U.S. President Donald Trump once again steps into the spotlight this week. His latest proposal to refinance about $9 trillion (USD) of the national debt could prevent a possible debt crash that some economists predict could happen as early as 2025.
The Proposal: Refinancing the Debt
The U.S. national debt is expected to top $34 trillion in 2024 and rising, according to the Treasury Department.
About a third of that debt is in short-term bonds, which have seen their interest rates rise significantly as a result of the Federal Reserve’s aggressive monetary policy.
Trump is proposing to use a refinancing mechanism to replace high cost, short-term obligations with long-term obligations, at a fixed interest rate, locking in the long-term cost of servicing.
"We have a unique opportunity to take advantage of current market conditions before the economy collapses under the weight of debt. We can enter into long-term agreements, lock in interest rates, and protect American taxpayers," Trump said at a recent rally in Pennsylvania.
Skepticism and Doubts
However, experts think differently owing to the feasibility and appropriateness of such a move.
Critics point out that the U.S. Treasury bond market does not work like a regular mortgage market, where people can simply "refinance."
Reissuing debt requires demand from investors, and in an environment of high inflation and budget deficits, this may be difficult. Such steps may signal to the market that the government is concerned about its ability to service the debt, which, in turn, may cause yields to rise and further pressure on the budget.
Causes of the Debt Crisis
Refinancing fails to solve structural problems such as chronic budget deficits, growing social obligations and a weak tax base.
“We are talking about a cosmetic solution. Even if we fix rates for 20 years, the debt will still remain, and we will continue to increase it every year unless we change the system,” said economist Joseph Brennan from the Brookings Institution, a Washington think tank.
Nevertheless, Trump’s proposal is gaining traction amongst the Republican electorate.
Political Calculace and Optics
With the U.S. mid-terms approaching, economic sustainability and the fight against the national debt is once again becoming one of the key points of the political agenda.
The proposal to refinance the debt could become part of Trump’s broader program aimed at demonstrating his “fiscal competence” and returning to a “strong America.”
Regardless of the political component, the issue of the national debt is indeed becoming increasingly relevant. Rates continue to rise, spending continues to increase, and confidence in U.S. debt obligations is gradually declining.
Perhaps now, as Trump argues, is the time for bold decisions.
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