Donald Trump is used to managing debt. But not like this.
As an actual estate developer, Trump relied heavily on borrowed money to fund projects. Trouble paying back his debts contributed to six business bankruptcies. Trump battled back by writing off some loans, refinancing others, finding latest lenders, and changing his business model.
The general public debt Trump will inherit because the forty seventh president is a totally different problem.
The national debt will exceed $36 trillion when he takes office on Jan. 20, up from $20 trillion when he began his first term in 2017. As a percentage of GDP, debt held by the general public has jumped from 75% in 2017 to 96% today. These numbers will only worsen. Refinancing is just not an option and a federal government bankruptcy is unthinkable.
The most important query is when markets will start punishing Uncle Sam for profligate borrowing — and it would already be happening.
Since last September, the Federal Reserve has cut short-term rates of interest by a full percentage point, yet long-term rates have risen by a full point. “This is very unusual,” Torsten Sløk, chief economist at private equity firm Apollo, wrote in his Jan. 7 newsletter. “The market is telling us something.” (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
The bond market doesn’t explain itself. But one factor behind rising long-term rates might be limitless borrowing by the Treasury Department. If borrowers issue more debt than investors can absorb, rates should rise. Rates is also ticking up due to concerns about future inflation. Whatever the explanation, higher rates mean higher borrowing costs for home and automobile buyers, and for businesses.
And oh yeah, the US government has to pay more too, making its fiscal woes even worse.
Read more: Trump’s first yr shall be full of fiscal follies.
This debt pinch will hit Trump’s agenda in 3 ways.
First, the federal government has hit its borrowing limit, which suggests Congress might want to raise the limit by late spring or early summer. That might be an unpleasant battle, with some GOP budget hawks holding out, threatening a US default.
“Policymakers will ultimately avert default, however the political dynamics on Capitol Hill could produce certainly one of the shakier debt ceiling dramedies in recent memory,” investing firm BTIG explained in a Jan. 6 evaluation.
Second, a debt ceiling showdown could trigger one other downgrade of US debt. Standard & Poor’s downgraded US debt one notch after a debt-ceiling standoff in 2011. Fitch did the identical after a similar showdown in 2023, and Moody’s modified its US rankings outlook to negative from stable that very same yr. Downgrades haven’t damaged US creditworthiness yet, but markets are getting more prickly.