08 Feb “You Say You Want a Revolution…”*

“Is duck-and-cover the safest course for the combination of Trump 2.0 and DeepSeek?” – The Lonely Realist

For those who scoffed at the possibility of a second American revolution, welcome to Trump 2.0. For those who disbelieved Candidate Trump’s promises, welcome to sudden, radical changes to America’s political and social order. Supporters are hopefully optimistic that Trump 2.0 will effect spending cuts and tariff increases and capitalize on America’s AI superiority to supercharge America’s economic growth and prosperity. MAGA pessimists fear that Trump 2.0’s firings, spending cuts and on-again, off-again tariff attacks will combine with China’s recently-revealed AI accomplishments to foment social, political and economic chaos. Doses of both optimism and pessimism are justified – that’s how revolutions work –, and each is likely to be realized in messy spurts.

A fucus of TLR commentaries over the past 6 years has been America’s enormous deficits and unrepayable national debt. Trump 2.0 is targeting both, first by attacking – literally – government spending and second, hopefully (although so far with little clarity), by cementing government revenues. Although the methods currently being used to cut spending are largely illegal and/or unConstitutional, that’s how a revolution works…, and revolution is precisely what a plurality of American voters chose (noting that a minority, a sizable one at that, is upset…, which is also how revolutions work). President Trump’s chosen method of cutting spending is to hand Elon Musk/DOGE the keys to the kingdom – that is, autonomy over the U.S. Treasury and its payment system. Neither Musk nor his team has the requisite security clearance, Constitutional authority or experience…, but, well, that’s also how revolutions work. Musk and his team of recent Tesla, X and SpaceX employees now have nominal control over ~$6 trillion/year of Federal spending together with access to all the financial information the government possesses on Americans and American businesses. Among their assigned tasks is deciding which payments will be made by each government agency as well as when those payments will be made. This includes payments by the Centers for Medicare and Medicaid Services, which disburses ~$1.5 trillion/year and which is where Musk says “the big money fraud is happening.” Government grants for all sorts of things (from DEI practices to basic science research) have been shut down paused, Musk/DOGE already have effectively shuttered the $40 billion U.S. Agency for International Development (USAID), fired or furloughed tens of thousands of government workers, and are deciding, and will quickly act on, what else should be cut from U.S. government spending.

America spends $6 trillion/year while bringing in revenues of $4 trillion (which revenues are falling), which results in unsustainable annual deficits of ~$2 trillion. Musk/DOGE have pledged to eliminate those deficits…, which indeed would be revolutionary. The only way to do so would be by making huge reductions in virtually every government program, cutting employment, foreign aid, cancer research, Medicaid, Social Security, national security, defense – you name it. What Musk/DOGE have begun to do therefore should not come as a surprise. This is what Candidate Trump promised and what Elon Musk said he would deliver. Yes, the process chosen by President Trump is unprecedented. Yes, Musk/DOGE are acting unlawfully and the Trump Administration is acting unConstitutionally. And, yes, there will be lawsuits that result in stays, the rehiring of some government employees and the restoration of a portion of the spending. However, those lawsuits, no matter how successful, will not require the rehiring of all employees or the restoration of all spending, and they will take time and result in early paper savings. (They also will be a boon to America’s litigation industry.) The downside is disruption for Americans and American businesses, including the shutdown of key parts of America’s government. That is the price Americans have agreed to pay for the Trump Revolution.

The revenue side will prove more challenging. Trump 2.0 proposes to raise revenue through tariffs. It will use that revenue to continue the Trump 1.0 tax cuts (which expire at the end of this year) as well as to satisfy Candidate Trump’s campaign promises to eliminate the taxation of tips, overtime pay and social security payments. To do so, the President initially slapped tariffs of 25% on goods coming from Mexico and Canada, 10% on Canadian energy, and 10% on goods coming from China, explaining to reporters that the levies weren’t bargaining tools and instead were rooted in America’s large trade deficits: “It’s something we’re doing, and we’ll possibly very substantially increase it, or not, we’ll see how it is.” The President agreed that Americans could feel “SOME PAIN” from the new tariffs, “BUT WE WILL MAKE AMERICA GREAT AGAIN, AND IT WILL ALL BE WORTH THE PRICE THAT MUST BE PAID.” Tariffs on Mexico and Canada, however, were short-lived. After the stock market recoiled in horror, the President temporarily suspended them, with Mexico and Canada essentially giving assurances that they would continue doing the things they already are doing to keep their borders secure. What remains are the 10% tariffs on Chinese goods. Those tariffs are not going to significantly move the revenue needle. Additional tariff attacks are expected.

America imports ~$3 trillion of goods/year from China, Mexico, Canada and the EU. If comprehensive tariffs are to be the source of revenue, Trump 2.0 will continue to encounter stock market angst and economic and diplomatic retaliation…, as well as profound global consequences (the WTO predicting a “catastrophic” double-digit loss in global GDP). Tariffs cause prices to rise because they disrupt supply chains. America’s supply chains with Mexico and Canada are highly integrated. Tariffs that include Mexico and Canada accordingly will maximize disruption, increase inflation and lead to job losses. As Canada and Mexico ably demonstrated when President Trump first advanced his tariff plans, both can effectively retaliate. Even though Trump 2.0 has a mandate for protectionism, including Mexico and Canada will maximize adverse consequences. However, without significant Mexican and Canadian tariffs, revenue will be insufficient to satisfy tax cut promises. Trump 2.0 therefore can elect to swallow the potentially “catastrophic” consequences of universal tariffs, or can inadequately limit tariff warfare to China and the EU (placing continued reliance on money-printing/Modern Monetary Theory), or adopt an alternative…, such as the tax reform outlined by TLR in November.

And then there’s DeepSeek, the “large language model” developed in China that delivers results as good as its far far far more expensive U.S. competitors. This was very very very bad news for those U.S. technology companies that have been spending hundreds of billions of dollars on their ever more expensive AI systems – you know, the Mag 7. Their share values promptly dropped by $1 trillion. Several commentators have labeled the debut of DeepSeek a “Sputnik Moment” for American tech dominance that shares uncomfortable similarities with the announcement 25 years ago by President Clinton that research into the human genome sequence would be made freely available. The Clinton announcement in March 2000 caused biotechnology stocks to plunge and, over the following six months, the Nasdaq followed. Might 2025 mark a top in the overpriced technology sector?

The combination of DeepSeek and the Trump 2.0 spending and revenue revolution promise disruptive times ahead. Duck-and-cover?

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*Revolution, Lennon/McCartney (1968).

Finally (from a good friend)