Donald Trump is used to managing debt. But not like that.
As a real estate developer, Trump relied heavily on borrowed money to finance projects. Problems with repaying his debts contributed to this six business bankruptcies. Trump fight back by writing off 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 when he began his first term in 2017. As a percentage of GDP, the national debt belongs to the public has increased from 75% in 2017 to 96% today. These numbers will only get worse. Refinancing is not an option and federal government bankruptcy is unthinkable.
The key question is when the markets will start punishing Uncle Sam for profligate borrowing – and that may already be happening.
Since last September, the Federal Reserve has cut short-term interest rates by a full percentage point, while long-term interest rates have risen by a full point. “This is highly unusual,” wrote Torsten Sløk, chief economist at private equity firm Apollo, in his January 7 newsletter. “The market tells 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 interest rates could be endless borrowing by the Treasury Department. If borrowers issue more debt than investors can absorb, interest rates must rise. Interest rates could also rise due to concerns about future inflation. Whatever the reason, higher interest rates mean higher financing costs for home and car buyers, and for businesses.
And oh yes, the US government also has to pay more, making the budget problems even worse.
Read more: Trump’s first year will be filled with fiscal follies.
This debt crisis will affect Trump’s agenda in three ways.
First, the government has reached its borrowing limit, meaning Congress will have to raise the limit by late spring or early summer. That could be an ugly battle with some budget hawks in the Republican Party holding out, threatening American bankruptcy.
“Policymakers will ultimately avert bankruptcy, but political dynamics on Capitol Hill could produce one of the shakier debt ceiling dramas in recent memory,” investment firm BTIG explained in a Jan. 6 analysis.
Second, a confrontation with the debt ceiling could trigger another downgrade of U.S. debt. Standard & Poor’s downgraded its U.S. debt rating by one notch after a standoff over the debt ceiling in 2011. Fitch did the same after a similar showdown in 2023, and Moody’s changed its U.S. rating outlook from negative to stable that same year. Downgrades have not yet damaged US credit, but markets are becoming more irritable.