By Davide Barbuscia
NEW YORK (Reuters) – Investors weigh if Donald Trump could turn to unconventional ideas to try to control the American debt in hot air balloon, after the president insisted that he has failed to reduce popular health and retirement services.
Some Trump advisers have married unorthodox ideas in recent months, in particular by forcing foreign governments to exchange treasury bills for cheaper bonds in order to reduce payments of interest and sell residence cards to wealthy foreigners to $ 5 million per pop.
With many officials and economists saying that American debt is on an unsustainable path, investors in American bonds, currencies and equity markets are starting to pay more attention to these ideas.
The American debt amounts to 36 billions of dollars, more than 120% of annual economic production (GDP), and increases rapidly while the government spends more than it raised in taxes. Last year, the US budget deficit exceeded 6% of GDP – although the Treasury Secretary Scott Bessent said he wanted to do that.
Trump’s new administration has launched aggressive measures to reduce federal spending through the Elon Musk Government Department (DOGE). And he announced his intention to increase additional income by imposing heavy import prices from business partners, including China, Mexico and Canada.
More than half a dozen investors and economists told Reuters that the outcome of these efforts to close the deficit was not clear. And none of the other external ideas would have enough impact to control the budgetary situation, they added.
Indeed, an exchange of forced debts with foreign governments could undermine the solvency of the United States and upset the global financial system, they said-torpedoing the objective of Bessent to greatly reduce the yield on 10-year-old American treasury bills, which underlies costs in the economy.
“The prospect of manipulating a long -term return thanks to a kind of financial or political engineering operation is very limited,” said Larry Summers, an economist who was secretary of the Treasury to President Bill Clinton, Democrat.
An official of the National Economic Council of the White House – the main group of economic advisers to the president – said that “ready -to -employment reflection is exactly what is necessary”, blaming the previous democratic administration to add to deficits and cause inflation.
Trump, said the official, had quickly moved to “restore tax mental health”. The manager said that a drop in American long -term interest rates in recent weeks was a sign of market trust in Trump policies. As an additional proof, the manager highlighted a drop in the term premium, which measures what investors invoice to hold debts for a longer period. The resumption of prices of American bonds after the Trump elections in November, investors had sold state obligations in the concern that its policies – including tax cuts and prices – would make the American deficit worse and put the economy on an inflationary path. But since mid-January, a few days before the inauguration of Trump, the yields of the treasury to 10 years of reference have decreased dramatically. The 10 -year yield, which passes inversely, fell to around 4.2%.
The term premium, which partly reflects the feelings of investors on the future size of the debt, has also decreased, but it remains firmly in positive territory after being negative for years.
Some investors argue, however, that yields fell not due to optimism around the American budgetary trajectory, but because Trump policies have increased economic uncertainty – strike the confidence of consumer and businesses, and leading to talking about slower or negative growth.
These concerns also display equity prices, have said certain investors. The American reference S&P 500 has dropped by more than 4% since Trump returns to the White House on January 20 against a drop of approximately 1.3% for a MSCI index of shares in more than 40 other countries. Niladri Mukherjee, director of investments at Tiaa Wealth Management, said that a “peak of political uncertainty” could lead to a smooth patch in the economy.
“The campaign promises are one thing, but the devil is in detail with regard to the development of policies,” he added.
Whatever the reason for recent market movements, the Trump administration must persuade investors of its measures to control debt works. Otherwise, the disappointment of investors could arouse resumption of the sale of bonds, increase borrowing costs and hinder the administration’s ability to continue its program.
“The price of bonds, such as the price of all financial assets, is mainly determined over time by the fundamentals, and the budget deficit is by far the most important fundamental,” said Summers.
Mar-A-LAGO Agreement
In an article in November, economist Stephen Miran, whom Trump chose to chair his council for economic advisers, raised the possibility that Trump could use the threat of prices and the attraction of American security support to persuade foreign governments to replace their cash flows for the obligations of the lower century.
Miran, who was an advisor to the Treasury during Trump’s first term, wrote the newspaper before his appointment while working as the main strategist at Hudson Bay Capital Management, an investment management company. It has not yet been confirmed.
The idea was part of a series of measures to increase the American competitiveness that Miran called “the Mar-A-Lago agreement”, after Trump’s residence in Florida. Miran refused to comment on Reuters, pending confirmation.
Such an exchange of debts could bring about $ 100 billion in interest on interest per year, said Julian Brigden, president of Macro Intelligence 2 Partners, a research company.
Although significant, it would be a fraction of the burden of the debt. The debt held by the public is expected to increase to 52 billions of dollars by 2035, compared to 30 dollars billions this year, according to the latest forecasts from the Congressional Budget Office.
But concerns about other exchanges of forced debt could cause the sale of pressure on treasury bills, which has declared yields, some investors and economists have declared – increasing the risk associated with the safest assets in the world.
“Perhaps perhaps could exert political pressure on certain people to buy obligations,” said Summers. “But that is likely to make others nervous at the idea of holding an asset supported by political pressure, which tends not to work forever.”
The NEC official declared that Miran’s article discussed a wide variety of potential options without pleading for any of them, and only Trump could say what he would adopt.
James Bianco, head of the consulting company based in Chicago, Bianco Research, said that Trump had already adopted certain measures indicated by Miran, including the use of prices as a leverage for security agreements and the creation of a sovereign fund.
“I started to realize that a lot of things in this document happen,” said Bianco.
Expect the unexpected
Another idea floated by the administration is the “Gold Card” program, which according to Trump and the Secretary of Commerce, Howard Lunick could help reduce the deficit. Trump said the residence plan had the potential to raise billions of dollars and help repay the American debt.
The projections encountered some skepticism. Some immigration and wealth advisers say it is unlikely to trigger a major influx of wealthy global investors because it would open their global income for American taxes.
Another subject of speculation on the market is the idea that administration could try to use the country’s golden stocks.
At current market prices, gold held in Fort Knox, Kentucky and other locations is worth around $ 758 billion, but it is estimated at only $ 11 billion on the balance sheet of the Federal Reserve due to a 1973 law which set its price, TD Securities, an investment bank, in a February 20 ticket.
Trump and Musk said they wanted to confirm that gold had not been stolen in the chests. Bessent spoke of monetizing “the active side of the American balance sheet for the American people”, but said that a re -evaluation of gold was not what he had in mind.
Ed Mills, analyst at Raymond James, a financial service company, said Trump could rely on his experience as a real estate promoter in any attempted revision of the country’s debt.
“Trump spent his life reorganizing and refinance the Trump organization’s debt,” said Mills.
Trump, of his own story, almost went bankrupt in 1990 and was forced to ask dozens of banks to modify the conditions of their loans and to forgive some of his debts – an event he considered as proof of his negotiation skills and his clever reflection.
“With Donald Trump, you have to expect the unexpected,” said Mills.
(Report by Davide Barbuscia; edition by Paritosh Bansal and Daniel Flynn)
