Donald Trump has a long history of managing debt, but the scale of the national debt he will inherit as the 47th president presents a unique challenge.
National Debt Hits Record Levels
Trump, known for his real estate ventures, often relied on borrowed money to fund his projects. While managing his businesses, he faced multiple bankruptcies due to trouble repaying loans. Through strategies like refinancing, loan write-offs, and finding new lenders, he was able to recover. However, the national debt he will confront is a completely different matter.
When Trump takes office on January 20, the national debt will exceed $36 trillion, up from $20 trillion when he began his first term in 2017. Debt held by the public has increased significantly from 75% of GDP in 2017 to 96% today. These figures are expected to continue rising. Unlike his past business challenges, refinancing the national debt is not an option, and the idea of a federal government bankruptcy is unthinkable.
The pressing issue is when the financial markets will begin to penalize the U.S. government for its excessive borrowing. Some believe it may already be happening.
Rising Long-Term Rates Signal Market Concerns
Since September, the Federal Reserve has cut short-term interest rates by one percentage point, but long-term rates have increased by the same amount. Torsten Sløk, chief economist at private equity firm Apollo, called this development “highly unusual,” suggesting the market is signaling concerns.
The bond market’s response is difficult to interpret, but one potential factor behind the rise in long-term rates is the ongoing borrowing by the U.S. Treasury. When the government issues more debt than investors can absorb, rates must rise to attract buyers. Another concern driving up rates could be expectations of future inflation. Regardless of the cause, the result is higher borrowing costs for businesses and consumers, including home and car buyers. The U.S. government, too, faces the burden of higher costs, worsening its fiscal problems.
Three Ways Debt Challenges Trump’s Economic Agenda
Trump’s economic agenda will face significant challenges from the rising national debt in three key ways:
Borrowing Limit Reached: The U.S. government is nearing its borrowing limit, and Congress must raise it by late spring or early summer. This could lead to a contentious political battle, with some Republican budget conservatives threatening a U.S. default. While a default is unlikely, the process could cause significant market instability, as noted by investment firm BTIG in a January 6 analysis.
Risk of Credit Downgrades: A debt ceiling conflict could lead to a downgrade of U.S. debt. In 2011, Standard & Poor’s downgraded U.S. debt after a similar standoff, and Fitch did the same in 2023. Moody’s also revised its U.S. ratings outlook to negative from stable that year. While past downgrades have not severely affected U.S. creditworthiness, market sentiment is becoming more sensitive.
Reluctance to Extend Tax Cuts: Trump may also face difficulty extending the tax cuts set to expire at the end of the year. Extending them for another decade could add $5 trillion to the national debt. Congress will struggle to cut spending without provoking backlash from various interest groups. Even proposals like Elon Musk’s efficiency commission could face significant resistance, as most cost-saving measures would require unpopular legislative action.
The Long-Term Outlook
If there’s any silver lining for Trump, it’s that the enormous national debt will likely be someone else’s problem after his second term. However, in the short term, the financial and political challenges posed by this unprecedented debt may hinder his ability to achieve his economic goals.
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