So you thought fiscal hawks were serious about the US deficit? Haha. Despite last minute snags the Republicans are expected to push through a trillion dollar tax-cut for their paymasters. One is told by Very Serious People that markets, bond vigilantes in particular, punish fiscal profligacy by demanding higher costs of borrowing. That’s poppycock. Both stocks and bonds are booming for good reason. The tax cut delivers a large, positive wealth shock to investors and the market is repricing to reflect investors’ greater appetite for risk. The bond market refuses to believe that the tax cut—a major fiscal shock when the economy is at full employment—will have much of an effect on economic activity. For the compression of the term spread means that the market expects subdued inflation and a shallow path of policy rates. Were a major pickup in economic activity around the corner, the yield curve would become steeper not shallower. So the euphoria in the stock markets is due not to expectations that animal spirits unleashed by the tax cut and regulatory “reform” would deliver higher growth. Rather it is due to the straightforward transfer of resources from the public sector to corporations and investors. What the market is celebrating in other words, is not the expected growth of the pie but redistribution of the pie in its favor.