Credibility
The United States is losing credibility as a nation. That, at least, appears to be the judgment of global financial markets, as 10-and-30-year U.S. Treasury interest rates broke the 5% mark and continue to rise. For most Americans, this number is background noise, an esoteric concept that has little to do with their everyday lives, and is seemingly trivial compared to the almost daily affronteries of the Trump administration. What does 5% mean compared to gas and grocery prices, or losing wars that have no legal remit to begin with, or continued threats to the fabric of democracy, or the endless, blatant, self-dealing? So what? Let Wall Street bond dealers and central bankers worry about that 5%.
Americans should worry about it though. That 5% is tied to all of their daily woes, and portends greater woes to come. It shows up in transaction costs, in retail prices, in the costs of mortgages. In short, it is one more accelerant on the affordability crisis. More than that, it is a quiet-yet-powerful verdict on all the woes that weigh heavily on Americans who exist outside the MAGA bubble.
Financial markets are often a surprisingly accurate measure of the truth of current circumstances and the analysis of people with actual “skin in the game” as to where events are heading. For instance, people can engage in punditry and misinformation about climate science, but at the end of the day, insurance actuaries have the ongoing data and are adjusting coverage and rates accordingly.
Back when America was great — which, if it isn’t obvious, was effectively before Donald Trump and MAGA started vandalizing the metaphorical structure of our country — the United States enjoyed the lowest cost of borrowing in the world. As of this writing, the U.S. borrows money more expensively than Canada, our neighbor with whom Mr. Trump decided — on his very own — to start a trade war with, and who he thinks should be some sort of inferior vassal or otherwise absorbed in the U.S. We borrow more expensively than every other traditional Western ally in NATO. More expensively than the U.K., where economic output has plummeted by 10% since Brexit, where energy prices are the most expensive in the world and small towns are dying and millions are struggling to access medical care. We borrow more expensively than France and Germany. We borrow more expensively than profligate Greece, the economic basket-case of the EU which has, on multiple occasions, required bailouts from EU partners and has been a constant monetary headache in Brussels. We borrow more expensively than China, and more than Japan, where a recent rise to a record high of 3% is setting off alarms in the fairly stagnant and aging Japanese economy. We borrow more expensively than Estonia and Lithuania, two former Soviet-bloc states on the frontline of an increasingly threatening Russia.
This number and its ongoing upward trajectory say quite a bit about who and what the United States is now.
Primarily it is a judgment on our current debt, which has soared to a debt-to-GDP ratio that we have only seen at one other time in history: the Second World War. Then, we mobilized an entire nation and built a military apparatus effectively from scratch, and deployed across the globe to defeat the forces of darkness. On top of that, we were still crawling out of the Depression and the debt incurred — too late — in that financial crisis. It was an unprecedented national endeavor, requiring unprecedented borrowing. That debt was paid down by a combination of fiscal discipline, and by a singular, unique stage of economic development: the urbanization of America. When the U.S. entered the Second World War, we were largely an agrarian nation, but the wartime industries and the emergence of new technologies spurred a wave of urbanization during which half the population moved to more urban centers, out of the fields, resulting in a surge of economic growth that simply cannot be repeated. You can only urbanize and move to the cities once, a lesson China is now discovering after urbanizing in the late 20th century. On top of that, we had a shared sense of responsibility about the need to raise taxes, and reduce spending.
The debt has predictably fallen and risen based on exigencies and need, reaching its nadir under the brutally efficient commitment to cutting the debt under the Clinton administration, and starting to rise again under the foolish Bush tax cuts before rising sharply during the Recession and the Global War on Terror. It has risen the most dramatically under Donald Trump and a Republican government, and that includes the lavish and even reckless spending of the Biden administration during COVID. More than 1/3 of the debt — and growing — has been achieved by Donald Trump, making him, I suppose, the greatest-debt-President ever.
A national debt is not in-and-of itself a bad thing. America has yet to produce an economist or public figure who can articulate the utility as well as Alexander Hamilton, and I would not presume the attempt either. Suffice to say, it is a valuable tool which reflects upon and shores up the credibility of a nation. One expects it to rise when meeting crises or great undertakings, and to be paid down when times are good, and that is precisely how the U.S. debt has been managed historically. The exception has been Donald Trump, who has expanded the debt exponentially when unemployment has been low and GDP strong. Not only has that debt not been used or needed to meet a crisis, it hasn’t produced anything noteworthy for anyone, save for the accounts of the extremely wealthy. The day will come, however, when we will need to have borrowing power and breathing room in the debt-payment budget to face a crisis — war, disease, AI displacement or destabilization of markets, natural disaster, climate change — and what will we do when that day comes?
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Right now, when times are arguably “good”, the interest alone from the debt has become perhaps the single largest line-item in the budget; it is now greater than the annual Defense Department budget. Every dollar more we borrow is even more expensive than the last, and so that annual interest will expand exponentially.
Bond markets are collectively reaching the conclusion that the debt figure might have reached the point where it simply cannot be paid down. More damning, I think the rising interest rate reflects the fact that bond markets are assessing that the United States lacks both the public political will and the institutional competence to pay future debt down.
It cannot be stated clearly enough; we cannot replicate the economic conditions after the Second World War that allowed us to pay down that debt. Scott Bessent and the Trump administration keep invoking a magic plan hinging on 3% growth, which itself is something unlikely to occur, notwithstanding the fact that there are no specifics as to how 3% growth will power us out of debt, or even where it will come from. “AI” is the answer often given, which is ludicrous on the face of it, and an entirely different topic about the potential displacement. There is no plan. The only feasible plan, without the economic boost of generational urbanization, is to raise taxes and cut spending more than we have ever done, and to do it when we are staring down the multiple potential disasters bequeathed to us by Donald Trump.
Markets have taken note of the fact that not only is there no plan, no future candidates for office have a plan. The Republican plan is still the Trump plan, which has been a slow-moving train-wreck to date, and which will only get more spectacularly bad. Cut taxes, spend more on nothing, and even worse, try to turn central banks into an instrument of the president’s political whims, much like Hugo Chavez or any number of banana-republic dictators. Democrats are also proposing more spending and cutting taxes, except for raising them on the very wealthy, a notion that has populist, class-warfare emotional appeal but mathematically will not solve the problem. At present, there is no potential successor legislative body or Executive branch that has indicated the capacity or will to address the debt.
Markets have noted the naked corruption and self-dealing of the Trump administration. He is, empirically, the most corrupt President in U.S. history. Additionally, he would be the most corrupt President in Russian history, or in Nigerian history. No matter how many vitriolic tribal arguments take place on social media regarding either the demonstrable corruption or the “fake news”, markets assign a certain level of risk to countries with corrupt, self-dealing demagogues in charge.
Finally, markets have taken the measure of the American people. Americans are lost in a miasma of misinformation, are academically illiterate and incapable of discerning truths beyond tribal belief, and have no comprehension of recent or semi-recent history. They returned an insurrectionist demagogue who campaigned on promises of chaos and damage to America’s power to the White House. They didn’t understand that’s what he promised, but for the functionally literate, he said it all out loud. They will elect other candidates with promises of short-term solutions and ahistorical emotional appeal; observe the sudden rise of the DSA within the Democratic party. When those future officials and the American public smash into this ever-worsening crisis, the public will lurch to the next short-term promise. A similar phenomenon has played out in the UK, where they turned over seven Prime Ministers in the past decade, and will continue to turn them over as each successive one has no answer for the self-inflicted wound of Brexit.
Any candidate for any office in America who were to campaign on what actually needs to be done may as well stay home.
What made the U.S. the world’s favored borrower in the past wasn’t simply our money. It was our character. By the mid-20th century, we were the most stable and enduring democracy in the world. Even at their worst, our government administrations were overall competent, and aided by a professional class that maintained continuity and standards with each transfer of power. (The so-called “deep state” so despised by expertise-hating MAGA voters). Markets and the world knew that Americans wouldn’t tolerate brazen corruption. The world knew that, even for all the frictions and flaws, the American public possessed a kind of collective responsibility by which we held each other and our government accountable. Though we had sometimes erred, we were, on the whole, judicious and responsible in wielding the most powerful military in U.S. history. We could be trusted, which at the end of the day is what credit is.
The 5% and rising treasury rate isn’t simply a verdict on our metastasizing debt. It is a verdict on our character. We are losing credibility — or have lost it — not because we are out of money, but because we have shown a deficiency of character. Hopefully we can correct that, because bad times are coming, and they will require people of character to face them.
