The Trump Presidency will be a race between two gigantic opposing forces. On the one hand, the lunatic asset prices that now prevail, both in stocks and real estate, have a very long way to fall – in the Austrian economic sense, there is a gigantic amount of malinvestment that must be liquidated. This fall will be a huge drag on the general economy. There will also be a modest deflationary force from ending the absurdly bloated government spending and handouts of the Biden years. Protectionism will raise prices and produce positive economic effects only in the long term. Only deregulation offers big short-term gains. The key question is whether those gains will be sufficient to ensure that the electorate grants us a further term of sound economic management after 2029. Based on the Biden-era experience, the alternative would be true long-term disaster.

The main new reason for believing that a massive decline in asset prices is likely soon is the behavior of interest rates. Despite Fed chairman Jay Powell having reduced short-term rates by a full percentage point in the autumn of 2024, and no clear sign of a resurgence in inflation (yet) long-term interest rates have risen instead of falling, with the 10-year Treasury rate above 4.7%. More indicative is the behavior of long-term TIPS (Treasury Inflation Protected Securities) whose yields have risen from around 1.9% in September to 2.6% this week. That “real yield” is higher than it has ever been since the first days of the TIPS market in 1998-2000 (when the first TIPS were small-volume and illiquid, hence commanded a natural yield premium). Long-term U.S. bond market conditions are thus tighter than they have been in a quarter of a century.

There are a number of possible reasons for this. The most likely is that bond markets are feeling the effects of the Biden administration’s last desperate burst of spending, as they endow every Stalinist NGO in existence with as much as possible of U.S. taxpayers’ money. Markets and the rest of us are flying blind on this, because the monthly U.S. Treasury cash flow data comes out only in the middle of the following month, with December’s data due for release on January 14 (probably – the effect of President Carter’s funeral on the schedule is unclear). November’s statement showed a monthly deficit of $366.7 billion, up from $314 billion the previous year, just one indication that the Biden administration’s spending has been rising uncontrollably in its last few months.

It makes sense that uncontrolled overspending will push up interest rates, but why would bond markets not discount for the future? With President Trump inaugurated next week, spending should thereafter drop, simply because the desperate last-minute handouts of goodies will cease. One possibility of course is that traders have an event horizon of a week – anything that happens more than a week away is completely ignored! That would explain many things, including how the stock market got to these absurd heights in the first place. However, assuming that traders are irrational and stupid is dangerous; every now and then they will surprise you with a spark of unexpected intelligence.

Whatever the cause of current high real interest rates, they will have an economic effect, both directly and indirectly. Directly, they will make new projects more difficult to finance, thereby lowering investment and eventually employment. They will also push marginal companies into bankruptcy; indeed there are considerable indications that this is already happening.

Indirectly, they will weaken the valuation basis of stock and asset markets. TIPS with yields of 2.5-2.6% are already a good deal, because they provide a real return of that level, plus complete protection against inflation. In addition, if there is any kind of recession there is a substantial chance that the Fed will revert to its practices of 2011-21, and force interest rates down to zero – in which case, long-term TIPS will provide a large capital gain on top of inflation and their intrinsic 2.5-2.6% yield. With equities and other assets at historic peaks and looking vulnerable, TIPS look a good bet (Disclosure: I own a bunch!) The only danger is of a U.S. government default before the maturity of the TIPS, and yes, that does keep me awake at nights! Anyway, with TIPS currently such a good deal, there seems little point in investing in anything else. That of course, suggests strongly that a market crash lies ahead – and all the left-wing billionaires will be willing it on and selling short, to make President Trump unpopular.

Once the market crashes, the pressure on the Fed to insert a blizzard of liquidity will become overwhelming, from President Trump (who as a real estate man, likes low interest rates – it is almost his only fault) and from the tech and private equity billionaires who will suddenly see their ability to act as leaders of fashion devastated by a wave of sunken equity values and suddenly recalcitrant lenders. The wailing these people will produce in all available media will be deafening, so it is most likely that the Fed will revert to its productivity-destroying interest rate policies of the 2010s. Inflation would in this case resurge sharply, which the left will be able to blame unjustly on Trump’s tariffs, one of the more sensible parts of his macroeconomic policy.

Without countervailing forces, that would certainly doom Trumpism in 2028, to be replaced either by the Democrats, encouraged in even wilder follies of leftism by their rapid resurgence, or by a zombie Bushie regime, deadening the economy, re-regulating and invading random countries according to the goat entrails in the Pentagon. Either way, those would doom us to perpetual decline—we cannot hope to be lucky enough to find another Trump.

However, there is one hope, and that is Trump’s policy of government-cutting and vigorous deregulation. This has enormous benefits in the long-term – for example abolishing the Department of Education could return the relative position of U.S. schools in world ranking from 18th, where it currently rests, to 1st, where it rested in 1979, when the pointless and damaging Federal bureaucracy was invented. Costs can also be severely cut in the Pentagon, where the recent shooting down of a U.S. warplane by friendly fire suggests its motto should be changed to “neglegenter et pretiosa” – careless and expensive! As for deregulation, just eliminating the Biden-era restrictions on fracking and offshore drilling could bring a surge in domestic oil and gas production that at current high prices would produce massive revenues for both companies and governments.

This is even more the case with abolishing the “climate change” subsidies and regulations that have proliferated in the U.S. Admittedly some of those regulations, notably in California and New York, are imposed by the states, so cannot be removed by Federal fiat, but even removing the Federal subsidies to electric cars and restrictions on fuel economy would cause a massive resurgence in the U.S. automobile industry.

Other subsidies that could be removed include the H1B visa program, removing which would greatly increase wages for U.S. tech workers and a mass program of deportation of illegal immigrants, which would eliminate their costs to Federal and state budgets. Ideally, all regulations and subsidies would be subject to sunset laws, forcing Congress to reauthorize them and justify their costs once a decade. Given Congress’s almost complete inability to do anything, this should ensure that most such laws automatically disappear, unregretted save for the bureaucrats involved.

Finally, a truly innovative President would completely abolish the Environmental Protection Agency, which has inserted glue into the U.S. economy for the last half century, often for utterly spurious reasons, such as its invention of the “snail darter” species, which was used to block completion of the Tellico Dam in Tennessee – which species has now been revealed to have been entirely fictitious. U.S. productivity growth fell from 2.8% per annum to 1.8% per annum around 1973. Excess regulation in general caused this sad decline, with the EPA, established in 1970, being the biggest change. However, there can be little doubt that without the EPA and other regulations, we would all today be about 50% richer.

President Trump has other good ideas – purchasing Greenland would make sense, because U.S. resource companies could then exploit Greenland’s huge natural resources (assuming the EPA did not get in the way). But only by truly aggressive deregulation and by eliminating government departments (not merely cutting them back) can he undermine the recessionary forces that will otherwise doom his Presidency and subject us all to interminable Marxist decay.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)