Beneath the bond and share market turmoil induced by President Trump – in the most extraordinary destruction of value in history by a single individual –lurks the fear that the US is heading for a debt crisis.
At $36trillion (£29trillion), the national debt is larger than the US economy: it is the highest in the world and has exceeded its historic peak after the Second World War.
The House Budget Committee warned a few weeks ago, before the tariff mayhem, that if it is not brought under control the US will either experience ‘slow and painful economic demise’ through stagnation or a ‘swift and catastrophic sovereign debt crisis’ where creditors lose confidence in Uncle Sam.
Ray Dalio, the veteran hedge fund manager, is among those warning that drastic measures may be needed to avert a debt ‘heart attack’ which he thinks could happen within three years. The debt pile in the US is a bipartisan issue. It has risen from $5.8trillion in 2001, with Trump and Biden both adding large sums: $8.5trillion in the case of Biden and $7.8trillion in the Donald’s first term.
Over the past eight years, an average of $1trillion a month has been added every six months. To misquote the old saying: ‘A trillion here, a trillion there, soon you are talking real money.’
On the current path, with an ageing population, without curbing government expenditure and if Trump’s promised tax cuts are to be delivered, the problem will get worse as the US continues to spend more than it earns.
Tough talk: Beneath the bond and share market turmoil induced by Donald Trump lurks the fear that the US is heading for a debt crisis
Fortunately for citizens of the US, their government has been able to borrow almost unlimited amounts of money at reasonable rates of interest, thanks to the status of Treasury bonds – basically, IOUs – as the ultimate in secure investments.
Foreign governments, including our own, are big holders of US Treasuries for precisely this reason. Trump’s behaviour, however, has called previous supposed certainties into question. Some of this he intended, and some – including the bond market meltdown of the past week – he patently did not.
His trade war sparked a sell-off in Treasuries, pushing some longer-dated yields up by the most since the 1980s, throwing that prized safe haven status into doubt.
Stephen Miran, chair of Trump’s council of economic advisers, floated the idea of a ‘Mar-a-Lago accord’ in a paper late last year that included strong-arming foreign governments to trade in the Treasuries they currently hold for much longer dated US debt, with maturities of up to 100 years.
Trump has, however, needlessly squandered goodwill among former allies who might have been amenable. As for China, it is the second-largest holder of US Treasuries, with about $760billion. Rumours swirl that the Chinese, who have been steadily reducing their holdings, have accelerated their selling. A Beijing fire sale in itself might not be enough to bring about wholesale crisis, but it could lead to contagion.
Scott Bessent, Trump’s Treasury Secretary, wants to halve the budget deficit – the shortfall when a government spends more than it takes in revenues – from more than 6 per cent of national income. That is a tough call.
The idea that Trump’s bull-in-a-china-shop approach will work at all, let alone without causing intolerable collateral damage, looks remote. The President may think he has re-negotiated debt plenty of times in his property empire, but this is different. He is playing with fire, and the whole world could get burned.
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