Global Investors Are Telling Donald Trump His Deficits and National Debt Risk an Economic Crash
Washington is unnerved these days about budget deficits and the national debt. Deficit angst comes along periodically, often as a pretext for cutting social spending. This time, however, there’s genuine cause for alarm.
Outsized deficits are par for the course when the economy is in recession or reeling from a shock like the pandemic or the financial collapse; most of the time, Washington has managed to keep deficits human-scale. Setting aside recessions, deficits as a share of GDP averaged 1.5 percent from the 1950s through the 1970s, shot up briefly to 4.0 percent of GDP in the 1980s, when President Ronald Reagan slashed taxes and beefed up defense, and returned to an average of 1.1 percent in the 1990s, including four years of surpluses. They ticked up again to 2.2 percent of GDP in the 2000s and 3.3 percent in the 2010s—again from two rounds of outsized tax cuts and Pentagon spending increases.
Now we’ve entered new territory. Since 2022, we’ve run up $7.4 trillion in deficits averaging 6 percent of GDP through four years of expansion, including a bumper $2 trillion deficit this year. If we include the post-pandemic spending in 2021, deficits have averaged 7 percent of GDP.
One doleful result: Our national debt now tops $40 trillion, including $32.2 trillion held by private and foreign government investors. That part alone is more than the combined national debts of China, the European Union, and Great Britain.
Such outsized deficits and national debt didn’t just “happen.” Successive presidents and congresses made them happen, principally by repeatedly cutting taxes and giving out blank checks for defense.
On taxes, we’re indisputably global outliers. The Organisation for Economic Co-operation and Development (OECD) reports that U.S. taxes at all levels totaled 25.6 percent of GDP in 2023—and that was before President Donald Trump’s One Big Beautiful Budget-Busting Bill reduced federal revenues by $4.5 trillion over 10 years. We pay a smaller share in taxes than 30 of the world’s 36 other developed countries, and none of those lower-tax nations—Chile, Colombia, Costa Rica, Ireland, Mexico, and Turkey—resemble us economically.
We’re also global outliers on military spending. Last year, the Pentagon budget topped $954 billion. That’s $50 billion more than the combined defense spending of China, Russia, Germany, India, Great Britain, and Ukraine. It’s still not enough for Donald Trump, who wants $1.5 trillion for defense next year.
The answer to our outsized deficits and debt, of course, is to address the source, by raising revenues and cutting defense spending. That’s what Bill Clinton did and balanced the budget and produced four hefty budget surpluses in the 1990s. Far from hobbling the economy, GDP and incomes grew faster under Clinton’s policies than during any presidency in the past half-century.
Yet, since Clinton, no one else has even tried. Trump and his economic minions certainly believe that deficits don’t matter. They assume there will always be eager buyers of U.S. government securities on whatever terms the Treasury sets. Truth be told, the proponents on the left of “modern monetary theory” spun the same fairy tale for Joe Biden’s administration as it ran up $3.5 trillion in deficits in his last two years in office.
In real life, public finance is more challenging—and riskier—than either side would have people believe. Every dollar of deficit financing comes from somebody’s savings, and Americans save so little we end up depending on foreign savings. This year, when the Treasury will have to attract $2 trillion for this year’s deficit, all private savings in America—the personal savings of individuals plus the retained earnings of businesses—will total only $2.2 trillion.
That’s only the beginning of the Treasury’s task because it also must refinance about one-third of the $32.2 trillion in national debt held by investors that comes due each year. That’s another $10 to $11 trillion. Under normal conditions, most of those investors—mainly foreign and U.S. banks, insurance companies, pension funds, and the like—“roll over” their maturing Treasury securities. They’ll use the proceeds to buy the new, similar securities.
There’s a catch. The Treasury must provide a competitive return with virtually no risk, and our outsized deficits and debt now make it difficult.
When our deficits and national debt were manageable, global investors were confident that the government of the world’s richest, most productive economy could always find the resources to pay its debts. The U.S. economy also consistently grew at a higher rate than the blended interest rate on our debts, so investors felt secure that the Treasury could handle the carrying costs of any new deficits.
Even when U.S. presidents have badly mismanaged the economy—heads up, George W. Bush—global investors have been ready to finance our deficits and debts at reasonable rates because they were confident we would never default. But today’s rising inflation, along with outsized deficits and debt, presents a variant of that risk because it reduces the value of the securities once investors buy them.
Even worse, today’s inflation isn’t a byproduct of an unanticipated economic shock. It’s the direct result of deliberate policy blunders—Trump’s tariffs and bungled war on Iran, along with his pressure campaign on the Federal Reserve to cut short-term interest rates, even at the risk of more inflation.
So, global investors are sending us a clear message: Our deficits and debt are so big—and our policymaking so erratic—that they no longer trust us to pay our debts without reducing the burden by engineering or tolerating more inflation. That’s why the market yield on 30-year U.S. Treasury bonds has reached its highest levels in more than two decades.
Even so, Donald Trump isn’t listening, and his senior economic officials seem unable to grasp the problem. Last week, Treasury Secretary Scott Bessent responded to rising bond yields with a ham-handed attempt to manipulate the bond market. The Treasury planned to buy $4 trillion in U.S. Treasury bonds, assuming an artificial burst in demand would push up bond prices and reduce yields.
It’s an addled version of the Federal Reserve’s quantitative easing program (QE) under President Barack Obama. Back then, it was designed to stimulate credit in a sputtering economy with near-zero interest rates and low inflation. This time, inflation and interest rates are both elevated—and rising. How will Bessent pay for his $4 trillion buying spree? The Treasury and the Fed will have to create the credit—in effect, print a lot of money—that will only keep inflation rising.
As those who remember basic economics would expect, Bessent’s gambit not only failed; it pushed rates up. Those yields are the market’s vote of no confidence in Trump’s economic team and especially Kevin Warsh, the new chair of the Federal Reserve.
Unless the administration gets its head around the deficit and debt, global investor confidence in U.S. policymaking and Treasury securities could continue to erode and reach the point where investors start cashing in their U.S. investments. That’s a scenario for an economic crash.
Trump may be hopeless, but we’re not helpless. The Democrats have an opening to announce a serious program to puncture the ballooning deficits, especially if they take Congress in November.
Bill Clinton provided the blueprint, and I can take you through it because I pulled together the budget and tax program for his 1992 campaign. When he entered the White House in 1993, the deficit was $255 billion ($588 billion in today’s dollars) and projected to increase. It would have been higher, but George H. W. Bush had raised excise taxes and income taxes on high-income people in 1990.
Clinton convinced Democrats in Congress to double down with larger tax increases for wealthy people, raised the corporate tax rate, increased Medicare taxes for wealthy people, and hiked the federal gasoline tax. It worked: Those changes, along with strong economic growth, increased federal revenues 54 percent after inflation over his two terms. Clinton also convinced Democrats to cut defense spending by 12 percent on a sustained basis, another first.
Five years later, the federal budget was in surplus; and from 1998 to 2001, the surpluses totaled $559 billion ($1.1 trillion in today’s dollars). Investors took note, and the yield on the benchmark 10-year Treasury bond fell 3.3 percentage points from 1990 to 1998.
Critics on the left today dismiss Clinton’s balanced budget program for, in Robert Kuttner’s baseless claims, “widening inequality, diminished economic security, and reduced confidence in the ability of government to aid its citizens.” Those charges are nonsense.
But Clinton’s policies didn’t slow the economy; they produced the strongest economic growth in a half-century. Real GDP grew at an average annual rate of 4.0 percent, outstripping Reagan (3.5 percent), Bush-1 (2.3 percent), Bush-2 (2.2 percent), Obama (1.7 percent), Trump in his first term (1.5 percent), Biden (3.6 percent), and year one of Trump’s second term (2.1 percent). Real median income also increased more than under Clinton’s two predecessors and five successors, and unemployment fell from 6.9 percent to 4.0 percent.
Clinton also didn’t sacrifice social spending to balance the budget. Adjusted for inflation, spending on domestic discretionary programs grew 10 percent, spending for income security programs including welfare grew 15 percent, Medicaid spending rose 37 percent, and the poverty rate fell from 15.1 percent to 11.3 percent, the sharpest decline of any postwar president.
Following Clinton’s model shouldn’t be a heavy lift for Democrats, since substantial majorities of Americans support higher taxes on wealthy Americans and corporations and cutbacks in defense spending. Clinton also grasped that controlling the deficit was a political precondition for public support for progressive initiatives. That’s an insight the next Democratic administration should take to heart before undertaking, as it will find it must, the immense challenges of restoring Social Security’s solvency, ensuring healthcare for everybody, and aggressively promoting a clean energy society.
This essay appeared originally at Washington Monthly.