Whether it’s Donald Trump who enters the Oval Office or Kamala Harris, the next president of the United States will face a fiscal cliff that can only be solved by inflating away the national debt.
Speaking with CNBC on Tuesday, hedge fund legend Paul Tudor Jones said the two candidates have handed out tax cuts and spending pledges “like Mardi Gras beads.”
Whoever wins next month—and his best guess is Trump—will soon find out that bond markets will revolt before allowing any of their checks to be cashed.
“We’re going to be broke really quickly unless we get serious about dealing with our spending issues,” said the billionaire investor and philanthropist, who first made a name for himself correctly predicting the Black Monday crash in October 1987.
Citing the $35 trillion national debt, Tudor Jones said the federal government owes seven times its annual tax revenue take. And government debt is only sustainable until it isn’t.
“Financial crises percolate for years, he argued, “but they blow up in weeks.”
Tudor Jones likened the current situation to kayfabe, a word from the professional wrestling world in which spectators know everything performers do is scripted and fake, but they pretend like it’s real anyway.
In this case, the Treasury market is happy to play along, acting like the U.S. is still good for the money even though, deep down, investors know it is not.
This precarious state of equilibrium won’t last forever, though. At some point, a catalyst will force bondholders to recognize that the emperor has no clothes, which is what economists call a Minsky moment.
“It’s this economic kayfabe, and the question is: after this election, will we have a Minsky moment here in the United States,” Tudor Jones said, “where all of a sudden there’s a point of recognition, that what’s going to happen—what they’re talking about—is actually fiscally impossible.”
While the U.S. fiscal dilemma is broadly similar to that of other indebted industrialized nations, such as Japan, it has a greater risk of capital flight.
That’s because, by his reckoning, Uncle Sam owes $20 trillion more to foreign creditors than they do to the U.S.
If America owned just as many assets abroad as it had liabilities, foreign creditors would have a vested interest not to repatriate their money.
This limits the maneuvering room for the incoming administration next year.
“The next president is going to come in, whoever that is, and they’re looking at: ‘Okay, I’ve got 20 trillion dollars that could have wings on it, as well as I’ve got a fiscally unsustainable path, what do I do?’,” he said.