Atul Singh: Welcome to the fifth edition of 2025’s FO° Exclusive. Last month, we covered Donald Trump’s new economic revolution via tariffs and more, the Pakistan–India clash and Mark Carney’s victory in Canada. This month, we have a new pope. US President Donald Trump has a new $400 million Qatari jet. He has been to the Middle East, which he has enjoyed very much. The Russians continue to strike Ukrainians and Vladimir Putin has called the Americans emotional. India and Pakistan have stopped fighting for now. Syria is on the edge of civil war, if we are to believe US Secretary of State Marco Rubio, and Colombia has joined China’s Belt and Road Initiative. We could go on and on. Needless to say, there are lots of issues to cover. There is no dearth of issues we can dwell upon.

However, in May 2025, we will cover two — two, not three — issues. They are: US Budget and US–China Tariff Deal Unleash New Economic Uncertainty, and Hunger Now Strikes Gaza and Big Crisis Brews in Israel. So, let’s get to number one: US Budget and US–China Tariff Deal Unleash New Economic Uncertainty.

So we have a lot to get through. And the gist of it is that for all the promises of balancing the budget and trimming government finances, the House of Representatives under their great leader, US President Donald Trump, has passed a budget that will spend even more. So deficits will go up, debt will go up.

Glenn Carle: I’d like to jump in here. Great art, I would argue — and I’m not a conservative who argues for the unities of time and space — must combine farce with tragedy so as to leaven the sadness. And the budget bill, we’ll call it, seems to be a spectacularly wonderful piece of art then. So why don’t you start with what is fundamentally — one should only look at it as a farcical enterprise, because otherwise we would all simply commit suicide.

Atul Singh: We don’t want you to commit suicide, Glenn. You have a long, long way to go, many books to write and many Hollywood thrillers to be made about your various stories. But let’s start.

The House of Representatives passed a budget bill for fiscal year 2025 by a single vote. Members of Congress debated the bill through two successive nights, and only after a marathon push, this bill passed in a 215 to 214 vote.

Contents and consequences of the Trump budget

Atul Singh: And this is extremely telling because it’s by a knife’s edge, a razor’s edge, and clearly the Congress — or rather the House of Representatives — is deeply divided. The bill is 1,100 pages long. I’m sure, Glenn, you’ve read every page. If not you, I’m sure some others have. I see we have Christopher Roper Schell in the audience, and I’m sure he’s read every page since he spent 11 years on Capitol Hill — so a hundred pages for every year.

Anyway, importantly, what does this 1,100-page extravaganza do? It extends corporate and individual tax cuts passed in 2017. Remember, this happened during Trump’s first term in office, so he’s very committed to extending these tax cuts. This bill also cancels many of former President Joe Biden’s green energy incentives. Now, I know, Glenn, you will be saddened by that. It tightens eligibility for health and food programs for the poor. The bill also funds Trump’s crackdown on immigration, adding tens of thousands of border guards and creates the capacity to deport up to one million people each year. The bill also loosens regulations on firearm silencers — because, you know, that’s extremely important. Not just to own a gun, but to have a silencer, (laughs) so that you can operate it with safety after night, without any sound to give you away.

Glenn Carle: That’s right, you don’t want to bother the neighbors!

Atul Singh: Yes, sound pollution is a terrible thing, ladies and gentlemen. Indian regulators and legislators should take note. They should learn something from the US.

Now, this is a sweeping tax and spending bill that increases US debt by trillions of dollars. Note: the US debt has already reached 124% of the GDP. The Congressional Budget Office (CBO) estimates that the bill will increase the US government’s deficit by $3.4 trillion by 2034. Note that the US government spent $1 out of $8 on interest payments. According to the CBO, this is more than the defense budget. Over the next ten years, the CBO estimates that the US will spend $1 out of $6 on interest payments because of an aging population. As we know, anywhere in the world, aging populations push up any government’s health and pension costs. The US is no exception. So maybe we need to bring back smoking, Glenn, smoking and drinking. All this clean living is a bad idea.

Glenn Carle: That’s right. That’s right.

Political rhetoric and regressive realities

Atul Singh: Now remember that this budget has led to mixed emotions. The Speaker of the House actually says the House has passed generational, truly nation-shaping legislation. This is Mike Johnson. Maybe he’s right. Who knows?

US President Donald Trump has called the bill, “One Big Beautiful Bill Act.” I don’t see how it is an act, because it has to go through the Senate — but let’s go with the President, because he is the most powerful man in the world, and the wisest, of course. And his billionaire ally, Elon Musk, is disappointed. Musk says the bill can either be big or beautiful but not both. So, well, now there seems to be a chasm between two BFFs — best friends forever.

Note that all Democrats and two Republicans voted against the bill. A third Republican voted “present,” which means he or she voted neither for nor against the bill. Another Republican missed the vote because he had fallen asleep. Very convenient. It will not show up on his record.

Now, after all this division within the House of Representatives, Moody has downgraded US credit rating from Aaa to Aa1, citing a decline in fiscal metrics. For the first time, the US does not hold a top-notch score from any of the three big credit rating agencies.

Markets are worried about growing US debt. And note, the CBO estimate, which I mentioned that the US would spend $1 out of $6 on interest payments, does not take into account Trump’s new budget. The House of Representatives’s new budget worsens an already bad fiscal situation. So obviously, markets are worried. Yields on 30-year government bonds have jumped to over 5%, the highest in 18 months. Markets are volatile and they have dipped somewhat — not dramatically, but still. If you look at them across a six-month timespan, they have dipped.

More importantly, the dollar has depreciated. This has major implications when it comes to the cost of imports and could add to inflationary pressures. So, on the whole, the US budget, which has just gone through the House of Representatives, now has to get through the Senate. And if it does, it adds to the fiscal pressures on the US.

Now look, any reform will require cutting a bit of spending and raising taxes, and that causes pain. And this is a challenge with all democracies. All democracies find it easy to kick the can down the road. They find it very difficult to cut spending or to raise taxes because that causes pain.

Glenn Carle: Well, that’s the thing. I mean, it’s easy to give, but it is very difficult to withhold or to take or to tighten one’s belt, or make others tighten their belts. I do agree with the Speaker of the House that it may be, if not the most significant, one of the more significant pieces of legislation in… well, that’s Trump who said this: if not in the history of the country, certainly it is very important. But I think for the really opposite reasons than Trump claims, although I don’t know that he actually believes himself.

So with all of these detailed things, what really is going on? It’s the same old story, really. And stereotypes are always based on some truth, and the relevant stereotype or thumbnail sketch of the respective parties’ positions and what’s happening — is that this is perhaps the most regressive budgetary tax legislation in history. It takes — the various proposals will probably remove ten to 12 million of the poorest citizens in the United States from any sort of medical insurance whatsoever so that those saved funds can essentially be granted to the top 1% of Americans based on wealth, which means that those who have $11 million net assets or more will receive all of the funds through tax cuts that have, up until this bill, funded medical insurance for the 12 million poorest Americans. 

The middle class will suffer a bit — probably $1,200 per year, or $1,200 to $1,600 per year, I think it is more in cost. So you’re going to get to that part actually next — that’s on tariffs — so I’m speaking a little bit there. But it’s not catastrophic for the middle class, but it is a phenomenal gift to the wealthiest 1%.

What’s happening — this is the standard difference between Republican philosophy and policy and Democratic, broadly speaking. But all thought is generalization and all generalization, of course, will ignore any number of specific details that contradict the broader statement.

The Democrats, as we all know, think the government must be activist so as to create more equality. Ideally, equality of opportunity — not always of outcome — for society as a whole, and that one cannot pull oneself up by one’s bootstraps all the time, but sometimes one needs assistance to start the process.

Whereas the Republicans believe — and we’re having a distilled version of pure conservative Republican ideology in the Trump administration, whose policies really are shaped by the right wing of the Republican Party — believe that the only function government should have is border control — we’re seeing that in spades in the Trump administration — a strong national defense, and that’s it. That’s it. So that, literally, people are free to do whatever they want — which means if they can’t figure things out, they can die under a bridge.

I’m paraphrasing once again one of my favorite quotes, which is from Anatole France in the 19th century and his arguments in France over liberal economic policies versus the socialist ones. That’s truly what is happening here, in a way that has not happened in policy terms since the 1880s, 1890s — since before the birth of the modern welfare state or social democracy, the role of governments to address some social concerns, be it the health of its citizens or stability of the banking system and so on.

Atul Singh: Though to be fair, Glenn, the House of Representatives have not really cut down Medicaid, Medicare, Social Security — the big ticket items — so they have not gone to—

Glenn Carle: Medicaid will.

Atul Singh: Okay. But not Medicare yet. And Social Security, they haven’t touched it much.

Glenn Carle: No, it’s coming.

Atul Singh: So they haven’t gone back to the pre-Bismarck era.

Glenn Carle: It’s coming. No, well, I didn’t say they’ve eliminated everything yet. But the trend and the objective is to reduce the size of the federal government. We saw this through Doge — whatever one thinks of Elon Musk, he actually was acting simply as an agent of the philosophy that has shaped the policy recommendations of the Heritage Foundation, American Enterprise Institute and the Project 2025 and its authors, which is to reduce, in absolute terms, the size and role of the federal government of the United States — to decentralize anything, to leave everything to local authorities or to do nothing.

And we have seen a proposed increase in the defense budget, a substantial increase in the border control budget — because we’re going to get rid of all these people who don’t look like me and are not here legally, or even maybe if they are here legally. And it is a nearly revolutionary shift in thrust and intent of the role of the federal government. Certainly one we’ve not seen since in the United States since the Supreme Court prior to 1933, and policies by the Democratic Party — the parties are switching the theology — up until about the presidency of Theodore Roosevelt 125 years ago.

So it is shockingly powerful and coherent. I personally find it appalling. One might support these views — I know a lot of people who are friends, actually, who do — but that’s the intent.

Now, on the budget deficit. Theoretically, this is supposed to — the Republicans have baked their bread and buttered it on claims that they want to be the party of fiscal responsibility. As Atul pointed out, this is the most irresponsible single budget in American history.

You know, when Social Security was begun in 1933, the retirement age was set at 65. And in an act of great humanitarian compassion, the life expectancy — so that meant that one could not receive the pension until age 65 — but the life expectancy in 1933 was 65. So one might be slightly cynical about how generous it was. But a fortunate circumstance was that there were something like 16 workers per beneficiary at the time. And as we all know, that has declined continually as the American population and all populations have aged. And now there are, I think, two workers per beneficiary. And that is unsustainable.

However, to fix all of this problem with Social Security and the federal budget deficit actually could be done without catastrophic harm or disruption. I believe that Paul Krugman has calculated — and his first name slips my mind, I just had a conversation with him, actually — one of President Bush’s chief economists is Mr. Mankiw — both of them have—

Atul Singh: Greg Mankiw.

Glenn Carle: Mankiw, yeah, have said — thank you — a change in revenues and expenditures adding up to 2.1% — that’s the figure that I retain — of GNP. So a rise in revenues, decline in expenditures equal to 2.1% of GNP would address the United States’s structural budget deficit.

That could be done progressively, without huge disruption. You freeze Social Security cost-of-living increases, say — I’m just making this up off the top of my head — and you increase taxes by 1% or something to that effect. These are not quite marginal changes, but they are not revolutionary changes. And yet, as Atul pointed out—

Atul Singh: It could increase retirement age as well. There are many, many tweaks you could do.

Glenn Carle: Which has been happening and probably should continue to. And if one does that — because now the life expectancy is not 65 — it’s 79, I think, for males—

Atul Singh: More parties, more beer.

Glenn Carle: Then we wouldn’t have to have all of the tooth-pulling and true pain, disruption that is coming from this bill, if ever it is passed, which is very problematic.

Tariff truce or temporary fix?

Atul Singh: So what we see is that the bill still has to go through the Senate. The bill will still have to then come in as legislation, and we see that the uncertainty that characterizes America is only on the rise. And indeed, that’ll have global consequences.

And talking about uncertainty, we have to talk about the US–China trade deal. And this happened a lot earlier than a lot of people expected. It happened after negotiations in Geneva. The US, of course, will decrease the extra tariffs on Chinese goods to 30%. China will remove non-tariff barriers on American goods and decrease extra tariffs to 10%. The total US tariffs on Chinese goods would remain about 40%, while Chinese tariffs on American goods would be 25%.

So this is detail-schmetail, in a way, but the key question is: Why did both these countries agree to a truce? Well, when it comes to US President Donald Trump, he clearly does not want empty supermarket shelves, inflation or recession. Most market analysts predicted a guaranteed US recession with 145% tariffs on Chinese goods. This was more pain than Americans were willing to bear.

Our sources in the Trump administration inform us that Bessenomics is winning against Navaronomics. Now, this is very interesting. In our conversations with many people in the Trump administration, they are saying that the administration is falling into two camps.

Bessenomics refers to Treasury Secretary Scott Bessant’s economic vision. So this is a more transactional take on traditional Republican economics. Bessant wants China to sign more purchase agreements, as it did during Trump’s first term — buy more commodities such as soybeans, maybe American beef, pork, manufactured goods such as Boeing planes. And so, his idea is: China has not played fair, and this is what Republicans believe in. And there’s more than an element of truth — China has not played fair when it comes to trade. It has backed national champions. It has tariff and, more significantly, non-tariff barriers. So let’s use tariffs as a transactional tool, as leverage to gain greater market access into China. That reduces the deficit, and that is in American interest because it creates American jobs, because a key focus for the administration is to bring back American jobs. So for Bessant, this is just a means to an end.

Navaronomics refers to the economic vision of Peter Navarro, the senior counselor for trade and manufacturing to Trump. Now, he aims for a total reordering of global trade through punitive tariffs. He is much more of a true believer. He believes in truth with a capital T. He’s much more of an ideologue. He’s a bit like the neoconservatives of Iran. And so, he’s authored the 2006 book, The Coming China Wars, and the 2011 book, Death by China. He believes that Chinese illegal export subsidies and currency manipulation make it impossible for American companies to compete. The solution is an isolationist and protectionist economic policy that unleashes a full-scale trade war on China.

And we hear — and this is not just us, this is a number of other publications have also alluded to this — that Bessant, not Navarro, has pushed for a US–China trade truce.

So that is the incentive on the US side. What is the incentive for Xi Jinping? Well, we’ve talked a lot about China, and we were China bears long before others were. And both Glenn and I remember going and meeting the Indian Foreign Ministry, and the Foreign Ministry folks there had belief in China’s miraculous ability to defy the economic laws of gravity. We always believed that the Chinese economic miracle would face a slowdown. It’s not that China will go back to smoking opium as in the 19th century, but we certainly see the increased unemployment — particularly youth unemployment — the decreased growth; the real estate sector in the doldrums, which we pointed out repeatedly; the high debts on bank books; the aging population; the fact that households have a majority of their wealth locked up in real estate — because you don’t have such developed capital markets, people are not owning portfolios of Apple, Google, Walmart and God-knows-what shares.

Glenn Carle: And in one of the great ironies of modern history, certainly one of the last two, I think it is, maybe three, remaining “communist” states have a terribly underdeveloped social security system. The Chinese people don’t have the pension system and care that Western democracies provide for their populations, which is in part why their savings are so high, and why the property bubble explosion is more than just bad economically, but catastrophic even socially.

Atul Singh: And our sources in Beijing and Tokyo regularly explain how the Chinese economy is experiencing a profound crisis. Why the Chinese Communist Party (CCP) fears unrest, and some even believe that the economic pain could lead to a real threat to the stability of the regime. And that is why Xi Jinping, who withdrew his zero-Covid policy very quietly with the white flag of surrender.

Therefore, Xi Jinping definitely doesn’t want to be bullied, he definitely does not want to lose face in his negotiations with the US. But also, this Xi-led CCP does not want the economic pain to get so overbearing that it starts impacting the stability of the regime. So it was in their interest to conduct a truce.

Now, both sides claim victory. Both sides say that the other is more vulnerable to tariffs. The jury is still out on what is truly the case. But the important thing is that this is just a truce. The trade war is not over yet. This is something to really bear in mind.

The US will retain tariffs on electric vehicles. The US will continue to stop China gaining cutting-edge technologies, whether it is semiconductors or jet engines. The US has already sanctioned more than 20 companies, including Hong Kong-based entities, for shipping Iranian crude oil. And of course, the Chinese are objecting to the US–UK trade deal, which lowers American levies on British car and steel imports provided that the UK works to promptly meet US requirements on supply chain security and ownership of production facilities.

Why is this important? Because the Chinese own a lot of these facilities in the UK, and the Chinese see this as a violation of the basic principle that trade agreements between countries should not target other nations. And they see this as a clear example of mala fide US intentions. So, on the whole, we believe this deal achieves a suboptimal equilibrium, and it could easily be undone.

Undermining superpowers from within

Glenn Carle: I think we should think of China and the United States as being two people in a rowboat in the ocean, who don’t get along whatsoever and want to go in opposite directions. But unless they both row, the boat will be swamped. So they’re stuck. China cannot do without the US market and cannot — without huge disruption to itself — withdraw or sell off, exit from the $700 billion, I think it is, in US bonds that it has. And the US can’t, without tremendous political problems for the administration and huge economic pain and recession, pay for the imported goods with the higher tariff rates or produce equivalent products itself in a way that would avoid causing economic harm.

[Atul shares the Geopolitical Risk Monitor on his screen]

Glenn Carle: Oh, goodness, are we sharing a screen?

Atul Singh: Yes, I’m sharing a screen showing the Chinese GDP growth declining. This is our Geopolitical Risk Monitor. You can see that there are strong incentives for China, as Glenn said, as there are for the US, to somehow not completely end up in a bish-bash-bosh and sink the boat, which is the global economy.

Glenn Carle: Something that’s shocking — at least shocking from the American perspective, perhaps a little less shocking from the Chinese perspective, but nonetheless shocking — is that both countries and both leaders, Xi and Trump, are taking actions that long-term undermine the strengths of their respective economies and societies.

Atul has spoken about the budget issue — that’s what we’ve talked about so far in the United States — and it’s very important. But it’s one element of a broader series of changes being proposed or executed through executive actions to a host of American practices and systems that really have been the generator of American exceptionalism and economic wealth, and therefore, political strength and influence. In the United States’s case, are Americans intrinsically superior economically? Obviously not; see others.

But what America has done better than anyone else — and it’s not only because America is a continent with great natural resources, which are fundamental attributes and parts of the explanation — but there’s this web of approaches and systems that has been unique in the world. We still have a vast array of strongly supported research institutions and universities, such as Harvard or Bell Labs, which do cutting-edge research. And they can do so because they have access to huge amounts of capital, which has been funneled significantly by the federal government, working within a society where the rule of law is on the whole objective and applied equally and openly; where capital flows are ample, liquid and relatively unregulated; where the workforce is highly trained and literally the best and the brightest from around the world have been aggressively encouraged to come, compete, succeed — and those who fail cause no problems, because the successes vastly outweigh the failures.

All of those attributes of American success are being eroded and undermined now. The budget is one component of this. And all of this is almost the American government committing suicide. It’s the Trump administration actively, consciously pursuing many of these policies. We can talk about the reasons why they think it should be done, but they’re undermining the roots of American exceptionalism.

At the same time, Xi Jinping, I think pretty clearly, is doing the same thing to China. China is the great success story in human history of the last 40 years, with its growth and the wealth and the opportunities it’s providing to ever more of its citizens, and its increasing influence and power worldwide. I would argue China has been, and could continue to be, achieving essentially all of the goals that it seeks without taking the steps that Xi has felt obliged to do, for fear of, as Atul touched upon clearly several times just now, losing control and seeing the Chinese party challenged or overthrown through social unrest and grievance and demand and so on. His response has been the classic one of an authoritarian, totalitarian — to double down on tightening control.

So that now you have, in every level of every corporation in China, every business, a representative of the political commissar, essentially — a Communist Party official who interferes with the rational decision-making of a bank, car company or farm, and undermines, long-term, the roots of the Chinese miracle, if you want to call it that, which has been decentralizing decision-making and providing opportunity for people to pursue their own interests.

So it is a remarkable thing we’re seeing. And the budget issues, which are critical, are just one component of this larger, terrible story that we’re living.

Atul Singh: Two quick points and we’ll move on. Peter Isackson makes the point that he is more inclined to follow Louis-Vincent Gave of Gavekal Research’s analysis of China rather than our doomsday scenario. Well, Louis has a point. But Louis is rather rosy on China. Yes, China has bet big on electric cars, solar panels and even AI. But fundamentally, we think that the structural problems in the Chinese economy are not going away. Xi is fundamentally amongst—

Glenn Carle: If I had to choose between the economic policies addressing fundamental issues of China today or those of the United States, I would choose China. Certainly, I agree with Peter on that.

Atul Singh: Okay, well, so maybe I’m a little biased. I think the Chinese economy, with its centralization and Xi being a Maoist, has a lot of risks that are underappreciated — particularly in the West. The top-down structure often has problems that are swept under the carpet, until one day they are no longer hidden.

Of course, the US has multiple problems, and we’ve touched upon them — in particular, the polarization, the division, the inability to make sane political and economic decisions, and now a very skittish market, which is seeing rising bond yields and a depreciating dollar. So, a lot of uncertainty in the world.

And those of you who are running companies and want to talk to us, we’re happy to talk to you. Give us a shout. We’ll take this forward.

Glenn Carle: I have for years now made the unamusing pseudo-witticism that with the Brexit vote, England basically committed suicide and declared itself an inconsequential island someplace in the mists of the North Atlantic. But Brexit, compared to what the United States is doing to itself, is a rational step. I do not want to understate the gravity of the harm — economically, socially, politically — of the policies that are working their way through the law-making process in the United States. And Atul talked about the budgetary one.

But let’s go to the next section of the world where things are going completely screwy.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article/video are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.