Budget hawks have been warning about America’s national debt since the 1980s as it grew larger than anybody ever thought possible. In 2003, when the national debt was a mere $7 trillion, Federal Reserve chair Alan Greenspan warned that deficit spending would lead to permanently higher unemployment and “potentially serious problems” as early as 2010.
It didn’t happen. Presidents from Reagan in the 1980s to Biden in the 2020s bemoaned the mushrooming national debt but did essentially nothing about it — and got away with it. Despite many warnings, unemployment stayed low, global investors gobbled up unprecedented amounts of US debt, and the US economy remained the world’s most dynamic.
With the national debt at $36 trillion, the bill is finally coming due, making President Trump the unlucky inheritor of a debt bomb constructed and fused by his profligate predecessors. That means Trump could be the one who has to deal with the economic problems Greenspan described, plus maybe a couple of others the maestro didn’t foresee.
The Moody’s rating agency catalyzed the debt problem on May 16 when it cut the US credit rating by one notch and changed its outlook from “stable” to “negative.” The US has held Moody’s top credit rating since the agency first issued it in 1919.
S&P Global cut the US credit rating all the way back in 2011. Fitch did the same in 2023. The problem isn’t the US economy. Each agency has highlighted political dysfunction as the culprit. “Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s said in a statement on May 16.
The Moody’s downgrade isn’t as shocking as the S&P downgrade was in 2011, since that was the first-ever hit to the US credit rating. Some analysts point out that the US fiscal problem is well understood at this point. “There is no surprise here,” Tom Lee of investing firm Fundstrat wrote on May 19. “Moody’s is citing facts we already know, the sizable US deficit.”
President Trump in Washington. (Reuters/Kent Nishimura) ·Reuters / Reuters
But Trump may not have the freedom of his predecessors to simply ignore the problem. What’s new is that markets are finally beginning to signal that America’s annual deficits are too large and the US is borrowing too much money.
After the S&P rating cut in 2011, a paradoxical thing happened: Investors plowed money into US Treasurys, the very debt instrument the agency had just downgraded. That was a traditional “flight to safety” in which investors, sensing risk, put their money into the safest place they could find, which then, as always, was US Treasurys.
As a result, interest rates fell after the S&P downgrade in 2011. That’s because higher demand for US debt pushes down the price the borrower has to pay — the interest rate. That was actually a boon for US borrowing, because it lowered the cost of interest payments.
The opposite is happening now. The Moody’s downgrade sent US rates higher, which means investors on net are selling US debt, not buying it. That will push US borrowing costs higher, making the fiscal problem even worse. And this isn’t a one-time phenomenon. It’s the continuation of a “sell America” trade that has emerged during the last few months, in which global investors sell US stocks and bonds at the same time. Traditionally, they’ve moved money from one asset class to the other as risks rose and fell, keeping their money in US markets. Now, money is flowing out.
This comes as Republicans who control Congress are preparing a large tax-cut bill that will add trillions more to the national debt, worsening the very problem Moody’s has highlighted. “There’s something very different about this downgrade,” Harvard economics professor Jason Furman told Yahoo Finance on May 19 (video above). “What Moody’s is concerned about is what those unified Republicans will do. Right now they are set on increasing the debt.”
The US fiscal situation is far from hopeless. Federal debt held by the public as a percentage of GDP has gradually risen from 40% in 1990 to about 100% today. Forecasters expect that to keep growing, mainly because of unchecked growth in mandatory spending programs such as Social Security and Medicare. The Congressional Budget Office forecasts that debt held by the public will reach 119% by 2035, with no slowdown in sight.
The US doesn’t have to completely pay off its $36 trillion national debt. Budget experts generally say the federal debt would be manageable if Congress could stabilize it at around 100% of GDP, then slowly reduce it over time. There are many blueprints for how to do that. Budget analyst Jessica Riedl of the Manhattan Institute has published one plan, as an example, that would trim retirement benefits for wealthier Americans, raise some taxes, and impose some caps on spending. Any credible plan to stabilize the debt must include a combination of Social Security and Medicare reforms, plus tax hikes. But changes could be phased in to lessen any shocks. Markets might even reward a credible debt-stabilization plan by pushing interest rates down, benefiting all borrowers.
Alas, there’s no sign that Trump or his Republican allies in Congress are getting the message. The GOP tax-cut bill legislators are drafting would add somewhere between $3 trillion and $9 trillion to the national debt over a decade. Some Republicans want to cut Medicaid, the health program for the poor, but that’s small potatoes. The spiraling cost of Social Security and Medicare is the No. 1 budget problem, and there’s no Republican plan to address that.
For years, investors wondered exactly how a US federal debt crisis would unfold. We’re now watching it happen. Instead of some sudden shock, it’s a slower process in which investors fall out of love with US assets and start to look for alternatives. The clearest market indicator is the interest rate on the 10-year Treasury note. It has been rising this year when, under normal market conditions, it should have been falling. If the 10-year rate, now around 4.5%, were to crest 5%, that could be a sign of real trouble.
Where it goes from here is unclear. A failed Treasury auction, with insufficient demand for all the debt on offer, could trigger a more sudden shock. But the Treasury still has some ability to manage that. And some investing bigwigs argue that despite its problems, the US still promises some of the world’s best returns.
Trump does not seem like the right guy to dig the US out of its debt hole. His protectionist tariff regime will push growth lower and unemployment and inflation higher. All of that will reduce federal tax revenue and make annual deficits bigger. Trump claims his tariffs will generate new tax revenue that will make up the difference, but multitudes of economists say the Trump tariffs will leave the economy and the government’s finances worse off, not better off.
The DOGE cost-cutting commission is a flim-flam operation that’s not looking where the real money is — Social Security, Medicare, and defense — and instead is making phony “cuts” that Congress isn’t validating in the budgeting process it controls. DOGE lord Elon Musk may have recognized the futility of his mission as he chose to dial back his DOGE activities and return to running Tesla.
That leaves Trump positioned to blame prior presidents (including himself) for a suffocating debt, with some legitimacy. Yet he still has no ready solution to address it. Trump won’t be the first to complain about the problem, but he may be the first who has to account for it.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
