Tax-free government bonds
While recession fears have eased and experts are optimistic about a downward trajectory for inflation this year, Spinozzi paints a bleaker picture to explain her "outrageous" prediction.
She assumes a second wave of inflation in 2024 coincides with a need to expand fiscal spending amid the presidential elections. The additional spending will be required to keep the economy going, avoid social unrest, and bulk up the military as geopolitical tensions rise.
What happens next? The budget deficit, which was around 6% of GDP in the 2023 fiscal year, surges above 10% of the GDP. Stocks soar thanks to government support programs. With high inflation, interest rates would have to go up as well.
In such a scenario, the government would find borrowing extremely expensive. In order to fight inflation and bring down interest rates, it would need to sell more U.S. Treasuries to domestic investors at a time when stocks are more tempting.
Saxo analysts think that in a desperate attempt to "normalize borrowing costs," Congress would make capital gains and interest income from government bonds tax-free (income from T-bonds is currently only taxed at the federal level).
As a result, investors flock to bonds in order to lock in the highest yields in decades without the tax burden and the stock market collapses.
This strategy would spell the end of capitalism “as money rotates from private corporations to the public, and holding riskier assets becomes more expensive,” Spinozzi explained. "Despite the government's failure to resolve inequality, lower borrowing costs extinguish social unrest. What follows is a long period of nationalisation and government intervention in critical sectors that are struggling to attract capital."
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Chatting through this bizarre idea with Bloomberg’s Merryn Somerset Webb, Saxo chief investment officer Steen Jakobsen said: “People are putting question marks on the U.S. debt and its ability to be refinanced. In economics lingo, we have a stock problem, which is the size of the debt, and we have a flow problem, which is the ever-increasing new (Treasury bond) issuance that we see.”
If the federal government were to try and create additional demand for Treasury securities, Jakobsen said the capital going to the public sector would increase in size and scope and that would "take away money from the smaller, but far more appealing — at least to most investors — equity market.”
Jakobsen conceded that “a lot of people would actually argue we already killed capitalism.”
He told Somerset Webb the “hand of the government is just getting heavier and heavier” — singling out the growing role of “regulation, wokeness, ESG [and] all of the frameworks that sit outside the actual clearing of prices in the [stock] market.”
When Somerset Webb asked if the U.S. is getting close to having a “government-run economy,” Jakobsen responded: “Exactly!” And he said that wouldn’t be in retail investors’ favor.
“We know that the government sector — both in GDP terms, but also in absolute productivity terms — is far less efficient than the private market,” he said.
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