Trump's tax reforms trigger a debt storm.

On May 22, a dramatic legislative "race against time" unfolded in American politics. After two consecutive nights of marathon debates, the Republican-controlled House passed a massive tax and spending bill led by Trump with a narrow majority of 215 to 214. Due to one Republican falling asleep during the vote and two party members defecting, the House Speaker personally cast the decisive vote to secure the bill's passage.

This 1,100-page bill not only fully implements Trump's political positions in areas like taxes, immigration, and guns, but more importantly, it significantly reshapes the federal financial structure, sparking intense controversy over the sustainability of U.S. debt.

Debt Crisis Warning Signals

According to estimates by the Congressional Budget Office (CBO), this bill will lead to a rapid expansion of fiscal deficits in the coming years, adding a whopping $3.8 trillion to the debt. With the current U.S. debt-to-GDP ratio exceeding 124%, this will push America's debt burden to over 130% of GDP—a level approaching the "danger line" in the eyes of many economists.

Moody's has already downgraded the outlook on U.S. credit ratings, warning that this move could undermine global investors' confidence in U.S. fiscal policy. Wall Street analysts point out that this fiscal operation of "tax cuts first, pay back later" is akin to "drinking poison to quench thirst," providing a short-term economic boost while sowing major risks of rising inflation and debt defaults in the medium to long term.

“Dollar Supremacy” Faces a Test

The dollar, as the global reserve currency, heavily relies on the U.S. government's ability to repay its debts. However, with massive tax cuts and spending expansions, the international market is beginning to reassess the intrinsic value of the dollar. There's a noticeable rise in risk aversion in the market, with assets like gold gaining popularity recently.

Despite the dollar index (DXY) rebounding short-term to 99.94 after the bill's passage, marking the largest increase in a week and a half, economists generally agree that if the Federal Reserve is forced to initiate a new round of quantitative easing (QE) due to debt issues, the dollar's long-term purchasing power might be eroded.

Gold and Risk Aversion Rise in Tandem

Amidst policy uncertainty and debt warnings, the medium to long-term outlook for gold is generally positive in the market. Analysts point out that the interplay of U.S. fiscal expansion, inflationary pressures, and credit risk will reinforce gold's role as an inflation hedge and safe-haven asset. Central banks across the globe may accelerate their gold reserves to hedge against the risk of dollar devaluation.

Legislative Battle Not Over

The bill now faces a more intense tug-of-war in the Senate. Despite Republicans holding a slim majority of 53 seats in the Senate, some party members have expressed opposition to certain provisions, especially those concerning social welfare cuts and looser gun control. Democratic leader Schumer has vowed to launch a comprehensive blockade, and the entire legislative process is expected to last at least several weeks.

Summary

Trump's fiscally focused "big gift," centered on tax reform, will not only have a profound impact on the U.S. economy but also turn debt issues into the "Sword of Damocles" hanging over Washington. As the debt level approaches historical limits, America's fiscal trust line is gradually being eroded, with potential ripple effects on the global financial market.

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