Why Trump's Big Beautiful Budget Bill could light another fire under bitcoin, gold

Legislation that calls for trillion-dollar tax breaks and spending cuts in the US suggests President Trump's plan to run its economy hot is already flowing through to asset prices. 

The adventurous growth plan legislated in the One Big Beautiful Act (OBBA) is prompting bond traders to scale back bets the US Federal Reserve will move to cut interest rates, as well as sparking a rush into gold and bitcoin as hedges against increasingly loose fiscal policy. 

"The US Congressional Budget Office indicates that the tax cut bill will keep the budget deficit around 7% of GDP [gross domestic product] which is well above the 3% or so of GDP necessary to stabilise the debt to GDP ratio," AMP economist Shane Oliver said.

AMP's forecasts for the fiscal consequences of OBBA suggests deficits as a percentage of GDP are not expected to fall significantly from 2024's level of 6.7% for the near future. Arguably, this also suggests a new era of profligate peacetime fiscal policy will be extended to offset the US debt pile if the OBBA is passed into law through the US Senate on Capitol Hill. 

3-3-3 plan canned

The OBBA's implications also suggests part of the 3-3-3 plan of US Treasurer Scott Bessent to limit deficits to GDP to 3% will be sacrificed for more tax cuts. 

This trade-off may help the US meet the other part of the plan for GDP growth of 3%, but that looks unlikely to outpace the growth of the debt pile now around $US36.2 trillion. 

The third part of the plan to increase domestic oil production by 3 million barrels a day is also to bring down inflation and energy costs. 

As such, we can assume OBBA brings some wild times ahead for asset prices that are already exhibiting spectacular moves. 

Bitcoin, gold, rates, stocks

Bitcoin as a bellwether for liquidity and fiscal stupidity ran to a record high around $US111,000 last week, as OBBA passed The House of Representatives. It has surged 61% in 12 months. 

Gold has jumped an abnormal 41% in 12 months. This is despite bond yields or risk-free rates climbing, which also suggests we're not far off some sort of monetary reset. 

The US dollar has also retreated to a three-year low as measured by the DXY Index and opened sharply lower on Monday. 

While long-end or 30-year government bond yields are also rising as the yield curve steepens. This signals that bond markets are not so sure the US Federal Reserve will play ball with Trump by cutting rates, and are also worried inflation may return on an upward trajectory. 

Rising borrowing costs for governments also signal unease about their fiscal positions. 

As for stocks, it's worth noting the OBBA is not much different to Trump's Tax Cuts and Jobs Act of December 2017. It delivered massive personal income tax cuts, alongside a 40 per cent cut to corporate tax rates, with more profits paid to shareholders via dividends, buybacks, or room to reinvest for earnings growth.

Public deficits by adding to the nation's credit card bill also help create surpluses in the private sector, so are not necessarily bad for corporate profits or share prices. 

So it's far from certain deficits or rising bond yields will push share market valuations lower. However, the failure of shares to retreat amid rising risk-free rates is more evidence the world is awash with debt-fuelled liquidity fuelling asset price bubbles. 

As a warning the below chart from AMP also suggests shares are expensive right now, as they do not offer sufficient yields above risk-free rates as defined by the equity risk premium.

Personally, I am in the bear camp on stocks and won't be surprised to see a blow-up if the OBBA pushes bond yields higher. 

Back to US budget

According to the US Congressional Budget Office, the OBBA would increase the federal deficit by $US3.8 trillion and reduce spending by around $1 trillion if passed into law.

However, the US state and federal governments are already spending a record percentage of GDP to show these levels are vulnerable to more reform. 

Trump's original tax cuts in 2017 took the Federal government's (excluding the states) take of GDP to as low as 17%, whereas that rose to about 23% under President Biden in 2024. 

General taxation in the Land of the Free is still well down on Australia at 29.6%, or OECD averages at 34% as European governments tax their citizens far more. 

But the plan to lower tax rates under OBBA faces criticism, as it's partly an extension of debt-funded growth policies and potentially sees investors lose faith in US dollar assets. 

"The US’ aggregate debt load has more than tripled from $10 trillion in 2007 to over $36 trillion today. Even adjusted for changes in size of the economy, the US’ debt-to-GDP ratio has nearly doubled from 65% to 125%," says Robert Alemeida a global investment strategist at MFS Investment Management.

Elsewhere around the world, the picture is no prettier. The European Union's Stability and Growth Pact for example limits member governments to deficits of no more than 3% of GDP and debt at no more than 60% of GDP. Although many members flout these rules that are a guide for minimal fiscal prudence and have debt-to-GDP levels even higher than the US. 

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