Over the last week, it feels like every conversation, media piece or industry debate has been converted into a Trump Trumpet.
The whole world appears to be debating the merits and shortfalls and potential fallout of the new administration’s targeted tarriff program.
The debate ranges from the serious to the delusional but the consensus so far is that Trump’s new tariff regime is about to change the entire trade structure globally, however opinions as to why Trump is pursuing this course of action have a vast array of opinios.
Are the tariffs about USA protectionism, job creation, election tactics, or a geopolitical trade strategy?
There is another alternative that is perhaps being overlooked and most may not be looking under the hood at the reality faced by the US economic situation.
Economic Status of the US
The US currently carries a total debt burden of $36,22 trillion – a scary number that equates to 35,44% of the total global debt (as of Dec 2024). By the end of 2026, the US will need to roll over $9 trillion in maturing Treasury bonds, of which a large proportion were issued while interest rates were almost zero during the covid era.
The national debt to GDP ratio in the US is one of the highest globally, sitting at 122% up 20% from where it was a decade ago and required $892 billion in debt servicing payments in the 2024 fiscal year alone.
On its current trajectory, this massive debt burden are forecast to reach $1.7 trillion by 2034 with total net interest due amounting to $12.9 trillion over the next decade.
The current 10-year US treasury bond yeild sits at around 4.2% and has been as high as 4.6% recently. Once existing bonds are paid out there is no option at this point but for the US to seek further financing via treasury bonds and that is where things start to take a different perspective.
A better outcome for the country would achieved for the US if they were to be able to restructure its finance at a lower yeild.
So What’s the Strategy Here?
Many of the Trump administration crittics have pointed out that the likely outcome of the tariff implementation is going to be a cooling of the US economy, due to higher cost of production initially and a slowing down of consumer spending due to uncertainty and unwillingness of consumers to absorb more debt.
The nett result would be a diminishing yield curve on the treasury bonds with a massive ultimate saving of billions. Every base point reduction on the treasury yield will save the administration billions over the mid-term and effectively would see the US restructure its debt at a lower rate and create a more manageable debt to GDP ratio.
The key would be how could the US effectively slow down its economy without creating permanent damage?
Tariffs a Trade Play or a Debt Restructure Play?
The Tariffs could well be part of such a position and are such that they can easily be adjusted and revised as the US sees the need in particular cases or industries. It is certainly a move of force and the US administration may well be looking at achieving more than just a soft landing with its national debt such as realigning job outsourcing and creating energy independence and dissolving global support in places where it no longer sees alignment of purpose.
The big Trump tariff move, may well encompass multiple factors, but if this is a strategy to essentially create a recessionary curve to bring bond yeilds down it could pan out well for the US economy in the medium term while creating some short-term pain.
While initially the tariffs are expected to be inflationary, it is likely to trigger a recession and a weaker economy would tend to drive lower inflation expectations, with decreased demand for capital, and thereby creates lower yields. So perhaps the true picture being created here is not as simple as some would have you believe and that there is a bigger move being played out with a view to the national finances being restructured at lower cost and triggering medium term growth prospects.
ARTICLE UPDATE:
The yield on the US 10-year Treasury note fell to almost 3.9% on Monday (7 April), and is hovering at a six-month low with the escalating trade war seeing China impose retaliatory tariffs on the US. this has created fresh recession concerns, driving investors toward the safety of government bonds.
This strengthens the theory that this is possibly a much bigger play taking place in the markets and is likely to be less about protectionism and more about saving the US from a crippling debt structure.
