This episode reveals how expiring tax cuts and new tariffs are setting the stage for a sharp U.S. fiscal contraction, creating significant recessionary risk that could impact capital flows into risk assets like crypto and AI.
Scoring the "Big Beautiful Bill": A Baseline for U.S. Fiscal Policy
- The speaker begins by analyzing the fiscal baseline set by a major tax bill, which was officially scored against a conservative trend growth forecast of 1.8-1.9%. Trend growth represents an economy's long-term potential expansion based on population and productivity gains, rather than short-term, debt-fueled stimulus.
- The initial scoring projected a mild fiscal impulse—a net positive effect on economic demand from government policy—through 2026.
- However, the law as written mandates a fiscal contraction starting in 2027, assuming no further legislative changes are made.
- The speaker, drawing on decades of experience, acknowledges the common view that deficits will inevitably continue to grow, but emphasizes that the current law points toward a tightening. His analysis grounds the discussion in the legal and mathematical reality of the policy, separate from political promises.
"Those who agree that the deficit will always grow are going to say nothing stops this train. And of course the deficit's going to grow in the back half. But the law says it's going to start contracting in 2027."
Tariffs as a Recessionary Catalyst
- The analysis pivots to the severe economic impact of layering new tariffs on top of this existing fiscal outlook. The speaker frames tariffs as a direct tax on consumption, creating a powerful headwind for the economy.
- He quantifies the potential impact as $400 billion, or approximately 1.5% of GDP, a significant economic shock.
- This combination of expiring stimulus and new taxes creates a clear recessionary scenario. The only way to avoid this outcome is if foreign exporters, like China, absorb 100% of the tariff costs—a scenario the speaker presents as highly improbable.
- Strategic Implication: For Crypto AI investors, a U.S. recession would likely trigger a flight from risk assets. Monitoring the implementation and economic absorption of tariffs is critical to forecasting market sentiment and capital availability for tech sectors.
"Add on 400 billion, add on one and a half% of GDP of tariffs, you got a recession."
Pinpointing the Economic Pain: Who Pays for Tariffs?
- The speaker methodically deconstructs who ultimately bears the financial burden of tariffs, dismissing simplistic political narratives. He argues the cost is inevitably distributed among domestic economic actors.
- He identifies three distinct groups that will pay: the export supply chain, the import chain (U.S. corporations), and the end consumer.
- He notes that currency dynamics at this stage make it more likely that U.S. entities, not foreign exporters, will absorb the cost. Corporations will either see their margins shrink or attempt to pass the costs on to consumers, both of which dampen economic activity.
- Actionable Insight: Researchers should analyze supply chain dependencies and corporate pricing power in key tech sectors. Companies with inflexible supply chains or low pricing power will be most vulnerable, potentially impacting their stock performance and R&D budgets.
"There's the export supply chain, the import chain, and the end consumer. Those three are who pay. There's nobody else."
The Verdict: A Contractionary Outlook and the Deregulation Wildcard
- The speaker delivers a clear verdict: the net fiscal impulse is undeniably contractionary. A fiscal impulse measures the direct impact of government fiscal policy on aggregate demand. A contractionary impulse means policy is actively slowing the economy.
- The only potential offset he considers is significant industrial deregulation, which has been promised but not yet delivered.
- He dismisses minor policy tweaks like SLR reform (Supplementary Leverage Ratio, a capital requirement for large banks) as "pushing on a string." For deregulation to be effective, it must directly incentivize companies to invest and build, for instance, by easing rules around environmental standards or inspections.
- The speaker’s skeptical tone underscores that until concrete, growth-oriented deregulation is enacted, the contractionary forecast remains his base case.
"My fiscal impulse is clearly it's clearly contractionary. There's no way around it."
Conclusion
The convergence of expiring tax cuts and new tariffs creates a clear fiscal drag, pointing toward a U.S. recession. Crypto AI investors and researchers must prepare for a risk-off environment where capital becomes scarce, demanding a focus on projects with resilient economic models and strong balance sheets.
