As you get closer to an event, the variance in potential outcomes decreases. This is why, in recent weeks, slight deviations in US election polls have led to large swings in forecast markets as well as bond and stock markets.

The market believes that Donald Trump will win. In most prediction markets, Trump is now over 60%. Over the past two weeks, shares of Trump Media and Technology Group (DJT) are up 62 percent, while Bitcoin is up 12 percent. More importantly for the U.S. economy, during the same period, the yield on the 10-year U.S. Treasury also rose 60 basis points to 4.2 percent.

The reason for the rise in DJT stock price is tribal. It owns Trump’s loss-making social media platform, Truth Social, but the stock price is unrelated to its financials, given its market cap is nearly $8 billion on quarterly business less than $1 million.

In theory, if Trump became president, more people would come to his platform to see what he posts, which would generate advertising revenue. However, given that all future cash flow relies on one man, this seems like a risky bet. After all, a 78-year-old man has only a 77 percent chance of living to age 82 and a 53 percent chance of reaching age 86, according to the Social Security Administration’s actuarial tables.

Unlike DJT’s market cap, the rise in Treasury yields is based in reality. The fear here concerns the US budget deficit. In a recent jobbusiness blogger Noah Smith points this out clearly: “People don’t seem to realize the magnitude of Trump’s proposed tax cuts. » It’s these tax cuts that explain why the Committee for a Responsible Federal Budget projects that Trump will add another $7.5 trillion to a deficit as high as it has been since World War II (as a share of GDP). ).

As a result, the bond market demands higher interest rates to lend to an increasingly risky U.S. government. If yields continue to rise, Treasury borrowing will be more expensive. However, Smith predicts that Trump could rely on the Fed to lower interest rates to reduce the cost of government borrowing. That’s not a particularly bold prediction given that Trump said: “I think in my case, I’ve made a lot of money, I’ve had a lot of success and I think I have better instincts that in many cases, people who would be on the Federal Reserve or on the president.

There is now a more than 50 percent chance that Trump will win. When he is in office, then there will be a good chance that he will keep his election promises to cut taxes and undermine the independence of the Fed. Given this, it is not surprising that Bitcoin has also risen alongside bond yields. It is when monetary policy is used to finance expansionary fiscal policy that the risk of rapid inflation arises, as we have seen in Turkey, where President Recep Tayyip Erdoğan has fixed interest rates.

Bitcoin’s creator, Satoshi Nakamoto, designed the digital currency for this very situation, after being influenced by the events of 2008. “The fundamental problem with conventional money is all the trust needed for it to work,” he says. he. wrote in 2009. “You have to trust the central bank not to devalue the currency, but the history of fiat currencies is full of abuse of this trust. »

These fears echo the same fears expressed by liberal economist Friedrich Hayek in the early 20th century when he criticized the newly created Fed. He feared that the existence of the central bank would encourage commercial banks to lend more because they knew there was a safety net, which would amplify the boom-bust cycle. Even if central bankers wanted to tighten credit conditions, Hayek said their “hands are virtually tied” because politicians would always intervene to prevent a banking collapse, and the market knew it.

The truth is that even if Trump doesn’t win, the world is moving toward a more populist form of politics where economies are increasingly controlled by the government, and the bond market knows it.

Kamala Harris is expected to increase the budget deficit by $3.5 trillion by continuing President Joe Biden’s industrial policies, while also proposing price controls on groceries and forgivable loan plans for Black entrepreneurs. Meanwhile, the UK has rejected free trade with Europe despite a growing share of its GDP depending on public spending.

The essentially free market system in the UK and US over the past 50 years has not served everyone as they would like, but it has created the highest standard of living in the history of humanity. Fittingly, economist Scott Sumner warns that before replacing free markets, “we might want to weigh the upside and downside risks of interventionism.” It’s unlikely we’ll succeed, so instead we head into the unknown.