Quick Bite – The Real Risk isn’t the Trade Deficit, It’s the Budget Deficit

President Trump loves tariffs, because he views trade deficits with the US as a foreign country winning, and America losing. We think that makes little sense. What Trump really should be worrying about is the US Budget Deficit – the government spending far in excess of what it collects in taxes, creating a vicious cycle of rising debt levels which show no sign of easing.

Last Friday, Moody’s downgraded the US credit rating from its highest AAA grade to Aa1, citing “large annual fiscal deficits and growing interest costs.” The move follows earlier cuts from S&P in 2011 and Fitch in 2023, driven by rising debt concerns and political gridlock.

Now, for the first time since 1917, the US no longer holds top-tier ratings from any of the major agencies — trailing the 11 countries that still boast the highest grading from all three, including Australia, Denmark, Germany, and Canada.

America spent more than $880 billion just on interest on its debt last year.

Source: Chartr

With the clock ticking on America’s $36 trillion debt ceiling (which could be breached as soon as August), the national debt continues to climb, as it has for decades. According to the Congressional Budget Office, the US public debt stood at 98% of GDP last year, and is set to surpass the WWII peak by 2029, hitting 119% by 2035.

Source: Chartr

Of particular concern is not just the current level of federal debt, but how quickly it’s growing. Last year, the deficit was $1.8 trillion, more than 6% of GDP. The interest payments on debt alone were some $882 billion, greater than the defense and Medicare budgets.

The latest tax cuts and spending push could add another ~$4 trillion to the federal deficit over the next decade, with Moody’s now projecting that the debt-to-GDP ratio could surge to 134% by 2035.

Treasury Secretary Scott Bessent shrugged off the downgrade, calling Moody’s a “lagging indicator.” But the markets took note, with the 30-year Treasury yield topping 5%, a level last seen in late 2023.

Source: Wall Street Journal

Fiscal concerns threaten to revive the “Sell America” trade that emerged last month, when investors worried that isolationist trade policies could lead to a global capital war that would result in foreign investors dumping US assets, including Treasuries.

That said, investors have had concerns about the US’s fiscal position for years without causing extended disruptions to stocks, preferring instead to focus on more short term issues like changes in trade policy. But as some wit famously said, “If something cannot go on forever, it will stop.” When that happens, and when the price has to be paid, is anyone’s guess.