Trump and US Debt

Recently, the market has begun to show some concerns about a June US debt crisis. My view on such claims is that US debt does indeed face some structural pressures, but this does not equate to an imminent substantive crisis. Given the current financial system, US debt remains the primary safe-haven and pricing asset. As long as the dollar remains the global reserve currency, and as long as the US doesn’t experience war or fundamental credit loss, market confidence in US debt is unlikely to be easily shaken.

For Q2, there is indeed nearly $5 trillion in US debt coming due, but this isn’t the first time we’ve seen such scale. Last year’s second quarter had similar figures, and several quarters throughout the year approached over $5 trillion. The market didn’t panic as a result. Looking deeper, over 80% of the debt maturing in June consists of short-term Treasury bills – assets with high liquidity and extremely low risk that remain preferred choices for cash management and institutional allocation. Even investors like Buffett continue to increase their holdings, with his cash positions almost entirely in short-term Treasury bills, holding even more than the Federal Reserve.

In fact, over the past week, US 5-year bonds saw the highest foreign demand in history in their latest $70 billion auction, completely reversing last month’s atmosphere of collapsing confidence in US debt, demonstrating that demand for short-term debt remains strong. Notably, the winning rate was 4.071%, slightly higher than last month’s 3.99%, but still one of the lowest levels since 2024 and better than market expectations of 4.075%.

Most striking was that foreign investors (indirect bidders) captured a record-high 78.4% allocation, showing global capital’s confidence in US assets remains robust. In contrast, direct bidders (typically representing US domestic institutions) received only 12.4%, significantly lower than last month’s 24.8%, while dealers absorbed only 9.2% of the remainder – the second-lowest on record. Overall, this auction’s strong performance indicates that everyone isn’t worried about the US, they’re just uninterested in long-term debt.

Of course, some people still worry that the US government is just issuing new debt to pay old debt. Indeed, while this doesn’t sound great, this is actually standard operating procedure for government debt management – not just for the US, but for most other sovereign nations as well. As long as the market has confidence in refinancing capabilities, this mechanism itself isn’t problematic. Although long-term bond yields have been volatile recently, we’ve also seen funds quickly enter to absorb them, indicating the market still has sufficient liquidity and acceptance.

Overall, US debt isn’t without risk, but current concerns are somewhat exaggerated. Returning to fundamentals and institutional mechanisms, as long as the dollar’s status remains unshaken and funds continue to use US debt as core allocation, market trust in US debt will be difficult to shake in the short term.

Regarding US Debt Downgrades

For some time, Moody’s was the last agency still maintaining the US’s AAA rating. So this downgrade, to me, symbolizes not market panic, but reality finally catching up with long-ignored structural problems. After all, the US fiscal deficit hasn’t been news for a while, soaring from 3.7% in 2022 to 6.4% in 2024, with projections possibly breaking 9% by 2035.

Looking at the historical trend of US federal debt as a percentage of GDP since 1790, it has climbed steadily, particularly accelerating after WWII and the 2008 financial crisis. Current debt already exceeds 100% of GDP, and projections under current law (black dots) and congressional new legislation scenarios (orange dots) show the debt ratio will further surge to 125% over the next decade.

However, looking back at history, US debt has been expanding long-term, and downgrades aren’t necessarily disasters. When S&P downgraded the US rating in 2011, the Dow crashed 6.6% the next day, but hit new highs six months later. The bond market actually rose contrary to expectations, with 10-year yields falling from 3% to under 2%, because investors still treated the US as the ultimate safe haven.

When Fitch downgraded in 2023, the market barely reacted – stocks held steady and continued climbing. This reinforces my belief that market reactions to ratings aren’t just about news headlines, but about overall economic and policy context.

Of course, Moody’s downgrade this time isn’t just a symbolic warning signal, but a reality check for US debt investors. While many are starting to worry whether poor Treasury auctions indicate shrinking demand, as I mentioned earlier, the problem isn’t “people don’t want to buy” but rather “no one wants to buy right now.”

For many central banks, insurance companies, and pension funds, US debt isn’t a freely chosen investment, but an institutionally mandated holding. But when markets expect higher future rates, more severe deficits, and even further tariff and inflation pressures, everyone prefers to wait and watch for cheaper prices before entering.

I’ve always believed that US debt hasn’t lost its market function, but we also can’t continue viewing it with the old logic of “buy and earn guaranteed profits.” When rising yields can no longer attract sufficient buyers, when the US government’s fiscal discipline is no longer trusted, markets naturally demand higher compensation – meaning higher yields and lower bond prices.

In such an environment, US debt still has a role, but it’s not a mindless allocation holy grail – it’s a tool requiring careful timing and structural judgment. Of course, many worry whether this will long-term shake global trust in dollar assets. Bessent previously said “ratings are lagging indicators,” but if foreign capital starts seeking alternative choices, rising US debt yields and declining dollar demand won’t be theoretical exercises – they’ll be real changes reflected in prices.

Indeed, the dollar system we’ve long relied on – the US buying global goods with dollars while the world buys US debt with dollars – if this logic starts loosening, the dollar’s global role will face adjustment pressure. I won’t predict how this will unfold, but I feel the market stands at an important crossroads: either moving toward an adjusted version of dollar hegemony, or the world entering a more multipolar monetary and trade system. But those are long-term matters – in the short term, dollar assets remain among the few mainstream assets.

One Big Beautiful Bill Act

After Trump took office, US debt yields have been highly volatile. Many media outlets and economic commentators believe the culprit is Trump and the Republicans’ “One Big Beautiful Bill” Act, which is estimated to cost $4 trillion over the next decade, frightening markets and making investors worry about fiscal discipline, causing them to sell US debt. However, this explanation is somewhat superficial, ignoring the broader context of economic changes and completely misjudging market reaction mechanisms.

First, US fiscal deficits didn’t appear this week – the US government has long overspent and been addicted to debt, which has been old news to markets. Moreover, the spending Biden pushed during his presidency was much larger than this tax extension, yet markets didn’t overreact then. Now media suddenly claims this relatively conservative tax reform will cause bond market collapse.

Explaining this wave of yield increases can’t focus solely on tax reform. Actually, the core reasons for market movements are threefold, with the most underestimated being unease about Trump’s trade policies. Since Trump announced “Trade Liberation Day” in early April and restarted reciprocal tariffs, markets have begun reflecting potential risks.

In fact, the US has long relied on dollar inflows from global trading partners to support bond demand. If import-export activity slows, foreign willingness to purchase bonds naturally decreases – this was already a structural factor pushing up yields. Additionally, tariffs don’t just hit international trade but also raise corporate import costs, squeezing consumer power and dragging on overall economic growth.

Another often-ignored logic is that as short-term recession risks decline, markets are no longer actively buying long-term bonds for hedging. Over the past year, due to concerns about US economic recession, funds flooded into the long-bond market, suppressing yields. But current conditions are different – US economic data hasn’t collapsed, unemployment remains low, and manufacturing and services show signs of stabilization. Many institutions are even revising 2025 growth forecasts upward.

For example, the Atlanta Federal Reserve’s GDPNow model estimates Q2 2025 GDP growth at 3.8%, with net exports contributing 1.4 percentage points. Under such economic expectations, markets naturally won’t rush to lock in long-term rates. Weakening long-bond demand and falling prices drive yields up – this isn’t a result of tax reform but more like market adjustment under changing risk preferences.

As for much media and analysis targeting tax reform, this is largely a political choice. Compared to tariffs, tax cuts are more attractive among Republican voters. Criticizing tariffs risks being labeled “pro-China” or “anti-manufacturing,” so making a big deal about tax cuts becomes a safer attack method. Media exploits the fact of fiscal deficits, hyping deficit panic and attributing all bond market turmoil to the “One Big Beautiful Bill” Act to achieve political attack purposes.

This operation has precedent – in 2022, when the UK’s Truss government introduced tax reforms, it also caused brief bond market turmoil. Amid fierce criticism, her policies were killed before implementation, ultimately leading to her resignation. Bond markets later stabilized, but political costs had been paid. Today’s America seems to be following a similar script.

So yield increases aren’t the result of a single event, but reflections of multiple policy and economic structural changes intertwining. If we only focus on tax reform, we might miss the real rhythm and risk sources. Markets aren’t fools – what really makes capital hesitate is chaotic trade policy and unclear policy contradictions, not a tax reduction itself.

Regarding the Fed’s Interest Rate Cut Pace

The Fed should have cut rates long ago, but due to Trump’s tariff issues, they’ve been waiting for further policy certainty. This is their dilemma, but the longer they remain stuck in this range, the more everyone will worry.

I’ve always believed that if the Fed truly wants to escape its current predicament, the first step is having courage to redefine its mission and objectives – not technical fine-tuning, but fundamentally rethinking what monetary policy can truly stabilize the economy and guide markets.

The old framework centered on “2% inflation targets” once established stable expectations, but in today’s rapidly changing era, it has become a form of institutional self-limitation.

The inflation we face can no longer be explained by economic overheating or excess demand. What we see is new costs from energy transition, long-term changes in labor market structure, and the price of supply chain security reorganization. These constitute “structural inflation” that can’t be precisely handled by the Fed’s tool of raising and lowering rates. The mechanism we once believed in now leaves central banks unable to advance or retreat, and markets are beginning to vote with their feet.

So many people still ask “when will rates be cut,” but this question itself is dynamic. It’s not that the Fed doesn’t want to cut, but it’s trapped in a logical deadlock – unable to admit tool failure while unable to provide new narratives to convince markets. This ambiguous strategy only makes investors more anxious and capital flows increasingly short-term. I even feel the less the Fed says, the louder yields become – they’re using prices to pressure the central bank: do you still have direction?

This isn’t just a policy problem, but a trust problem. If the Fed can’t propose new logic that aligns with reality, markets will eventually treat it as an institution unable to navigate, no longer waiting for its statements but directly pricing themselves. In my view, this fundamentally shakes the central bank’s role. If central banks can no longer be seen as expectation anchors, yield curves will begin reflecting institutional uncertainty rather than macroeconomic stability.

Therefore, I believe the Fed must step out of its comfort zone and stop using past models to explain the present world.

The 2% inflation target shouldn’t be sacred, but an adjustable reference range. Neutral rates shouldn’t be calculated from historical averages but re-estimated from current structures. What we need is a worldview upgrade, not just adjusting tools by 0.25 percentage points to pretend action.

Especially in recent weeks, bond markets are sending warning signals. If the Fed doesn’t rebuild policy narratives, this trust crack will rapidly expand. I believe this reconstruction will eventually happen, but if not actively led by the Fed, then the rhythm and method will be determined by markets – meaning markets will guide Fed policy changes.

How to Understand Trump’s Policy Contradictions?

Trump’s fiscal policies have always been full of contradictions, particularly in rhetoric about debt reduction goals, which are indeed unconvincing. On one hand, he and Republicans claim to want to reduce America’s massive fiscal deficit. On the other hand, they continue pushing large-scale tax cuts and high tariff policies. These are difficult to coexist in economic practice. More confusingly, these policies seem complementary but actually cancel each other out due to conflicting implementation logic.

Trump emphasizes that tariffs aren’t just trade tools but leverage and revenue sources. They argue for using higher foreign tariffs to force other countries’ concessions while implementing domestic tax cuts to ease inflationary pressure and stimulate investment and consumption. However, this approach faces a reality problem: if tax cuts are meant to reduce people’s tax burden, there needs to be sufficient fiscal revenue sources as compensation. If tariffs are only short-term pressure tools that will eventually be reduced, fiscal balance becomes impossible.

Another contradiction is handling inflation and exchange rates. Trump’s camp hopes to use tariffs and bond market structural changes to promote dollar depreciation and manufacturing recovery. But this conflicts with capital reflows and dollar appreciation effects that tax cuts might bring. When policy goals conflict, markets are not only confused, but overall fiscal strategy lacks stable direction.

These contradictions show that so-called “debt reduction” is more political packaging than Trump’s real policy priority. His first-term tax policies not only failed to reduce deficits but expanded federal debt. If similar approaches are restarted, expected fiscal contraction becomes even harder to achieve.

However, this doesn’t mean Trump’s economic policies are impossible. In my view, what’s worth watching isn’t whether he can “significantly reduce fiscal deficits” but whether he can rapidly expand America’s economic aggregate through other means. As long as nominal GDP grows fast enough, even if absolute debt remains unchanged or slightly increases, the debt-to-GDP ratio could decline. Such improvement isn’t true deleveraging but diluting debt pressure through scale expansion.

Therefore, I don’t hold great expectations for whether Trump can substantially “reduce debt.” After all, his One Big Beautiful Bill Act provides $1.1 trillion in tax relief for high-income families earning over $500,000, but has almost no corresponding spending cuts. Such fiscal strategy isn’t really about tightening budgets or lowering total debt levels, but trying to stimulate large-scale investment and consumption by businesses and wealthy classes through massive tax cuts, thereby boosting overall GDP growth.

If this logic works, it could indeed make the debt-to-GDP ratio appear stable – not through debt reduction but by “raising the denominator” to dilute fiscal pressure. However, from the Congressional Budget Office (CBO) model perspective, this approach’s effectiveness is likely limited. Historical experience also tells us that tax cuts for the rich don’t necessarily effectively translate into substantial domestic demand expansion or real economic investment.

So if Trump can really make markets believe US fiscal pressure remains controllable, the key probably isn’t whether he reduces deficits but whether he can maintain a narrative of “growth over debt” through capital reflows, manufacturing rebuilding, and economic growth. To some extent, this is more like economic-level political balancing than true fiscal discipline.

Regarding Musk’s Money-Saving Plan

When I first heard Musk say he could save the US government $2 trillion, I was frankly willing to believe it. After all, he’s not someone who talks empty words – achievements like SpaceX, Tesla, and Starlink affirm his execution ability. But months later, that ambitious plan to cut one-third of the federal budget shrank from $2 trillion to $1 trillion in half a year, then adjusted to $150 billion.

But it’s not just about numbers shrinking. According to DOGE’s own website data, by mid-May they claimed to have saved taxpayers $170 billion. This figure still sounds enticing and made many think Musk delivered on his promises. However, according to their receipts, only about 40% of this $170 billion has clear supporting data.

If we further filter out items marked as “unable to obtain,” the remaining verifiable savings with visible specific sources is only $42 billion – about one-quarter of the total claimed amount. In other words, most claimed savings can’t actually be verified.

Of course, this doesn’t mean DOGE did nothing. They did cancel some suspicious leases, terminate certain subsidies, and took action against fraud and renegotiating unreasonable contracts. The problem is when a plan champions “transparency and data-driven” approaches yet continuously reveals egregious errors, it’s hard not to question the sincerity.

For example, in February they recorded an $8 million contract as $8 billion – off by exactly 100 times. This figure was noticed because it happened to be the largest savings item on receipts at the time. If it weren’t so outrageous, perhaps no one would have discovered it yet. Musk’s response was: “No one can be 100% correct.”

Frankly, everyone is willing to give him space to make mistakes. After all, government inefficiency is an old American problem, and having someone willing to kick the iron plate for reform deserves recognition. But the problem is if reform lacks rigor, it will eventually deteriorate. DOGE’s essence is a credibility experiment in transparency and efficiency. Unfortunately, it currently looks more like a numbers performance.

Now that Musk is preparing to step down from DOGE’s leadership role, perhaps this also symbolizes this cost-cutting revolution entering its final stage. From $2 trillion to $150 billion, then to the current figure with only one-quarter verifiable, DOGE’s reduction scope is probably about done. For Musk, this experiment both demonstrated his ambition and exposed limitations. He might really want to make government more like a company, but government isn’t SpaceX – it can’t eliminate waste at rocket speed. DOGE’s endpoint might not be failure but making people rethink: when a genius wants to solve institutional problems with engineering logic, should we trust execution ability or beware oversimplified formulas?

Is America Really Not Great?

This tariff war made everyone realize how dependent they are on the US market. Some ask: if Americans are no longer willing to be the world’s final buyer, who can take over? Trump dares to be so aggressive because America has been buying too much from the world for too long, right? But have these purchases really made America lose out, especially since we know America has long dominated services, global capital, and corporate profit distribution?

So is America a loser or winner? I think the answer is obvious – America has never really lost, it’s just that its internal structure is showing cracks. From economic aggregate, innovation capacity, capital market depth to technological control, America remains the world’s strongest economy. But the problem isn’t national decline – it’s that this strength is distributed too unevenly.

Actually, the phrase “Make America Great Again” reveals deep internal anxiety. In fact, America doesn’t need to be great again because it never lost that status. The problem isn’t that the external world isn’t supportive enough, but that America’s internal economic order has problems. Over the past decades, as manufacturing moved offshore and finance and technology rose, Wall Street and Silicon Valley became new myths, but Rust Belt workers and suburban communities gradually became marginalized.

Looking back at American economic history, from post-WWII to the Cold War’s end was the so-called manufacturing era, while after 1991, America fully embraced technology and finance. This turning point wasn’t just policy change but value choice. America no longer wanted to manage physical industries but let capital flow freely to pursue highest profits.

This path indeed created prosperity – America mastered technological upstream, financial centers, brand value, and patent systems, successfully building a global capital closed loop. But what was the cost? Manufacturing city hollowing, working-class fractures, massive middle-class displacement. Trump’s rise wasn’t because he had brilliant economic plans, but because he spoke to this group’s anger and disappointment.

He proposed tariffs, attacked free trade, emphasized industrial repatriation. Many say he’s anti-globalization, but not exactly. He doesn’t want to return to the past manufacturing era but wants to reshape global value distribution leverage through trade conflicts and negotiation pressure, forcing companies to keep more profits and jobs on US soil without breaking financial and technological core positions.

This is very Trump-style thinking – not institutional reform but using threats and negotiation as leverage. Simple and crude, but also quite effective in some ways. Like now, average 10% tariffs are already in place, many companies are forced to reevaluate supply chains, and various governments are choosing to wait and see or even concede. This situation is what Trump designed from the start – presenting extreme positions initially to create more space for subsequent negotiations.

Of course, this approach has significant side effects. Short-term, America might benefit from capital reflows and policy effects, but medium-to-long term, inflation pressure, global uncertainty, and market volatility could all become backlash. Trump opened that wound but didn’t really address the system’s deep pathology – like capital taxation, fiscal redistribution, education and labor protection systems – he didn’t touch these at all.

Ultimately, I don’t think Trump can fundamentally solve America’s manufacturing hollowing problem, but he did put this issue back on the table. He’s not a solution provider but someone forcing us to reexamine problems.

For those of us observing from the periphery, perhaps what’s more important is recognizing this upheaval’s nature. This isn’t simple trade disputes but a national-level redistribution project where domestic politics spills over externally. Trump made the world understand that America’s problem isn’t globalization but distribution mechanisms under globalization, and his method is just using the most political, most destructive form to force systemic correction.

In summary, I don’t think America really lost – it’s just finally feeling that the system it designed can also hurt itself, and Trump is the one who walked into the pain point and pressed hard. He might not heal, but he showed us the wound. America is already great enough; what’s truly lacking is how to distribute this greatness more fairly and stably.