Donald Trump is used to debt management. But not like this.
As a real estate developer, Trump relied heavily on borrowed money to finance projects. Trouble repaying his debts he contributed to six business bankruptcies. Trump fight back by writing off some loans, refinancing others, finding new lenders, and changing its business model.
The public debt that Trump will inherit as the 47th president is an entirely 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, debt held by the public has it jumped 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 main question is when markets will start punishing Uncle Sam for profligate lending – and it may already be happening.
Since last September, the Federal Reserve has cut short-term interest rates by a full percentage point, yet long-term rates have risen a full point. “This is very unusual,” wrote Torsten Sløk, chief economist at private equity firm Apollo, 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 rates could be endless borrowing by the Treasury Department. If lenders issue more debt than investors can absorb, rates must rise. Rates could also be increasing due to concerns about future inflation. Whatever the reason, higher rates mean higher borrowing costs for home and car buyers, and for businesses.
And oh yes, the US government has to pay more too, making its fiscal woes even worse.
Read more: Trump's first year will be full of fiscal folly.
This debt pinch will hit the Trump agenda in three ways.
First, the government has reached its borrowing limit, which means Congress will need to raise the limit by late spring or early summer. That could be an ugly fight, with some GOP budget hawks holding out, threatening the US default.
“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 explained in a Jan. 6 analysis.
Second, a debt ceiling showdown could trigger another downgrade of US debt. Standard & Poor's downgraded US debt one notch after the debt ceiling clash in 2011. Fitch did the same after a similar contest in 2023and Moody has changed his US ratings outlook to negative from stable the same year. A downgrade has not yet damaged the US's creditworthiness, but markets are getting more jittery.