TL;DR

I keep a close eye on the U.S. Treasury General Account (TGA) at the Federal Reserve, essentially the government's cash reserve.

The TGA balance reveals whether the government is spending or saving (tax revenue minus expenses like Social Security, Medicare, interest payments, and wages). It’s a key indicator of upcoming debt issuance, money supply changes, and market liquidity.

Since tariffs directly impact trade, corporate earnings, and tax receipts that flow into the TGA, the Trump administration’s trade strategy will have a key impact on bond issuance, yields, the dollar, and the equities market that just went ballistic following the 90-day pause with China.

Let’s take a pulse.

Debt ceiling

Current debt is in blue, with debt less the balance in the TGA in green, and the debt ceiling inidcated by the red line, and currently set by Congress at a whopping $36.1 trillion.

If you cast your mind back only 6 years ago (to the middle of Trump 1.0) the debt ceiling was reset at $22 trillion.

That means Congress has let government debt grow by 9% per annum while productivity (measured by GDP) has only grown at 5.3% nominal and 2% real with most of this occurring under Biden’s watch.

It’s not a great look. Still, I’ve noted on many occasions that debt in a sovereign context has become profoundly unproductive, with only around 20c in the dollar creating a good or a service (GDP).

The rest of it refinances past debts, pays interest, funds buy-backs and speculation as well as offshore military and other pursuits that do not directly build the U.S. economy. And that is why the deficits are so large.

We are talking about a debt stack that is far too big to ever be repaid (considering $2-$3t in annual deficits plus interest payable on Treasurys) without compromises, resets, and jubilees. And since that is the undisputed case, more debt will need to be issued to refinance old debts because there is insufficient new GDP to repay it. Then in time, some of the debt will be monetised as the Fed will once again be forced to buy Treasurys from the banking system in exchange for new reserves that the banks will eventually turn into money, if and once they lend it out.

For the moment, the Fed has been quiet. letting Treasurys roll off its balance sheet. leaving all the heavy lifting to fiscal policy.

Trump’s fiscal challenge

While U.S. government debt currently redlines at $36.1 trillion, the government has dry powder of $577 billion stashed in the TGA.

This means Treasury has $577 billion to deploy before having to ask Congress for more to avoid a government shutdown, which if approved requires the Treasury to issue more Treasurys on top of the $8-9 trillion it needs to refinance each year, plus interest.

The trick now is for Scott Bessent’s Treasury to utilise that powder when needed, but to otherwise work with President Trump to widen the gap between government income and expenditure and slow down the pace of debt growth.

How? Under Trump 2.0. the narrative that’s being sold places a reliance on higher tax and tariff collections (or higher taxes from higher activity in circumstances where trade deals replace tariffs) and spending less where possible.

What we are seeing so far is that where another country plays ball, there is a minimum 10% or zero tariff; plus, income tax on the resultant increased trade (theoretically) following tariff removal, plus a focus on lower government spending. Although on that score, DOGE looks more like DOG and reportedly has not yet created any meaningful savings.

Still, care needs to be taken if using blunt instrument tariffs to avoid a ‘transitory’ correction becoming a recession. Meaning that lower trade, revenue and tax collections would be the logical result of sticky tariffs, leading to higher unemployment and lower consumption, etc.

This dynamic incentivises the White House to go (or bluff) hard, while remaining alive to backflipping if recession becomes a distinct possibility.

It’s a kind of feather and cold-water style of incremental negotiation, much like the 11th hour phone call made by Trump to the UK PM that demanded more from the UK, in the first bilateral deal done since Liberation Day.

Trade deal progress

Speaking of that phone call to the British PM—last Friday the first framework agreement with the UK raced over the line in 45 days flat.

Details to follow. However, key takeaways:

It is a bilateral agreement (or the start of one) and in a bilateral deal you work out where your trade is coming from and going to with other countries and seek to divert some of those flows back to your counterparty within the new agreement.
Removal of some tariffs completely, and minimisation to 10% for non-exempt items.
A focus on UK automotives, bilateral steel and ships (which is code for a naval rebuild) and aerospace, as well as agriculture, with technology to follow.
Technology being stage 2 indicates the U.S. wants to keep its options open on that score, with clear interest in semiconductor manufacturing technology and not just chips.
The UK has agreed to tariff or protect against the same parties as the U.S., thus setting up a bloc.
There is an advantage of being first/preferred status, because if you’re last, you might find less people buying your goods and less places to sell them without being subject to tariffs or protectionist mechanisms agreed under bilateral deals (which is what appears to be happening with the UK deal).
Trump continues to build his posse to go after China.

But then we saw a U.S. capitulation on China, proposing to cut tariffs from 145% to 80%—still eight times the 10% minimum threshold. Not long after, the two leaders agreed to pause reciprocal tariffs for 90 days and reset baseline tariffs to 10%.

Markets and sentiment reversed. with the bulls now back in control, but let’s see how long this détente lasts.

India and Pakistan hostilities have ceased for the moment, and now that India has the largest (reported) population in the world, the U.S. will no doubt be forging a closer relationship.

But still, what of China, really? The jury’s kind of out while Putin and Xi play exploding pickleball using Trump’s minerals deal with Ukraine as the net.

Now what?

More trade deals to generate more taxable revenue (and inflows into the TGA)? Or revenue from sticky tariffs followed by below trend economic growth which could lead to layoffs and contraction?

For the moment, Trump has opted for the former with the UK framework agreement and China detente, but he will likely continue to push the latter, when it suits him.

As for the gap between the blue and green lines in the chart above, let’s see in which direction that starts to develop.

See you in the market.

Mike

How trade warring impacts TGA and $36 trillion debt ceiling

TL;DR

Debt ceiling

Trump’s fiscal challenge

Trade deal progress

Now what?