Donald Trump is used to managing debt. But not like this.
As a real estate developer, Trump relied heavily on borrowed money to finance projects. The problem of repaying his debts contributed to this Six business bankruptcies. Trump Fight again By writing off some loans, refinancing others, finding new lenders, and changing its business model.
The public debt that Trump will inherit as the forty-seventh president is a completely different problem.
The national debt will exceed $36 trillion when he takes office on January 20, up from $20 trillion when he began his first term in 2017. As a share of gross domestic product, the debt held by the public has declined. It jumped from 75% in 2017 to 96% today. These numbers will get worse. Refinancing is not an option, and bankruptcy of the federal government is unthinkable.
The key question is when markets will start punishing Uncle Sam for profligate borrowing – and that may already be happening.
Since last September, the Fed has cut short-term interest rates by a full percentage point, but long-term interest rates have risen by a full percentage point. “This is highly unusual,” Torsten Slok, 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 does not explain itself. But one factor behind the rise in long-term interest rates may be endless borrowing by the Treasury. If borrowers issue more debt than investors can absorb, interest rates must rise. It is also possible that interest rates will rise due to concerns about future inflation. Whatever the reason, higher interest rates mean higher borrowing costs for buyers of homes, cars, and businesses.
And yes, the US government has to pay more as well, further exacerbating its financial problems.
Read more: Trump’s first year will be full of financial follies.
This debt crisis will hit Trump’s agenda in three ways.
First, the government has reached its borrowing limit, meaning Congress will need to raise the limit by late spring or early summer. This could be an ugly fight, with some GOP budget hawks holding out, threatening a US debt default.
“Policymakers will eventually avoid a default, but the political dynamics on Capitol Hill could produce one of the most fragile debt ceiling dramas in recent memory,” investment firm BTIG explained in a January 6 analysis.
Second, the standoff over the debt ceiling could lead to another downgrade of the US debt rating. Standard & Poor’s downgraded the US debt rating by one notch after a debt ceiling standoff in 2011. Fitch did the same after a similar standoff in 2023, and Moody’s changed its outlook for US ratings to negative from stable in the same year. The credit rating downgrade has not harmed the US creditworthiness so far, but the markets are becoming more prickly.