Trump's "Great Beautiful Act": Looming Liquidity Crisis and Market Prospects
Recently, Trump's proposed "Great Beautiful Act" has sent shockwaves through financial markets, with many investors closely watching whether the bill could trigger a liquidity crisis and whether the market can successfully avert disaster.
Judging from the bill's main provisions, its fiscal impact presents a clear "addition and subtraction" dynamic. On the "addition" side, the bill aggressively promotes cash handouts, proposing tax cuts for businesses and individuals totaling $4.5 trillion over a decade. This tax reduction policy aims to stimulate corporate production and investment, encourage personal consumption, and thereby drive economic growth. At the same time, increased military and immigration spending will bring fresh capital inflows to related industries. For instance, higher military budgets will directly benefit defense contractors, spurring the development of the defense industrial chain and boosting employment and R&D investments.
However, the bill is equally unsparing in its "subtractions." It plans to slash certain healthcare, welfare, and renewable energy subsidies, with projected savings of $1.4 trillion over ten years. Cuts to healthcare and welfare could undermine the livelihood security of vulnerable groups, and from a consumption perspective, reduced benefits may weaken their purchasing power, impacting related consumer markets. Meanwhile, the reduction in renewable energy subsidies is undoubtedly a heavy blow to the green energy sector. Renewable energy firms may face slower R&D progress and hindered capacity expansion due to diminished financial support, ultimately affecting the entire industry chain.
From a macroeconomic perspective, the "Great Beautiful Act" could have multifaceted implications for market liquidity. While tax cuts may increase disposable funds for businesses and individuals in the short term, boosting market liquidity, the long-term fiscal balance tells a different story. Large-scale tax reductions and increased military spending, coupled with insufficient savings from healthcare cuts, could further widen the government's fiscal deficit. To fill this gap, the government may ramp up Treasury issuance. A flood of government bonds could absorb market liquidity, tightening financial conditions to some extent.
For businesses, tax cuts may initially ease financial burdens, raise profits, and free up capital for production expansion, R&D, or debt repayment. However, if market liquidity tightens later due to fiscal strains, corporate financing costs could rise, testing their cash flow resilience. This is especially true for firms reliant on renewable energy subsidies—their sudden withdrawal might strain finances, even pushing some into operational distress and exacerbating liquidity risks.
From a financial market standpoint, equities may enjoy a short-term rally on tax cut expectations, as improved corporate earnings prospects attract capital inflows. Yet, once the market recognizes the potential liquidity squeeze from fiscal imbalances, a swift correction could follow. In the bond market, massive Treasury issuance may depress bond prices, lift yields, and expose investors to asset depreciation risks.
In summary, Trump's "Great Beautiful Act" is a double-edged sword—while aiming to stimulate the economy, it also sows the seeds of a liquidity crisis. Whether the market can escape unscathed hinges on the government's ability to balance fiscal books and the market's adaptability to policy shifts. In the coming period, financial markets will likely fluctuate under the shadow of this bill, requiring investors to stay vigilant on policy developments and exercise caution in their decisions.
