RUTH SUNDERLAND: Donald Trump has a big debt problem

Looming US Debt Crisis: Trump’s Policies and Market Instability

Market volatility and bond market upheaval, exacerbated by policies emanating from President Trump, have ignited fears of a looming US debt crisis. This period marks a historic erosion of economic value potentially attributable to a single figure, raising concerns about the nation’s fiscal trajectory.

Exploding National Debt

The national debt has ballooned to an alarming $36 trillion (£29 trillion), exceeding the size of the entire US economy. This level of debt surpasses any point in history, even exceeding the post-World War II peak.

The House Budget Committee previously issued warnings about this escalating debt, cautioning that failure to address it could lead to a period of prolonged economic stagnation or, more drastically, a severe sovereign debt crisis. Such a crisis could erode creditor confidence in the United States’ financial stability.

Expert Warnings and Bipartisan Issue

Prominent voices like Ray Dalio, a seasoned hedge fund manager, have echoed these concerns, suggesting that forceful interventions might be necessary to prevent a debt-induced “heart attack” within the next three years. The growth of the US debt is not a partisan issue; administrations from both parties have contributed. Since 2001, the debt has surged from $5.8 trillion, with both Presidents Trump and Biden adding significantly – $7.8 trillion under Trump’s first term and $8.5 trillion under Biden.

Recent trends show an average increase of $1 trillion roughly every six months over the last eight years. This rapid accumulation underscores the severity of the fiscal challenge.

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Unsustainable Spending and Future Risks

Continuing on the current path, particularly with an aging population and unchecked government spending, paired with potential tax cuts as proposed by Trump, the debt situation is projected to worsen. The US is consistently spending beyond its revenue, creating an unsustainable fiscal imbalance.

Reliance on Treasury Bonds and Shifting Perceptions

Historically, the US government has benefited from the unique status of Treasury bonds – government IOUs – considered a virtually risk-free investment. This reputation allowed the nation to borrow vast sums at reasonable interest rates.

Foreign governments and investors worldwide have traditionally held US Treasuries as a cornerstone of secure investment portfolios. However, Trump’s actions and policies have cast doubt on these long-held certainties, triggering unforeseen consequences, including significant bond market turmoil.

Trade Wars and Safe Haven Status in Question

Trump’s trade disputes have precipitated sell-offs in Treasuries, causing yields on long-term bonds to spike at rates not seen since the 1980s. This volatility challenges the perceived “safe haven” status of US debt.

Stephen Miran, former chair of Trump’s council of economic advisers, proposed a “Mar-a-Lago accord.” This concept involved pressuring foreign governments to swap their existing Treasuries for debt with extended maturities, potentially up to 100 years.

However, strained relationships with former allies, exacerbated by Trump’s approach, may hinder cooperation. China, a major holder of US Treasuries with approximately $760 billion, is reportedly reducing its holdings. While a Chinese sell-off alone might not instigate a full-blown crisis, it could trigger broader market instability and contagion.

Deficit Reduction and Economic Strategy

Scott Bessent, a former Treasury Secretary under Trump, advocates for halving the budget deficit – the gap between government spending and revenue – from over 6% of national income. Achieving such a substantial reduction presents a considerable challenge.

Global Economic Risks

The effectiveness of Trump’s confrontational approach remains questionable, particularly in mitigating potential collateral damage to the global economy. While he may draw parallels to his real estate negotiations, managing sovereign debt is fundamentally different. His current course of action is fraught with risk and carries the potential for widespread global economic repercussions.