Currently, Congress is hunkering down to negotiate spending bills in order to avoid a government shutdown on March 23. Budget impasses like this one are not rare or particularly surprising. The U.S. federal government has shutdown over 20 times in the last five decades, per Axios. Lawmakers remain concerned about spending levels as the national debt grows past $34 trillion.
This precarious fiscal position the government finds itself in could force it to make a “dramatic move” this year that would mark “the end of capitalism” in the U.S., according to Althea Spinozzi, head of fixed income strategy at Saxo.
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."
