Donald Trump is used to managing debt. But not like that.
As a real estate developer, Trump relied heavily on borrowed money to finance his projects. Difficulties in repaying debts contributed to six business bankruptcies. Asset retaliated by canceling some loans, refinancing others, finding new lenders and changing its business model.
The national debt that Trump will inherit as the 47th president is a completely different problem.
The national debt will exceed $36 trillion when he takes office on January 20, up from $20 trillion at the start of his first term in 2017. As a percentage of GDP, debt held by the public has increased. went from 75% in 2017 to 96% today. These numbers will only get worse. Refinancing is not an option and a federal government bankruptcy is unthinkable.
The main question is when markets will start punishing Uncle Sam for his excessive borrowing – and that may already be the case.
Since last September, the Federal Reserve has cut short-term interest rates by one percentage point, while long-term rates have increased by one point. “This is very unusual,” Torsten Sløk, chief economist at private equity firm Apollo, wrote in his January 7 newsletter. “The market is telling us something.” (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
The bond market cannot be explained. But one factor driving the rise in long-term rates could be the Treasury Department’s endless borrowing. If borrowers issue more debt than investors can absorb, rates must rise. Rates could also rise due to concerns about future inflation. Whatever the reason, higher rates mean higher borrowing costs for home and car buyers, as well as businesses.
And oh yes, the US government also has to pay more, making its budget woes even worse.
Learn more: Trump’s first year will be filled with tax madness.
This debt squeeze will affect Trump’s agenda in three ways.
First, the government has reached its borrowing limit, which means Congress will have to raise that limit by late spring or early summer. This could be a nasty battle, with some fiscal hawks in the Republican Party holding out, threatening to default the United States.
“Policymakers will ultimately avoid a default, but the political dynamics on Capitol Hill could produce one of the shakiest debt ceiling dramas in recent memory,” investment firm BTIG said in a statement. analysis of January 6.
Second, a confrontation with the debt ceiling could trigger a further downgrade of the US debt rating. Standard & Poor’s downgraded the US debt rating by one notch after a debt ceiling impasse in 2011. Fitch did the same after a similar confrontation in 2023and Moody’s changed its U.S. Ratings Outlook Changes from Stable to Negative that same year. The downgrades have not yet damaged US creditworthiness, but markets are becoming increasingly thorny.
