Donald Trump is set to return to the White House. His ‘Agenda 47’ has 20 core promises that aim to “Make America Great Again.” And if you’ve read those, there's one question worth asking — will these ideas steer America’s wealth in the right direction? From the presidential election result, we can conclude that about 51% of voters think so, while the rest aren't on board with Trump and his ideas.
On one hand, Trump says that he will end inflation and make things affordable again, but at the same time, he plans to impose tariffs and cut outsourcing. These promises are contradictory, since bringing everything back to the US will inflate prices. Even with “hugely lucrative” IRA subsidies, BloombergNEF estimates for example, that “US-made solar cells and modules will cost 18.5 cents a watt, compared with 15.6 cents for a product from Southeast Asia.”
Secondly, Trump wants to make America the dominant energy producer in the world (which it already is). He aims to do this by increasing the production of fossil fuels, further accelerating the risk of climate change. All this after America was hit hard by many calamities just this year, like Hurricanes Helene and Milton, which resulted in over $100 billion in damages, according to USA Today.
In an attempt to answer the query of this gentleman on X (formerly Twitter) and many others like him, I decided to take a closer look at these policies and their impact on the US national debt.
Stretching legs beyond the coverlet
Let me add some context on what could happen if the government does not use its finances responsibly and the debt problem that might result. The national debt is currently at around $36 trillion, which is 1.3 times the GDP as of 2023. The interest payments for this debt stood at 15% of revenue from taxes as of last year and the Congressional Budget Office (CBO) forecasts it to be around 22% of revenue by 2034.
In a given fiscal year, when a government spends more money than it earns, it runs into a budget deficit. To cover this gap, the government borrows money by selling bonds. The national debt is the accumulation of this borrowing along with the interest owed to investors who purchased these securities.
The CBO projects that by the mid-2030s, all the revenue earned will be required to fund mandatory government spending alone – which is largely Medicare, Medicaid, Social Security, and interest on debt. At that point, the only way to finance basic functions such as defense, law enforcement, infrastructure, and education would be to borrow more or cut back on discretionary spending.
CBO projects that by 2034, the US will need to borrow more just to pay interest on debt
The runaway debt problem
The public debt level has risen significantly over the past decade. You can blame the financial crisis or pandemic or high inflation and maybe going forward, the tax cuts or natural calamities, but the fact remains that it currently stands at near all-time highs. The forecast laid out by the CATO Institute suggests that even with deficits staying steady for the next 30 years, the total public debt will keep rising, thanks to the accruing interest on the debt.
Public debt of the US to breach WW2 level around 2028
Both Trump and Harris shrugged the debt question off during their campaigns and didn’t bother talking about how they might tackle this. Instead, both candidates were busy unveiling costly new proposals.
Trump is vocal about cutting taxes and aims to deliver large tax cuts for workers and corporations, which might decrease their revenue from tax collections and hence increase their deficits. He’s talked about abolishing the income tax entirely, and funding the government entirely through tariffs.
The effect of all this talk has been yields rising in US 10-year bonds since September ‘24, which means rising borrowing costs for the government. That rate grew steadily with the chances of Trump winning. It's mainly because investors fear that rising budget deficits during the Trump presidency would require funding through increased Treasury issuance.
US 10-year bond yield grew as chances of Trump winning increased
A rocky road ahead
Unfortunately, there’s no easy fix for this debt issue. It will require a mix of spending cuts and higher taxes. The longer we delay, the tougher the solution will get. Moody’s has warned of a potential downgrade if America’s fiscal health deteriorates.
Trump's administration has a challenge ahead - manage the ballooning deficit, but also address long-term issues like healthcare reform, infrastructure spending, and military expenditures
Frankly speaking, nobody can accurately tell you how soon or late this debt issue might turn into a crisis. One way to manage this risk is to invest in the most durable companies that are currently trading at the right valuation and are trending upward. Investors and central banks have also been recently turning to the ultimate defensive investment - gold.
