Donald Trump is used to managing debt. But that's not it.
As a real estate developer, Trump relies heavily on borrowed money to finance projects. Six companies went bankrupt due to difficulty repaying their debts. Trump has fought back by writing off some loans, refinancing others, finding new lenders and changing business models.
The public debt that Trump will inherit as the 47th president is an entirely different issue.
When he takes office on January 20, the national debt will exceed $36 trillion, up from $20 trillion at the start of his first term in 2017. Debt held by the public as a share of GDP has jumped from 75% in 2017 to 96% today. These numbers are only going to get worse. Refinancing was not an option, and federal bankruptcy was unthinkable.
The main question is when the market will start punishing Uncle Sam for his profligate borrowing - and that may already be happening.
Since September, the Fed has lowered short-term rates by a full percentage point, but long-term rates have risen by a full percentage point. “This is highly unusual,” Torsten Sløk, chief economist at private equity firm Apollo, wrote in a Jan. 7 newsletter. "The market is telling us something." (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
The bond market cannot explain itself. But one factor behind rising long-term rates may be endless borrowing by the Treasury. If borrowers issue more debt than investors can absorb, interest rates must rise. Interest rates may also rise due to concerns about future inflation. Whatever the reason, higher interest rates mean higher borrowing costs for homebuyers, car buyers and businesses.
Oh yes, the US government also has to pay more, making its fiscal woes even worse.
Read more: Trump's first year will be filled with fiscal folly.
This debt crunch will impact Trump’s agenda in three ways.
First, the government has reached its borrowing limit, which means Congress needs to raise it by late spring or early summer. It could be an ugly fight, with some Republican budget hawks holding out and threatening the U.S. to default.
"Policymakers will ultimately avoid default, but political dynamics on Capitol Hill could produce one of the most destabilizing debt-ceiling tragedies in recent memory," investment firm BTIG explained in a Jan. 6 analysis.
Second, the debt ceiling showdown could trigger another downgrade of U.S. debt ratings. Standard & Poor's downgraded the U.S. debt rating by one notch after the 2011 debt ceiling impasse. Fitch did the same thing after a similar showdown in 2023, the same year Moody's revised the U.S. rating outlook to negative from stable. The downgrade has not yet damaged U.S. creditworthiness, but markets have become more sensitive.