasoline on the fire. The tweaks are huge in size and the outcome is unclear. NGDP volatility could be high.

Not sure why we can't just let the plane land

Softly with modest NGDP downward pressure and modest offsetting rate cuts. But this is where we are and in three weeks we will see the result more clearly