Millions of investors are watching the value of their bond funds sag almost daily as concerns about the impact of Trump's policies on the national debt grow
If Donald Trump expects to be the next president, he could do something useful right now and reassure all the investors in U.S. Treasury bonds about all his massive deficit-spending plans.
Otherwise they're apt to fall back on his comments from 2016, when he called himself "the king of debt" and bragged about his ability and willingness to stiff anyone foolish enough to lend him money. "I've made a fortune by using debt, and if things don't work out I renegotiate the debt. I mean, that's a smart thing, not a stupid thing," he told CBS during an interview back then. "You go back and you say, 'Hey guess what, the economy crashed, I'm going to give you back half.'"
And right now the bond markets are starting to freak out, as the likelihood grows that the king of debt is going to be put in charge of a U.S. government already sinking into a sea of red ink. The current total value of U.S. Treasury debt: $35 trillion.
More than 120 million individual U.S. investors have money in mutual funds or exchange-traded funds, and about 20% of that money, or $6.5 trillion, was invested in bond funds at last count. U.S. bonds are the traditional mainstay of older investors and retirees, who depend on them for income.
The interest rate that bondholders are demanding in order to lend money to the U.S. government for the long term has jumped about 10% since Trump's polling surge began late September. And because bonds work like a seesaw, when that interest rate goes up, the price goes down. Millions of investors are watching the value of their bond funds sag almost daily.
Oh, yes, and rising interest rates are pushing up mortgage rates as well.
Steve Russell, fund manager at London-based investment manager Ruffer & Co., tells me that in recent weeks he's seen an "uncanny correlation" between the odds of a Trump victory and a Republican sweep, on the one hand, and spiking interest rates on 30-year U.S. Treasury bonds BX:TMUBMUSD30Y and inflation-protected bonds on the other. Russell adds that growing worries about U.S. debt sustainability are also driving gold prices (GC00) higher.
No, of course Trump is not the only reason for that. You can also factor in the Federal Reserve, inflation worries, and the strong U.S. economic growth that voters don't really care about. But Trump is a big factor. Logically, he has to be. Do the math.
Trump's proposals would add billions to the national debt
Trump has proposed huge, sweeping, unfunded tax cuts, plus big spending hikes in areas such as defense. His tax cuts include extending and deepening the 2017 cuts when they expire next year; slashing the corporate tax rate further from 21% to 15% for domestic manufacturers; and exempting overtime, tips and Social Security benefits from taxes.
His numbers simply don't add up. Even Rick "Tea Party" Santelli, the ultraconservative, MAGA-adjacent bond-market commentator on CNBC, pretty much admits it. I contacted the Trump campaign for comment but haven't heard back.
The number crunchers at the Committee for a Responsible Federal Budget, a nonpartisan think tank which studies the federal budget, estimate that Trump's proposed plans will probably add $7.5 trillion to the national debt over 10 years, and could add as much as $15 trillion.
(The think tank isn't partisan. For example, they recently defended Trump's record on Medicare. But they estimate Harris's proposed extra debts would be much less.)
The Congressional Budget Office was already forecasting that U.S. national debt will hit an unprecedented 122% of annual gross domestic product in 10 years, regardless of who becomes president.
But the CBO forecast doesn't include any of Trump's proposals. Throw them into the mix, and based on CRFB calculations we're looking at a 2034 national debt that could be a third or even two-thirds higher - somewhere between 140% and 160% of gross domestic product.
To put that in context, the national debt peaked at 106% at the end of World War II. At the end of the Civil War in the 1860s, the national debt was less than 50% of GDP. When Trump took office in 2017 it was around 80% of GDP, and when Bill Clinton left the White House in 2001 it was 34%.
In Germany, the figure is 45%.
In other words, the U.S. is already on an unsustainable fiscal path and Donald Trump wants to speed up. So you can see why the bond market would be worried. How much extra will bondholders demand in order to keep lending to the U.S.A.?
One problem here is that, thanks to the internet, these days lots of voters no longer feel any need to do their homework or check their facts. (This is not a partisan point. It goes for people on both sides, in different ways.) I hear frequently from Trump enthusiasts, and they will often say that the former president can enact his proposals and restore fiscal sanity to Washington at the same time by cutting out "waste," "foreign aid" and "all the money going to illegals."
If only this were true.
Right now, Social Security, Medicare, defense and debt interest alone soak up more than 80% of all your tax dollars. If you don't believe me, go to the latest budget outlook produced by the Congressional Budget Office, and look at the summary table on page 2. You'll see that in 2024 the federal government will spend an estimated $1.45 trillion on Social Security, $903 billion on Medicare, $849 billion on defense and $892 billion on net interest. The total cost: $4.09 trillion. That's 84% of the $4.89 trillion we paid in federal taxes, including payroll taxes.
The numbers 10 years out are expected to be even more dramatic. According to the CBO - again, on page 2 - Social Security, Medicare, defense and debt interest are predicted to cost $2.48 trillion, $1.74 trillion, $1.14 trillion and $1.71 trillion, respectively, in 2034. The total: $7.1 trillion. That will be 95% of the $7.46 trillion the CBO expects us to be paying in taxes.
And we're not even counting other core stuff - such as spending on veterans ($200 billion this year - see page 22), or the nursing-home support that many people think comes from Medicare but actually comes from Medicaid (another $200 billion a year - see this report from the Congressional Research Service).
In other words, if we left Social Security, Medicare, defense spending and debt-interest payments untouched, we would pretty much have to cancel everything else in the federal budget in order to balance the books.
Not just all welfare, food stamps, income support and Medicaid. But all the highways. And homeland security. FEMA. The Justice Department. The whole shebang.
Illegal immigrants, incidentally, are not costing Social Security or Medicare a nickel. Regardless of your views on immigration more generally, they are, if anything, net contributors to both programs, because some of them use fake or borrowed Social Security numbers when they work and pay FICA taxes - but despite what you may hear on the campaign trail, they are not eligible for benefits.
Total U.S. military aid to Ukraine since Russia's invasion in 2022, one issue that gets raised plenty in MAGA circles, has amounted to less than 8% of one year's defense spending. (And most of that aid money is actually spent here on making weapons).
So even if you agree that the federal government is wasteful in many ways, or could usefully go on a diet, that won't get you very far at the big-picture level.
Little protection for bondholders
From where, exactly, can anyone find massive spending savings to offset the tax cuts, even in part? Trump has vowed not to cut Social Security or Medicare, and he wants to increase defense spending.
What about ... er ... interest payments? Cue the king of debt.
When an organization borrows more than it can afford, eventually the bondholders face a reckoning. Who will protect the investors in "risk-free" U.S. bonds?
As CNBC's Santelli points out, we're currently in the "Santa Claus" phase of the political cycle, when politicians make lots of promises. If Trump wins, Congress may stop him from enacting these massive unfunded tax cuts and spending hikes. There again, it may not. Republicans in the House and the Senate will have every political incentive to go along to get along. Nobody wants to get "primaried" by a base that thinks "foreign aid" makes up 70% of the federal budget. (It's actually 1%.)
Could the U.S. Constitution protect long-term bondholders from the risk of outright default? Noah Feldman, the top U.S. constitutional law professor at Harvard, tells me that the legal position isn't entirely clear. "There is a legal debate about whether default would be lawful under the clause of the Constitution that says the validity of public debts must not be questioned," he said.
I asked Feldman if bondholders might also get any constitutional protection from the fifth amendment, which says private property cannot be taken for public use "without just compensation." He didn't think so. Sorry, folks.
But as Santelli points out, even if Uncle Sam never defaults, as long as he has to keep on borrowing more and more money, bondholders will demand higher rates of interest. It's a matter of supply and demand. And as interest rates rise, bond prices will fall.
No wonder hedge-fund managers like Paul Tudor Jones and Stanley Druckenmiller are betting heavily against U.S. Treasury bonds, especially as a Trump victory looms.
And as the interest rates on U.S. bonds rise, the overall cost of money for companies will rise as well. Rising rates are bad news for stocks as well as bonds.