The Fed's rate threat is really a cut
Gold sits at 4,000 to 4,100 because gold traders believe the Fed will hike interest rates. The dollar index is at 101 for the same reason. The dollar rose on the expectation of hikes.
Here is the trap. The Fed does not have to deliver those hikes for it to matter. Even a hike acts like a cut, because they will not raise rates as fast as inflation is rising. Real interest rates (the rate after you subtract inflation) will fall even if the number on paper goes up. Say the Fed hikes by 75 basis points. That is nothing. Inflation will run far higher than that, above what people expected, so real rates drop. If the Fed does not deliver any hike, that amounts to a cut. In fact, a big cut. I have hammered this point for months. Investors do not get it.
The Fed cannot just talk about hiking. It has to actually hike. If it does not, what is left of its credibility is gone. The markets should be a lot weaker right now under this threat, unless nobody believes it. But the gold traders do believe it, and that belief is holding gold up.
The economy is weak. The housing market is weak. The labor market is weak, and the last jobs numbers were bad. The last thing the markets could survive is real rate hikes. That is the main reason the hikes were called off in the first place. It is also why the Fed cut rates when Powell was chair. That was not just to help reelect Biden or elect Kamala Harris. Banks had started to fail. The economy was at risk because of the sheer size of our debt. The debt problem keeps getting worse.
A record trade gap that tariffs cannot fix
The trade deficit reports just came out. The unified May trade deficit was 77.6 billion dollars. The prior month was 54.6 billion. That is a 42% jump in one month. It was actually a bit less than markets expected, so the market wanted a huge increase and got one. Both sides got worse: exports fell 3.2% and imports rose 3.3%.
Look at goods alone. The country runs a surplus in services, but the goods deficit, meaning physical merchandise, was 106.5 billion dollars for May. That is enormous, one of the worst goods deficits ever. Trump was supposed to fix that with tariffs.
I said from the start the tariffs would not work, and they did not. They failed in Trump's first term and they are failing in his second. He campaigned on cutting the trade deficit, yet trade deficits hit record highs during his presidency. I predicted that. The tariffs did not attack the disease, they attacked the symptom, and that let the disease get worse. There was no manufacturing renaissance. The manufacturing recession continues, and the country grows more dependent on foreign manufacturing.
AI could gut the one surplus America has
The service surplus is the next thing to break. AI will make its first big difference in services. Many services America now exports could be done by foreign companies using AI instead of American workers. If our trading partners can use AI to do work Americans used to do, those Americans lose their jobs. The service surplus shrinks, the deficit gets worse, and service-sector employment falls with it. Future job losses may come from software, not factories.
Deficits, democracy, and what government owes you
Budget deficits are big because politicians want to get elected and give the public what it wants. That is the built-in flaw of democracy, and it is why the founders built America as a republic, not a democracy. They knew democracies and their history of failure well. The republic exists to protect the minority from the majority. It has democratic features, but that is its core purpose.
On CNBC, senior economics reporter Steve Liesman and Rick Santelli were debating on air. Santelli was right, Liesman rarely is. Liesman argued that deficits exist because the public wants things like health care, so the government has to provide it.
No. That is not the job of government. Government exists to secure your rights and liberties, not to hand you stuff. You do not have a right to health care, because a right cannot impose a duty on someone else. If I claim a right to health care, which doctor is my slave? I would be using government to force people to treat me. You have no right to take anything from anyone else. Rights exist on their own. Government secures your right to go pursue health care, meaning it has no business blocking you from buying the care you want.
Yet government interferes constantly. The FDA has to approve drugs, and if it does not approve one, you cannot buy it even if you want it. It is upside down. Government destroys rights by telling you what you cannot buy, then offers you free care only if you consume the care it deems appropriate. People wanting health care, or anything else, does not obligate the government to supply it.
Government owns nothing to give
Say people want housing. How would they get it from a government that owns no housing? The government would have to hire builders, and it would have to take that money from the private sector, either taxing citizens and paying a private builder, or hiring contractors. So why inject the government at all? Let the free market build housing. That is how capitalism works.
A capitalist spots a need and tries to fill it because filling it can make him rich. He only profits if he satisfies needs efficiently, using fewer resources than the buyer values the result at. To build a home, I combine land, labor, and capital to make something a buyer values at more than it cost to build. That gap is the profit. The same logic runs every product: clothing, food, all of it. As a businessman, I am driven by my customers' needs and wants.
Buyers pay because they must cover the resources used to make what they want. If nobody had to pay for anything, there would be nothing. My customers are themselves producers, either running businesses or working for someone. They collectively create economic output, so they get to spend in proportion to what they helped produce. Purchasing power comes from your own effort. It does not come out of thin air.
Politicians cannot satisfy demands the way a business does, because there is no profit motive. All they can do is take money from one person and give it to another. Assign government the job of meeting consumer demand and it does the job far less efficiently, wasting resources and destroying individual liberty. It becomes destructive of the very reason government was created, which is to make sure you do not lose what you earn.
Calling wealth "theft" gets it backward
Elizabeth Warren criticized the big, beautiful bill, and I was critical of it too, but for the opposite reasons. She called it the rich robbing the middle class and the poor, because the wealthy got the lion's share of the tax cuts. She called that legalized theft, as if wealthy people keeping more of what they earn is stealing.
Look how far we have come. If I want to keep the money I earned and the property I own, I stole it? If I object to the government taking my property, I am a thief? No. The theft I object to is the taking. The thieves are the people who want to take the money, not the people who earned it. Wanting to keep what you earn is human nature. The whole American system rests on private property and on not having it taken from you. Government has the right to tax, but it cannot tax to take your money and hand it to someone else.
Government can tax for the general welfare of the country, not the specific welfare of an individual. It can tax to cover the military and the like. It is not allowed to redistribute wealth. The Constitution was written specifically to stop the government from redistributing wealth. By Warren's logic, if you do not want your wealth redistributed, you are stealing, so anything you keep from the government is money you stole.
She never calls people on welfare thieves. They are not the ones taking, but they receive stolen money and they voted for the thieves, which makes them accomplices. The people who earned the money are not the thieves. And how did they earn it? They built businesses, made products, provided services, created jobs, and added real value. In exchange they earned money. Wanting to keep more of it does not make them thieves.
