Alarms flashing red as Trump takes US debt to level almost beyond comprehension

When some of the nation’s best informed business and financial players start describing the current economic outlook as “GFC-like”, it’s time to worry.

For weeks, the concern about the confluence of higher interest rates on government debt, the AI building boom, inflation and the Trump administration’s loose grip on economic reality has been building.

As one analyst I spoke to recently put it, that concern is now flashing red.

And the person at the centre of this – Donald Trump – either doesn’t care or understand what he’s doing.

The heart of the problem is the sheer level of debt being created by the US government.

The numbers are almost beyond comprehension.

On track for a budget deficit of $US2 trillion this year ($2.8 trillion, about 6 per cent of GDP), government gross debt sailed through $US40 trillion last month. Experts believe it will clock $US41 trillion later this year.

The interest bill on that debt is rapidly climbing and is now $US1.25 trillion a year. That’s more than $US3 billion a day.

One of the reasons the interest bill is growing is that the interest rate on all that debt is soaring. Between the end of February – the day before Trump’s missiles started flying into Iran – and today, the interest rate on US government debt has soared by more than 20 per cent.

America’s not alone. Interest rates on government debt have jumped everywhere. By about 40 per cent in Japan, 26 per cent in Germany, 21 per cent in Britain. Australia has fared relatively well with a 12 per cent increase, but it is still adding to the burden facing the nation’s present and future taxpayers.

Now, these higher rates are reflecting several issues.

Big tech companies are undertaking the largest build of new infrastructure since the rollout of railways and canals. That means they are asking investors – the same ones who would buy government debt – to sling them upwards of $US1 trillion.

To win over an investor, interest rates go up.

Investors also need higher interest rates to cover the cost of inflation. In the US, the frontline defence against inflation is the Federal Reserve which would ordinarily be lifting its own interest rates to slow the economy.

But everyone is now worried the Fed under new chairman Kevin Warsh, recently appointed by Trump, is reluctant to lift borrowing costs because it might upset the president.

Warsh might be right.

After stronger-than-expected American job figures were released last week, Trump took to Truth Social to warn that if the Fed doesn’t cut interest rates, he will “STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT”.

Here was the president threatening economic self-harm on a scale so large it would drive the world into a recession if not depression. It was ludicrous even by Trump standards.

It acted like a feedback loop into the pricing of American government debt. Investors want confidence that they will be repaid for sinking their cash into the US.

The US Treasury market has been for decades considered the safest of all investments. As one seasoned US observer told me this week, investors don’t trust Trump’s America to pay its bills.

We’re seeing the decline in faith in real time.

Last week, Norway’s huge sovereign wealth fund revealed plans to cut by 40 per cent its holdings of American government debt. The Netherlands’ central bank announced it was moving tonnes of gold out of the US (and Canada).

Adding to the turmoil, American tariffs on Canadian imports ramped up last week while the oil price nudged $US100 a barrel over growing concerns about how the now seven-month old war against Iran is progressing.

The president’s social media performance at the weekend gave no confidence his focus is on the troubles he has helped create.

He released a map of New Mexico but with Mexico crossed out and replaced with America (to go with his changes to Lake Ontario and the Gulf of Mexico).

Not satisfied with renaming a US state, Trump looked to the stars.

He put on his social media feed an image of the moon, an American flag and the words “The Moon Is Ours”. He also released renderings of versions of uniforms for the US Space Force.

As one critic noted, if George Lucas of Star Wars fame had been asked to clothe members of the Empire in these uniforms he would have baulked because they were too Nazi-looking.

It’s almost as if Trump has no interest or understanding of the path of economic disaster he has set the US upon.

There had been hope that Trump’s Treasury Secretary, Scott Bessent, would act as a check on the president’s worst impulses.

He hatched a “3-3-3” plan of 3 per cent economic growth, a 3 per cent budget deficit to GDP rate and a 3 million barrel a day increase in domestic oil production. He hasn’t reached any of his self-set targets.

Rather than come up with new ideas to deal with the huge budget deficits being run-up by his boss, Bessent is borrowing from the Trump playbook by resorting to abuse.

Last week, he ranted at both the Financial Times and Wall St Journal for their coverage of America’s debt issue.

He labelled the FT – a paragon of economic centralism – as “anti-American”, “anti-business” and “anti-Western values”. The Journal, he declared, was no longer a business paper. Instead, he only read it for the book reviews.

Like populists everywhere, including here in Australia, facts or reasoned arguments are just speed humps on the way to power. But there are real, tangible repercussions from ineptitude, ignorance or vindictiveness.

The GFC – the biggest economic dislocation since the Great Depression – was a credit crisis amplified by a collapse in faith in the American property market.

If investors continue to lose trust in the American government debt market, it will be American taxpayers and businesses paying the initial price – and then the rest of us.

Shane Wright is a senior economics correspondent.

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