Trump's Debt Trap: A Recipe for Disaster

Strategic Insights -

The Trump administration's fiscal policies have created a perfect storm for financial disaster, with the US budget deficit soaring to 7pc of GDP at the top of the cycle and a structural debt trap looming in the next recession. The US Treasury faces gargantuan demands on global capital markets, with $7 trillion of debt to be refinanced this year alone, and Republicans on the House ways and means committee pushing for a "big beautiful bill" that adds $3.8 trillion to the debt mountain. The American people cannot fund such debt issuance, and the Fed's willingness to soak up the debt, and inflation be damned, raises the risk of a stealth default via debasement.

Key Takeaways:

  • The US budget deficit is structural, implying a double-digit blow-out and a compound debt trap in the next recession.
  • The Federal Reserve's measure of 10-year real rates has jumped from negative five years ago to 2pc since Covid, playing havoc with the US debt trajectory.
  • The Bank of America has pencilled in deficits of $2 trillion this fiscal year, $2.2 trillion in 2026, and $2.3 trillion in 2027, even if all goes well.
  • President Trump's fiscal policies, including tax cuts and increased spending, have reduced the net national savings rate to 0.6pc, exacerbating America's chronic trade deficits.
  • The US Treasury is facing significant strain, with hedge funds honing in on stress emerging in the US Treasury market, and the "Bessent Bond Put" being used as a last resort to nudge banks into buying more treasury debt.
  • The Trump administration's talk of a forced debt swap or a "fee" on foreign holders of US treasuries is a concern for bondholders, and a potential expropriation of their pension pots.
  • US federal debt is projected to reach 133pc of GDP by 2030, up from 99pc before Trump 1.0, and could rocket quickly from there to 150pc if interest rates misbehave.
  • Market volatility is increasing, with investors buying gold instead of US treasuries as a safe haven, and Larry Summers warning that markets are no longer treating America as a "bastion" economy.

Statistics:

  • US budget deficit: 7pc of GDP at the top of the cycle
  • Fed measure of 10-year real rates: up to 2pc since Covid
  • US Treasury debt to be refinanced this year: $7 trillion
  • US Treasury deficits projected: $2 trillion this fiscal year, $2.2 trillion in 2026, and $2.3 trillion in 2027
  • US net national savings rate: 0.6pc
  • US trade deficits: chronic and exacerbated by Trump's fiscal policies
  • US Treasury market stress: hedge funds are honing in on stress emerging in the US Treasury market
  • US federal debt: projected to reach 133pc of GDP by 2030, up from 99pc before Trump 1.0
  • Foreign holdings of US debt securities: $14.2 trillion
  • Foreign holdings of US equities: $17 trillion

Sources:

  • Harvard professor Ken Rogoff, co-author of This Time is Different: Eight Centuries of Financial Folly
  • Bank of America
  • Evercore ISI
  • IMF
  • White House economic council, headed by Stephen Miran
  • Scope Ratings
  • Reuters
  • Bloomberg