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Tag: National debt

  • Elon Musk warns the U.S. is ‘1,000% going to go bankrupt’ unless AI and robotics save the economy from crushing debt | Fortune

    Tesla CEO Elon Musk doubled down on his warnings about U.S. debt, predicting financial doom will be guaranteed without the transformative effects of AI and robotics on the economy.

    In a lengthy, wide-ranging interview with podcaster Dwarkesh Patel alongside Stripe cofounder and president John Collison on Thursday, the tech billionaire was asked why he pushed for aggressive spending cuts while leading the Department of Government Efficiency if technology will supercharge GDP growth and ease the debt burden.

    Musk replied that he was concerned about waste and fraud. That’s despite reports that many across-the-board staffing cuts included critical employees who had to be hired back.

    “In the absence of AI and robotics, we’re actually totally screwed because the national debt is piling up like crazy,” he added.

    Interest payments alone on the $38.5 trillion debt pile are about $1 trillion a year, exceeding the U.S. military budget, Musk pointed out.

    Debt-servicing costs also top spending on social programs like Medicare. But President Donald Trump has vowed to boost annual defense outlays to $1.5 trillion, so the defense budget could overtake interest payments again, at least temporarily.

    Reflecting on his work with DOGE, Musk said he had hoped to slow down the unsustainable financial trajectory the U.S. is on, buying more time for AI and robotics to boost growth.

    “It’s the only thing that could solve the national debt. We are 1,000% going to go bankrupt as a country, and fail as a country, without AI and robots,” he predicted. “Nothing else will solve the national debt. We just need enough time to build the AI and robots to not go bankrupt before then.”

    In late November, Musk made similar comments, saying on Nikhil Kamath’s podcast that the deployment of AI and robotics “at very large scale” is the only solution to the U.S. debt crisis.

    But he cautioned that the increased output in goods and services as a result of the technologies would likely lead to significant deflation.

    “That seems likely because you simply won’t be able to increase the money supply as fast as you increase the output of goods and services,” Musk added.

    Deflation would actually worsen the debt burden in real terms, while inflation would ease it initially, though a resulting spike in bond yields would eventually send debt-interest payments soaring.

    To be sure, the U.S. has some built-in advantages given that the dollar remains the world’s reserve currency, allowing the Treasury Department to borrow at lower interest rates than would be possible otherwise.

    The ability of the U.S. to issue debt in its own currency and the Federal Reserve’s bond-buying capacity also lessen the risk of an outright default.

    Still, the Committee for a Responsible Federal Budget warned last month that the U.S. is on a trajectory that could trigger six distinct types of fiscal crises.

    While it’s “impossible” to know when disaster will strike, “some form of crisis is almost inevitable” without a course correction, the CRFB said in a report.

    Jason Ma

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  • After U.S. debt soared to $38 trillion, the ‘easy times’ are now over as hedge funds jump into the bond market, former Treasury official warns | Fortune

    The holders of U.S. debt have shifted drastically over the past decade, tilting more toward profit-driven private investors and away from foreign governments that are less sensitive to prices.

    That threatens to turn the U.S. financial system more fragile in times of market stress, according to Geng Ngarmboonanant, a managing director at JPMorgan and former deputy chief of staff to Treasury Secretary Janet Yellen.

    Foreign governments accounted for more than 40% of Treasury holdings in the early 2010s, up from just over 10% in the mid-1990s, he wrote in a New York Times op-ed on Friday. This reliable bloc of investors allowed the U.S. to borrow vast sums at artificially low rates.

    “Those easy times are over,” he warned. “Foreign governments now make up less than 15% of the overall Treasury market.”

    While they didn’t dump Treasuries and still hold roughly the same amount as 15 years ago, foreign governments didn’t ratchet up their buying in line with the recent surge in U.S. debt, which now tops $38 trillion.

    Private investors have stepped in to absorb the massive supply of Treasury bonds, but they are also more likely to demand higher returns, making rates more volatile, Ngarmboonanant pointed out.

    The influence of hedge funds, which doubled their presence in the Treasury market in the last four years, raises particular concern among U.S. officials, he added. In fact, the biggest share of U.S. debt that’s held outside the country is now in the Cayman Islands, where many hedge funds are officially based.

    Ngarmboonanant attributed “unusual turbulence” during recent shocks in the Treasury market, which has historically been a safe haven during crises, to hedge fund activity. That includes the sudden selloff in the immediate aftermath of President Donald Trump’s shocking “Liberation Day” tariffs.

    Relying on AI-fueled productivity gains, stablecoins, Fed rate cuts or inflation to sustain U.S. debt will eventually backfire, he said.

    “Financial engineering and false hopes won’t keep America’s lenders happy,” Ngarmboonanant predicted. “Only a credible plan to restrain deficits and control our debt will ultimately do that.”

    The ability of bond investors to force lawmakers to change course has earned them the “bond vigilantes” moniker, which was coined by Wall Street veteran Ed Yardeni in the 1980s.

    Indeed, upheaval in the bond market after Trump unveiled his global tariffs in April helped convince him to retreat from his most aggressive rates. That prompted economist Nouriel Roubini to say, “the most powerful people in the world are the bond vigilantes.”

    But analysts at Piper Sandler recently dismissed the power that bond vigilantes actually have over politicians. 

    In an August note, they pointed out that the bond market didn’t prevent federal deficits from exploding and haven’t steered Trump away from continuing to press his overall tariff agenda.

    Still, the U.S. debt outlook has become so dire that even longtime Republican Mitt Romney, a former senator and presidential candidate, has called for increasing taxes on the rich as the Social Security Trust Fund races toward insolvency in 2034.

    “Today, all of us, including our grandmas, truly are headed for a cliff,” he warned in a recent New York Times op-ed. “Typically, Democrats insist on higher taxes, and Republicans insist on lower spending. But given the magnitude of our national debt as well as the proximity of the cliff, both are necessary.”​

    Jason Ma

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  • ‘Bond King’ Jeffrey Gundlach warns of the next financial crisis: ‘It has the same trappings as subprime mortgage repackaging in 2006’ | Fortune

    Jeffrey Gundlach, the billionaire founder and CEO of DoubleLine Capital, warned on Monday of an area he’s concerned about, and it’s not a bubble related to artificial intelligence. “The next big crisis in the financial markets, it’s going to be private credit,” the so-called “Bond King” said on Bloomberg’s Odd Lots podcast. Gundlach said the sector “has the same trappings as subprime mortgage repackaging had back in 2006,” arguing the issues underpinning private credit are severe.

    Gundlach explained that, in recent years, the “garbage lending” that plagued public markets before the Great Recession has shifted into private markets. Private credit has become increasingly popular and is now over-allocated to by large asset pools. The core problem, according to Gundlach, lies in the fundamental lack of transparency and liquidity.

    A major element of the private credit appeal is the Sharpe ratio argument, which suggests investors get comparable returns to public markets but with much lower volatility. However, Gundlach contends this is an illusion achieved by failing to market assets to market, similar to how a five-year CD appears stable even if its true value declines as interest rates rise. He provided an anecdote about private equity firms marking positions down slightly when the S&P 500 corrects, only to mark them back up when the market recovers, thereby underreporting volatility.

    Gundlach illustrated the fragility of this pricing system by noting that private assets essentially have only two prices: 100 or zero. He cited a recent event concerning a home renovation business, Renovo, which went into Chapter 7 bankruptcy after issuing $150 million in private credit. The company listed liabilities between $100 million and $500 million, while listing assets as less than $50,000. Gundlach questioned how private firms could have marked this asset at 100 only weeks prior when the massive disparity between liabilities and assets was evident.

    Given these vulnerabilities, Gundlach recommended investors allocate less to financial assets than typical, suggesting a maximum of 40% in equities (largely non-U.S.) and 25% in fixed income (favoring short-term Treasuries and non-dollar fixed income). He advocated for the remainder to be held in cash and real assets like gold. Gundlach reminded investors that market trends, even when correctly identified, take time to unfold, citing his own experience where being negative on packaged mortgages in 2004 took three years to start decaying.

    One of America’s top institutional landlords, The Amherst Group CEO Sean Dobson, defended the subprime mortgage at the ResiDay conference in New York City earlier in November. “Subprime mortgages were serving millions of Americans to get them to buy homes,” he said. These weren’t junk mortgages, but were designed for people with below-average credit scores, he said, reminding the crowd that just “two missed payments” could send a credit score from 745 to the subprime 645. “You can go from prime to subprime in two months.”

    The AI ‘mania’

    Other top economists are issuing similar warnings. Mohamed El-Erian, for instance, told the Yahoo Finance Invest conference that he fears the AI bubble will “end in tears” for many, while agreeing that private credit was a concern. He used Jamie Dimon’s metaphor of “credit cockroaches,” while arguing that the problems aren’t “termites”—in other words, not eating away at the foundations of the economy.

    Bank of America Research estimated private credit as a $22 trillion industry through late 2024, so big it would be the world’s second-largest economy. It has more than doubled in size since 2012, BofA added, as the number of companies listed on public markets has halved. The S&P 500 is extraordinarily concentrated, with Scott Galloway repeatedly warning in recent weeks that there’s “nowhere to hide” if the AI story turns negative. A whopping 40% of the S&P’s market cap lies in just 10 companies, and those companies are overwhelmingly invested in AI, Galloway and NYU Stern Finance professor Aswath Damodaran recently discussed. Unsettlingly, Gundlach seemed to be arguing that private capital is a giant iceberg sitting underneath what could be a melting icecap of equity markets.

    To be sure, Gundlach is plenty concerned about AI, noting that it’s similar to one of the biggest ever breakthroughs in technology roughly 100 years ago: electricity.

    “Electricity being put into people’s homes was probably one of the biggest changes of all time,” he said, with the result that “electricity stocks ere in a huge mania” around 1900, and they performed very well. Unfortunately, this peaked in 1911.

    “People love to look at the benefits of these transformative technologies,” but those benefits get priced in very early, during what Gundlach called “mania periods,” adding, “I just don’t think there’s any argument against the fact that we’re in a mania.” But Gundlach also argued that some impossible things are happening on the national debt.

    When the impossible is about to happen

    The massive U.S. national debt and soaring interest expenses are creating a mathematical impossibility that requires radical government intervention potentially within the next five years, Gunldach told Odd Lots hosts Joe Weisenthal and Tracy Alloway. He recalled the beginning of big deficits in the Reagan years, when the national debt was considered a distant threat, but it used to be a 60-year problem, then a 40-year and a 20-year, but now it’s a five-year problem, which means it’s a “problem in real time.”

    Gundlach said his conviction is based on the accelerating trajectory of U.S. government debt and interest costs. The official deficit stands at approximately 6% of GDP, a level historically associated with the depths of recessions. Currently, interest expense consumes about 30% of the $5 trillion in federal tax receipts. This figure is poised to climb higher as outstanding bonds, which have an average coupon of around 3% for the next few years, roll off and are replaced by new debt issued at higher rates (Treasuries are currently yielding up to 4.5%).

    Drawing on plausible assumptions regarding deficit growth, Gundlach outlined a stark prognosis for the end of the decade. Under the current tax and borrowing regime, he said, it is “quite plausible” that by 2030, 60% of all tax receipts will be allocated to interest expense. Pushing the projections further under a pessimistic scenario (Treasury rates hitting 9% and the deficit reaching 12% of GDP), the situation becomes mathematically impossible: “by around 2030, you would have 120% of tax receipts going to interest expense, which of course is impossible.”

    Gundlach argues something will have to give: “What happens is that you have to blow up the entire system, because all the tax receipts would go to interest expense.” This inevitability means the traditional rule system must be abandoned. When something is impossible like this, Gundlach added, “you have to open up your mind to a radical change in the rule system.”

    Nick Lichtenberg

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  • America’s path out of $38 trillion national debt crisis likely involves pushing up inflation and ‘eroding Fed independence,’ says JPMorgan Private Bank | Fortune

    While optimistic economists argue that America can grow its way out of a debt crisis, pessimists believe the real outcome will be somewhat less popular.

    Business leaders, policymakers, and investors are growing increasingly concerned by the United States’s borrowing burden, currently sitting at $38.15 trillion. The worry isn’t necessarily the size of this debt, but rather America’s debt-to-GDP ratio—and hence, its ability to convince investors that it can reliably pay back that debt. It currently stands at about 120%.

    To reduce that ratio requires either GDP to increase or scaling down the debt. On the latter end, this could include cutting public spending. This was already tried by the Trump administration, with the Department of Government Efficiency (DOGE) under Elon Musk claiming to have saved $214 billion.

    While those savings were drastically lower than promises made by the Tesla CEO when DOGE was first formed, and they’re a drop in the ocean of the bigger U.S. deficit picture, it does reveal the renewed focus Washington is giving to debt.

    This will be a prevailing theme for investors as well, according to JPMorgan Private Bank’s outlook for 2026. (The ban serves high net worth individuals.) The report, released today, says there are three issues investors need to bear in mind: Position for the AI revolution, get comfortable with fragmentation over globalization, and prepare for a structural shift in inflation.

    It is this final part, a shift in inflation, which is where the debt question comes in.

    JPMorgan writes: “Some market participants warn of a coming U.S. debt crisis. In the most extreme scenario, the Treasury holds an auction and buyers are nowhere to be found. We see a more subtle risk. In this scenario, instead of a sudden spike in yields, policymakers make a deliberate shift. They tolerate stronger growth and higher inflation, allowing real interest rates to fall and the debt burden to shrink over time.”

    A key snag in the plan is the toleration of higher inflation: After all, this is the remit of the Federal Reserve’s Open Market Committee (FOMC), which is tasked with keeping inflation as close to 2% as possible. While the FOMC could be swayed to take a broader view than its dual mandate of stable prices and maximum employment if a national debt crisis impacted these factors, it may need more than arguments from politicians.

    The method of allowing the debt burden to shrink thanks to lower rates is called financial repression, and could have knock-on effects on other parts of the economy over time. For example, Fortune reported over the weekend that America’s housing crisis happened, in part, due to a period of sustained low rates after the financial crisis.

    To orchestrate this repression could take some maneuvering, JPMorgan says: “We could see a less straightforward path to reduce the U.S. government’s debt load. Policymakers could erode Fed independence and effectively inflate the debt away by driving a stronger nominal growth environment characterized by higher inflation and, over the near term at least, lower real interest rates.”

    The less popular route

    Economists have previously described the looming debt crisis as a game of “chicken” to Fortune, as one administration passes the issue on to the next without plucking up the courage to address fundamental spending or revenue-raising changes.

    With an ageing American population, any government move to scale back social and healthcare spending would be likely be unpopular enough to prevent it from coming to fruition, the bank says. Likewise, increasing taxes are a sure-fire way to turn off voters.

    The report adds: “U.S. tax collections as a share of GDP are near the low end among OECD nations, suggesting ample capacity—if not the political will—to raise tax revenue to reduce debt. Similarly, mandatory spending on entitlement programs such as Social Security and Medicare could be curtailed to ‘bend the curve,’ as economists refer to efforts to slow the pace of future spending growth. But those options may prove politically unpalatable.”

    That said, the Trump administration has mustered some “peculiar” proposals for increasing revenue, without too much pushback from the public. One option is foreign cash, with the president claiming his “gold card” visa scheme could generate up to $50 trillion by selling cards to would-be American citizens at a price tag of $5 million apiece. However, America is already home to the majority of the world’s millionaires and the U.S. may struggle to find individuals who could afford such a card.

    Then, of course, there are tariffs, which raked in a record $31 billion in August. Debate is rife about whether U.S. consumers will end up ultimately paying for the policy, or whether the cost will be “eaten” by foreign firms. With a lack of data during the government shutdown, there’s no way to see whether that inflationary pressure is being passed through yet.

    The good news is, “at the moment, investors seem comfortable financing the U.S. government’s debt,” the outlook report added. At the time of writing, U.S. 30-year treasury yields sit at 4.7%, similar to where they began 2025, suggesting buyers of American borrowing are not yet demanding higher premiums to be enticed.

    JPMorgan adds: “U.S. Treasury bond buyers have been lining up, their demand on average 2.6x greater than supply. But the growing debt-to-GDP ratio of nearly 120% of GDP is troubling to most investors and economists. Solving the problem will be tricky.”

    Eleanor Pringle

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  • U.S. debt tops $38 trillion for the first time, worsened by government shutdown

    The U.S. gross national debt has surpassed $38 trillion for the first time, U.S. Treasury Department data shows.

    The country’s mounting debt comes as the government remains closed, disrupting the economy as hundreds of thousands of federal workers go unpaid. 

    Government shutdowns can boost the national debt because they delay economic activity and postpone fiscal decisions, while pausing federal programs and starting them up again can also increase costs. The Office of Management and Budget estimated that a 2013 U.S. government shutdown cost $2 billion in lost worker productivity. 

    “Reaching $38 trillion in debt during a government shutdown is the latest troubling sign that lawmakers are not meeting their basic fiscal duties,” Michael A. Peterson, CEO of the Peter G. Peterson Foundation, a nonpartisan nonprofit focused on fiscal policy, said in a statement. 

    “If it seems like we are adding debt faster than ever, that’s because we are. We passed $37 trillion just two months ago, and the pace we’re on is twice as fast as the rate of growth since 2000,” he added.

    The longest shutdown in U.S. history, the 35-day stalemate in 2018, cost the economy $11 billion, largely to a reduction in spending by federal workers, according to the Congressional Budget Office. 

    In September, 81% of voters surveyed by the Peterson Foundation highlighted the national debt an issue of concern. According to economists, the growing mountain of debt leads to higher interest costs for the U.S. government. 

    Interest payments on the nation’s debt are forecast to rise from $4 trillion over the past decade to $14 trillion over the next 10 years, curtailing public and private spending in key economic sectors, the Peterson Foundation said. 

    Rising U.S. debt could also undermine investor confidence in the economy, David Kelly, chief global strategist with J.P. Morgan Asset Management, said in a report earlier this month. 

    Credit rating agency Moody’s downgraded the U.S. credit rating in May from its top rating of Aaa to Aa1, reflecting investor concerns about the government’s growing debt. The two other major credit rating agencies, Standard & Poor’s and Fitch Ratings, have also lowered the U.S. rating. 

    Maya MacGuineas, president of the Committee for a Responsible Federal Budget and a prominent voice on the nation’s fiscal policies, also expressed concern at the national debt topping $38 trillion.

    “The reality is that we’re becoming distressingly numb to our own dysfunction. We fail to pass budgets, we blow past deadlines, we ignore fiscal safeguards and we haggle over fractions of a budget while leaving the largest drivers untouched,” she said in a statement. “Social Security and Medicare, for example, are just seven years from having their trust funds depleted — and you don’t hear anything from our political leaders on how to avoid such a disaster.”

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  • As national debt accelerates to $38 trillion, watchdog warns it’s ‘no way for a great nation like America to run its finances’ | Fortune

    The U.S. national debt has surged past $38 trillion, according to the U.S. Treasury Department, just two months after surpassing previous forecasts to reach $37 trillion in August. This means the federal debt rose by $1 trillion in a little over two months, which the Peter G. Peterson Foundation calculates is the fastest rate of growth outside the pandemic.

    Michael A. Peterson, CEO of the nonpartisan watchdog dedicated to fiscal sustainability, said this landmark is “the latest troubling sign that lawmakers are not meeting their basic fiscal duties.” In a statement provided to Fortune, Peterson said that “if it seems like we are adding debt faster than ever, that’s because we are. We passed $37 trillion just two months ago, and the pace we’re on is twice as fast as the rate of growth since 2000.” The foundation’s analysis attributes the acceleration to a combination of deficit spending, rising interest costs, and the economic drag of the ongoing government shutdown.

    Peterson emphasized that the costs of carrying this debt are mounting rapidly. Interest payments on the national debt now total roughly $1 trillion per year, the fastest-growing category in the federal budget. Over the last decade, the government spent $4 trillion on interest, and Peterson calculated that it will balloon to $14 trillion over the next 10 years. He said that money “crowds out important public and private investments in our future.”

    Shutdown exacerbates fiscal burden

    The partial government shutdown, now entering its third week, is compounding those challenges. Shutdowns have historically been costly, adding $4 billion to federal expenses during the 2018–2019 closure and $2 billion in 2013, according to federal estimates. Each day of stalled government operations contributes to higher short-term costs, delayed economic activity, and postponed budgetary reforms—effectively worsening the debt problem they often stem from.

    Delays in fiscal decision-making also magnify long-term costs, as Treasury reports have repeatedly warned. For instance, the Treasury’s Bureau of Fiscal Service Financial Report for fiscal year 2024 included a description of an “unsustainable fiscal path” and an indication that “current policy is not sustainable.” Deficit reduction has lagged significantly behind the pace seen after previous economic crises, including the Great Recession, when Congress implemented stricter spending caps and fiscal reforms within a few years of recovery.

    Debt ripples

    Paying off just the interest on this debt threatens to ripple through the economy. A recent Yale Budget Lab report highlighted how ballooning federal debt exerts upward pressure on both inflation and interest rates, potentially constraining growth and lifting borrowing costs for households and businesses alike. Meanwhile, an analysis conducted by EY this year found that the national debt’s rising trajectory could lead to sustained job and income losses over time.

    A complicating factor, somewhat, is the “significant” revenue being generated by President Donald Trump’s tariff regime, several analysts have noted. Apollo Global Management Chief Economist Torsten Slok said the $350 billion being generated each year was “very significant” in September. The Congressional Budget Office (CBO) found that the tariffs, as constructed in August, before an appeals court ruled many of them to be illegal, could cut deficits by $4 billion over the next decade. The ratings agency S&P Global reaffirmed the U.S. credit rating shortly before the appeals court ruled, saying that “broad revenue buoyancy, including robust tariff income, will offset any fiscal slippage from tax cuts and spending increases.”

    Still, the U.S. credit rating is no longer top-rated at any of the three major ratings agencies, which have cited both unsustainable fiscal trends and recurring political gridlock. These downgrades have had immediate consequences, placing further upward pressure on borrowing costs and raising questions about the long-term global standing of the U.S. dollar as the world’s reserve currency. Relatedly, gold has been on a historic tear for much of 2025, before slumping to its worst sell-off earlier this week. Gold is still trading above the $4,000-per-ounce mark, a more than 50% increase year-to-date.

    “Adding trillion after trillion to the debt and budgeting-by-crisis is no way for a great nation like America to run its finances,” Peterson said. “Lawmakers should take advantage of the many responsible reforms available that would put our nation on a stronger path for the future.”

    The Treasury Department did not respond to a request for comment.

    Nick Lichtenberg

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  • The White House thinks taking partial ownership of a Canadian mining company will reduce the national debt

    Since being reelected, President Donald Trump has falsely claimed his tariffs will reduce the national debt. Trump is now taking this marketing pitch to sell another one of his economic policies: government ownership in private companies. 

    On Wednesday, the Energy Department announced that the government will be taking a 5 percent stake in Canadian mining firm Lithium Americas and a 5 percent stake in Thacker Pass, the company’s lithium mining project in Nevada. This equity stake builds on a $2.26 billion loan from the Biden administration Energy Department to the company last year to “help finance the construction of facilities for manufacturing lithium carbonate” at Thacker Pass, which has the largest confirmed lithium reserves in North America. The deal, according to Energy Secretary Chris Wright, will ensure “better stewardship of American taxpayer dollars.”

    The White House has taken this messaging further. “This is a creative solution by the president of the United States to tackle our nation’s crippling debt crisis,” White House press secretary Karoline Leavitt said on Wednesday. “The president is focused on how can the United States government make more money, how can we make our country wealthy and rich again? Cutting some of these unique, creative deals with companies around the world and here at home is just one way that the president is seeking to do that.”

    These types of “creative deals” have become a hallmark of the second Trump administration. Since Trump’s return to the White House, the federal government has taken a “golden share” of U.S. Steel, granted export licenses to American chipmakers in exchange for a cut of the revenue generated from their sales, and, more recently, became the largest shareholder of Intel by taking a 10 percent stake in the company (worth about $9 billion at the time of acquisition and $17 billion today). 

    The deals have been justified as a way to protect America’s economic and national security interests, and the Lithium Americas announcement is no different. “It’s in America’s best interest to get that mine built,” Wright told Bloomberg. “Lithium Americas needs to raise some more capital so the mine is financially sound….We’re leaning in with a large amount of debt capital, so it’s just a more commercial transaction.”

    Like the other government stakes before it, the economic justification for this deal is flimsy. At the time of the initial Energy Department loan in 2024, global lithium demand was experiencing unprecedented growth, which has continued and is expected to continue as the use of semiconductors, electric vehicles, and renewable energy sources becomes ubiquitous. With the mine expected to produce 400,000 metric tons of battery-grade lithium carbonate each year and generate over $2 billion in revenue (according to a January estimate), there is no reason why taxpayers need to finance a project that the market seems to think will be profitable. 

    The White House’s argument that this will tackle the “crippling debt crisis” could be even flimsier. Scott Lincicome, vice president of general economics at the Cato Institute, tells Reason that taking a 5 percent stake in a $2 billion project is a “rounding error for our debt problem.” The national debt currently stands at over $30 trillion held by the public. Lincicome points out that “the only way to get money back is by selling the stake, which [the Energy Department] doesn’t plan on doing.” At the end of the day, he adds, this deal has less to do with addressing the national debt and “everything to do with exercising more control over private businesses.”

    The White House has made several questionable claims to justify Trump’s takeover of the economy. Arguing that a government stake in an already federally backed project will shrink the national debt could be its weakest argument yet.

    Jeff Luse

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  • Trump is bringing in enough revenue from tariffs to cut deficits by $4 trillion over the next decade, CBO says

    President Donald Trump’s hike in tariffs is projected to generate enough revenue to cut federal deficits by $4 trillion over the next decade, according to the latest analysis by the Congressional Budget Office (CBO). The nonpartisan agency said it had updated its estimates of tariff revenues as part of the development of the short-term economic forecast covering 2025 to 2028, to be published on September 12.

    The CBO report found that increased tariffs—many targeting imports from China, Mexico, Canada, and the European Union as well as automobiles, steel, and other goods—have raised effective tariff rates by about 18 percentage points compared to last year. If these rates remain, primary deficits would shrink by $3.3 trillion and interest payments would fall by another $700 billion, bringing the total deficit reduction to $4 trillion over 10 years.

    Impact of tariffs on deficit

    Higher tariff revenues mean less need for federal borrowing, resulting in significant savings on national debt interest payments. This marks a substantial revision from the CBO’s June estimates following recent hikes in tariff rates and broader coverage across key imports, when the agency projected a $2.5 trillion decrease in primary deficits and $500 billion reduction in interest outlays in a report that examined the effects of the tariffs implemented between January 6 and May 13, 2025. The CBO said it used the same methods to generate the projections, mainly based on data from the Census Bureau, Customs and Border Protection, and the Treasury.

    The study notes that tariff revenue could partially offset deficits caused by new tax cuts and spending bills, such as the “One Big Beautiful Bill Act,” which is expected to raise deficits by $3.4 trillion, also according to the CBO. However, legal challenges and evolving trade negotiations may impact future tariff-related revenues, the CBO cautioned.

    Wider economic context

    The federal debt currently stands at about $37 trillion, and analysts remain concerned about upward pressures on interest rates and borrowing costs due to rising debt levels. Lawmakers are also facing a government funding deadline at the end of September, which places added scrutiny on deficit management in upcoming fiscal debates.

    Separately, the Committee for a Responsible Federal Budget (CRFB), a nonpartisan budget watchdog that sits outside the government, has calculated that Trump’s tariff regime, if kept permanent, could reduce the deficit by up to $2.8 trillion in the next decade. The CRFB called the revenue being generated by the tariffs both “meaningful” and “significant.”

    It’s an open question whether the tariffs will offset the impact of OBBBA, from a deficit standpoint. The CRFB has gamed out several scenarios—including the bulk of the tariffs being ruled illegal and thrown out by an appeals court—and warned that the nation’s finances have “deteriorated” since January. In June, the CRFB also warned that the tariffs wouldn’t cover the costs of OBBBA, however the CBO’s significant upgrade of deficit reduction calls that calculation into question. Still, there is the question of who “eats” the tariffs, to paraphrase Trump’s famous instructions to Walmart about its margins. As many economists have noted, the tariffs essentially function as a sales tax on American consumers, so the deficit reduction is coming from, more or less, you and me.

    While Trump and supporters frame tariffs as a key tool for deficit reduction without raising taxes on U.S. households, critics caution about broader economic impacts, including higher consumer prices and trade tensions. The CBO indicates its projections assume ongoing tariff regimes, noting that changes in trade policy or international negotiations could alter the fiscal outlook.

    For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing. 

    Nick Lichtenberg

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  • Unbelievable facts

    Unbelievable facts

    In 1835, President Andrew Jackson managed to completely pay off the national debt of the United…

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  • Harris and Trump have competing tax plans. Here’s how your paycheck would change under both.

    Harris and Trump have competing tax plans. Here’s how your paycheck would change under both.

    Presidential candidates commonly trot out new tax proposals as part of their campaign platforms, often pledging to help ease the financial burden on taxpayers. This year, the plans emerging from rivals Kamala Harris and Donald Trump could affect voters’ paychecks in very different ways. 

    Former President Donald Trump would seek to extend the tax cuts enacted through the Tax Cuts and Jobs Act, his signature 2017 legislation that reduced taxes for most Americans, although research has shown the top earners received the biggest benefits. He’s also proposing to eliminate taxes on tips and on Social Security income, while also lowering the corporate tax rate.

    Vice President Harris has proposed introducing more generous tax benefits for families, as well as hiking the corporate tax rate to help offset spending from bigger tax credits. 

    The two proposals reflect different views of how best to support U.S. families and fuel economic growth. On the one hand, Trump’s plan would provide tax cuts for all income groups, but the biggest winners would be higher-income Americans. The greatest benefits under Harris’ plan would go to the lowest-income Americans, while she would up the taxes of the top-earning households. 

    “It’s true that Trump looks like he’s winner for everybody, but he’ll provide much bigger giveaways to the top 1% and top 0.1%, whereas Harris will be negative for these people,” said Kent Smetters, faculty director of the Penn Wharton Budget Model, a group within the University of Pennsylvania’s Wharton School that analyzes the budgetary impact of government policies. 

    Ultimately, both plans would come with significant price tags, although the combination of Trump’s tax cuts for corporations and individuals would prove more expensive, Penn Wharton forecast. It estimates that his proposal would add $5.8 trillion to the federal deficit over the next decade, compared with $2 trillion for Harris’ plan. 

    In an email, Republican National Committee spokesperson Anna Kelly said that Trump’s tax policies will “shrink deficits” as well as “lower long-term debt levels” through cuts in federal spending, increasing energy production and deregulation.

    The Harris-Walz campaign, meanwhile, is pointing to the Penn Wharton Budget Model’s analysis as evidence that Trump would create a “deficit bomb agenda.” 

    “Donald Trump’s campaign may want to mute Donald Trump on the debate stage, but they can’t mute our strong economy and Trump’s disastrous agenda that will explode the deficit, increase costs on the middle class by nearly $4,000 a year, and send our economy hurtling into a recession by mid-next year,” Harris-Walz spokesman James Singer said in an email.

    “Explosive” deficit?

    Although Harris’ tax proposal would potentially have a smaller impact on the nation’s deficit than Trump, Smetters noted that both parties would ultimately add to the nation’s growing fiscal burden. 

    The federal budget deficit in fiscal year 2024 is projected to hit $1.9 trillion, the Congressional Budget Office forecast in June. That represents a 27% increase from its prior February forecast, due partly to new funding provided to Ukraine, Israel and other countries. 

    Deficits may seem abstract to many taxpayers, but at the simplest level they show the country is spending more than it’s taking in through tax revenue. That, in turn, increases the national debt to finance the deficit. Many economists warn that comes with a cost, such as higher interest payments to service that growing debt. 

    “Essentially we’re on this explosive path right now,” Smetters said. 

    At some point, soaring U.S. debt could sow doubt in capital markets about the federal government’s ability to either raise taxes or cut spending enough to avoid defaulting on that debt, he added.

    “Neither candidate is being serious about addressing the big issue —the house is burning down and the candidates are arguing over the furniture,” Smetters said. “They are just making things worse and harming the economy.”

    Aimee Picchi

    Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.

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  • Trump’s economic proposals could cost trillions, study finds

    Trump’s economic proposals could cost trillions, study finds

    Trump’s economic proposals could cost trillions, study finds – CBS News


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    Former President Donald Trump’s tax and spending proposals could send the national debt soaring, according to a new study by the Penn Wharton Budget Model. Scott Lincicome, the vice president of general economics at Cato’s Herbert A. Stiefel Center for Trade Policy Studies, joins CBS News with more.

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  • Hotshot Wharton professor sees $34 trillion debt triggering 2025 meltdown as mortgage rates spike above 7%: ‘It could derail the next administration’

    Hotshot Wharton professor sees $34 trillion debt triggering 2025 meltdown as mortgage rates spike above 7%: ‘It could derail the next administration’

    Among the illustrious nameplates adorning the offices of Ivy League business schools is one Joao Gomes. A Wharton Business School finance professor, Gomes is issuing a warning cry many of his peers so far have chosen to ignore: America’s burgeoning public debt mountain.

    Professor Gomes is what some might call up-and-coming: He was appointed senior vice dean of research in 2021, adding University of Pennsylvania’s Marshall Blume Prize to his CV in 2018.

    But the fresh-faced expert isn’t afraid to step away from the pack if it means pushing presidential hopefuls for some answers. Gomes admits he’s “probably” more worried than his colleagues about government debt, but refuses to stay silent on a broiling issue he believes will throw the global economy into disarray.

    Gomes predicts America’s $34 trillion debt burden may upset the world’s financial markets as early as next year—should a president-elect announce a raft of expensive policies.

    And remember the UK’s mortgage meltdown following a disastrous premiership under Prime Minister Liz Truss? That’s on the cards as well, as Gomes said rates could spiral to 7% “or higher” if the topic is swept under the rug by Washington.

    The warning isn’t chiming alone. Since the beginning of the year an increasing cacophony of alarm bells has been ringing out: JPMorgan Chase CEO Jamie Dimon says there will be a market “rebellion” over the issue while Bank of America CEO Brian Moynihan says it’s time to stop “admiring” the problem and instead do something about it.

    This fear is echoing outside of Wall Street, too. The Black Swan author Nassim Taleb says the economy is in a “death spiral,” while Fed Chairman Jerome Powell says it’s past time to have an “adult conversation” about fiscal responsibility.

    But despite this, presidential candidates likely won’t be getting on stage with promises of how they’ll wrestle down the debt-to-GDP ratio to a more palatable figure (experts are currently predicting it will reach 190% by 2050.)

    “I wish it was a big issue but I’m not sure it’s in the interest of either party to make it a big issue,” Gomes told Fortune. “As we discuss promises about: ‘What we’re going to do with tax and programs’ it’s going to be important to put it in the context of: ‘Can we afford that?’”

    “It’s a really obvious moment in history for us to say: ‘OK, what are our choices, what can we feasibly do, who has the better plan?’ I suspect neither party is interested in that and it might all be pushed under the rug.”

    Indeed, while one party will have to make some unpopular decisions to tackle the issue, it’s a problem created by both of them. Bank of America Research’s Flow Show team, led by investment strategist Michael Hartnett, calculated in February that the deficits run up under the tenures of Presidents Trump and Biden are the greatest since Franklin D. Roosevelt in the 1930s.

    Trump and Biden both dealt with a crisis-struck economy trying to navigate a global pandemic. FDR, of course, was firefighting the Great Depression and then oversaw the American entry into World War II.

    Gomes believes that irrespective of who contributed to the mess, one party is going to have to shoulder the responsibility for unpicking it: “Toward the latter part of the decade we will have to deal with this.”

    “It could derail the next administration, frankly. If they come up with plans for large tax cuts or another big fiscal stimulus, the markets could rebel, interest rates could just spike right there and we would have a crisis in 2025. It could very well happen. I’m very confident by the end of the decade one way or another, we will be there.” 

    Warning signs

    As with any financial crisis, there will be warning signs when the national debt comes home to roost—though for consumers and markets this realization may not happen in synchrony.

    At a policy level, Gomes believes, this will be when the parties buying debt decide the model is simply no longer sustainable. This could even be triggered by government policies announced early in the next administration, which in turn will spook a market seeing a hefty price tag attached.

    “The most important thing about debt for people to keep in mind is you need somebody to buy it,” Gomes told Fortune. “We used to be able to count on China, Japanese investors, the Fed to [buy the debt]. All those players are slowly going away and are actually now selling.”

    America’s ability to pay its debts is a concern for the nations around the world that own a $7.6 trillion chunk of the funds. 

    The nations most exposed are Japan, which owned $1.1 trillion as of November 2023, China ($782 billion), the U.K. ($716 billion), Luxembourg ($371 billion), and Canada ($321 billion).

    “If at some moment these folks that have so far been happy to buy government debt from major economies decide, ‘You know what, I’m not too sure if this is a good investment anymore. I’m going to ask for a higher interest rate to be persuaded to hold this,’ then we could have a real accident on our hands,” Gomes said.

    In this case, Gomes believes America would see something of a Liz Truss-like implosion. In 2022, the British MP backed a mini-budget featuring a raft of fiscal stimulus, spooking the City to the extent that the pound spiraled to its lowest value ever against the dollar.

    After the shortest premiership in British history, Truss was promptly ousted, but not before leaving a legacy: British mortgage rates increased by approximately 2% in a matter of weeks.

    And following this trend, mortgages—a cornerstone of Western economies—are precisely where consumers will start to feel the heat. When mortgage rates go above 7% is when consumers will start pushing for change, said Gomes, adding that if policymakers don’t take steps now the public will be back to these rates, “if not worse.”

    Avoiding exposure

    The good news is, there are a couple of ways to avoid this crisis. The bad news is, nothing at all needs to happen for government debt to become the economic issue of the next decade—and it’ll be pretty unavoidable once it gets here.

    And if you’re wondering how much debt the government would need to recoup per person, it’s not pretty: current estimates are that it’s over $100,000 for each individual.

    The route to avoiding this problem sounds simple: After all, if the debt-to-GDP ratio is what’s got everyone so concerned, just upping the second variable will rebalance it, right? Yes, but it means growing the economy pretty swiftly, and few are convinced America can do that.

    The second solution is unpopular, but may be the only alternative the government is left with: Cutting spending. “Responsible budget proposals” may suffice to stave off any market upset, Gomes said, while “imposing major cuts on some programs … opens a Pandora’s box of social unrest that I don’t think anybody wants to think about.”

    If markets do indeed rebel across the globe and throw the world’s largest economy into disarray, the ripple effects will be felt across borders. Unfortunately, Gomes believes there will be no avoiding it: “A government that runs into funding difficulties, that cannot convince investors to fund its debt, that government is going to probably have to raise taxes. There’s no way you can protect yourself from that.

    “Any exposure you have, whether it’s mortgages or loans, is really hard to avoid in any dimension. It’s bad across the board for the country but it’s hard to avoid exposure wherever you live in the world.”

    Eleanor Pringle

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  • Michael Pettis explains why debt is not the problem, but the symptoms of China’s economic woes

    Michael Pettis explains why debt is not the problem, but the symptoms of China’s economic woes


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    Michael Pettis of Carnegie China says we are beginning to see the impact of China’s high debt-to-GDP levels and the country will need another source of real growth if the “rapid expansion” of infrastructure comes to an end.

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    Thu, Feb 8 202410:55 PM EST



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  • After Jamie Dimon warns of market ‘rebellion’ against $34 trillion national debt, Jerome Powell says it’s past time for an ‘adult conversation’ about unsustainable fiscal policy

    After Jamie Dimon warns of market ‘rebellion’ against $34 trillion national debt, Jerome Powell says it’s past time for an ‘adult conversation’ about unsustainable fiscal policy

    With the United States’ national debt closing in on $34.2 trillion, some of the biggest figures in the world of finance have been speaking out. But few expected Federal Reserve Chairman Jerome Powell to address the issue—at least until this weekend, when Powell spoke out about the debt on CBS’ 60 Minutes Sunday. “In the long run, the U.S. is on an unsustainable fiscal path,” Powell warned.

    Even as the U.S. economy avoided a widely forecast recession in 2023, record government spending and lower tax receipts led the national debt to surge to an all-time high. And that trend has continued into this year. The U.S.’s government debt to GDP ratio, a measure of total public debt to economic growth, has surged from just over 100% in 2019 to over 120%. That’s down from the COVID-era peak of 133%, but as Powell put it, the government’s debt is still “growing faster than the economy.” 

    This means it’s now “past time, to get back to an adult conversation among elected officials about getting the federal government back on a sustainable fiscal path,” Powell argued Sunday.

    ‘Borrowing from future generations’

    It’s rare to see a Fed official discuss politics. The U.S. central bank is supposed to be a non-partisan, independent institution, after all. Powell reiterated as much in his 60 Minutes interview over the weekend, saying “we mostly try very hard not to comment on fiscal policy and instruct Congress on how to do their job, when actually they have oversight over us.”

    But almost immediately after that statement, Powell criticized lawmakers for “effectively borrowing from future generations” with their “unsustainable” policies. “It’s time for us to get back to putting a priority on fiscal sustainability,” he added.

    Fed Chair Powell joins a number of critics of fiscal policy and the surging national debt, including JPMorgan Chase CEO Jamie Dimon. Dimon, warned last month that the U.S. economy is headed for a “cliff” if something isn’t done to address the federal government’s excessive debt burden.

    “We see the cliff. It’s about 10 years out, we’re going 60 miles an hour [toward it],” he said at a Bipartisan Policy Center panel. Dimon argued that U.S. lawmakers will need to alter the current path of spending and control the national debt or there could be “rebellion” among foreign owners of U.S. government bonds.

    Other Wall Street heavyweights have been criticizing rising federal deficits for years. Mark Spitznagel, founder and chief investment officer of the private hedge fund Universa Investments, told Fortune last year that we are living “the greatest credit bubble in human history.”

    “And that’s not my opinion, that’s just numbers,” he said. “There is no question about the fact that we are living in an age of leverage, an age of credit, and it will have its consequences.”

    Ray Dalio, founder of the hedge fund giant Bridgewater Associates, has also been warning of brewing issues. In December, he argued that the U.S. government is reaching an “inflection point” with its debt problem. Eventually, the government will have to borrow just to make its annual debt servicing payments, and that’s a recipe for a debt crisis, Dalio warned.

    Some good news?

    The good news? As Powell described Sunday, the U.S. still has a “dynamic, innovative, flexible, adaptable economy, more so than other countries.” Powell argued that this is the “big reason” why the U.S. economy has outperformed its peers over the past few years—but there are a few others, as Fortune detailed last week. America’s dynamic economy means the debt situation isn’t too far gone to rectify just yet. But as Powell said: “sooner is better than later.”

    Despite the criticism, Treasury Secretary Janet Yellen has brushed off concerns about the rising national debt. The key metric Yellen looks at is net interest payments as a share of GDP, and that is still “at a very reasonable level,” she argued in a CNBCinterview last September.

    Subscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up for free.



    Will Daniel

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  • US national debt hits record $34 trillion as Congress gears up for funding fight

    US national debt hits record $34 trillion as Congress gears up for funding fight

    WASHINGTON — The federal government’s gross national debt has surpassed $34 trillion, a record high that foreshadows the coming political and economic challenges to improve America’s balance sheet in the coming years.

    The U.S. Treasury Department issued a report Tuesday logging U.S. finances, which have become a source of tension in a politically divided Washington that could possibly see parts of the government shutdown without an annual budget in place.

    Republican lawmakers and the White House agreed last June to temporarily lift the nation’s debt limit, staving off the risk of what would be a historic default. That agreement lasts until January 2025. Here are some answers to questions about the new record national debt.

    The national debt eclipsed $34 trillion several years sooner than pre-pandemic projections. The Congressional Budget Office’s January 2020 projections had gross federal debt eclipsing $34 trillion in fiscal year 2029.

    But the debt grew faster than expected because of a multi-year pandemic starting in 2020 that shut down much of the U.S. economy. The government borrowed heavily under then President Donald Trump and current President Joe Biden to stabilize the economy and support a recovery. But the rebound came with a surge of inflation that pushed up interest rates and made it more expensive for the government to service its debts.

    “So far, Washington has been spending money as if we had unlimited resources,” said Sung Won Sohn, an economics professor at Loyola Marymount University. “But the bottom line is there is no free lunch,” he said, “and I think the outlook is pretty grim.”

    The gross debt includes money that the government owes itself, so most policymakers rely on the total debt held by the public in assessing the government’s finances. This lower figure — $26.9 trillion — is roughly equal in size to the U.S. gross domestic product.

    Last June, the Congressional Budget Office estimated in its 30-year outlook that publicly held debt will be equal to a record 181% of American economic activity by 2053.

    The national debt does not appear to be a weight on the U.S. economy right now, as investors are willing to lend the federal government money. This lending allows the government to keep spending on programs without having to raise taxes.

    But the debt’s path in the decades to come might put at risk national security and major programs, including Social Security and Medicare, which have become the most prominent drivers of forecasted government spending over the next few decades. Government dysfunction, such as another debt limit showdown, could also be a financial risk if investors worry about lawmakers’ willingness to repay the U.S. debt.

    Foreign buyers of U.S. debt — like China, Japan, South Korea and European nations — have already cut down on their holdings of Treasury notes.

    A Peterson Foundation analysis states that foreign holdings of U.S. debt peaked at 49 percent in 2011, but dropped to 30 percent by the end of 2022.

    “Looking ahead, debt will continue to skyrocket as the Treasury expects to borrow nearly $1 trillion more by the end of March,” said Peterson Foundation CEO Michael Peterson. “Adding trillion after trillion in debt, year after year, should be a flashing red warning sign to any policymaker who cares about the future of our country.

    The debt equates to about $100,000 per person in the U.S. That sounds like a lot, but the sum so far has not appeared to threaten U.S. economic growth.

    Instead, the risk is long term if the debt keeps rising to uncharted levels. Sohn said a higher debt load could put upward pressure on inflation and cause interest rates to remain elevated, which could also increase the cost of repaying the national debt.

    And as the debt challenge evolves over time, choices may become more severe as the costs of Social Security, Medicare and Medicaid increasingly outstrip tax revenues.

    When it could turn into a more dire situation, is anyone’s guess, says Shai Akabas, director of economic policy at the Bipartisan Policy Center, “but if and when that happens, it could mean very significant consequences that occur very quickly.”

    “It could mean spikes in interest rates, it could mean a recession that leads to lots more unemployment. It could lead to another bout of inflation or weird going on with consumer prices —several of which are things that we’ve experienced just in the past few years,” he said.

    Both Democrats and Republicans have called for debt reduction, but they disagree on the appropriate means of doing so.

    The Biden administration has been pushing for tax hikes on the wealthy and corporations to reduce budget deficits, in addition to funding its domestic agenda. Biden also increased the budget for the IRS, so that it can collect unpaid taxes and possibly reduce the debt by hundreds of billions of dollars over 10 years.

    Republican lawmakers have called for large cuts to non-defense government programs and the repeal of clean energy tax credits and spending passed in the Inflation Reduction Act. But Republicans also want to trim Biden’s IRS funding and cut taxes further, both of which could cause the debt to worsen.

    Both claims are previews of cases that will likely be put to voters in this year’s presidential election.

    White House spokesman Michael Kikukawa put the blame on the GOP, saying in a statement that the steady accrual over years was “trickle-down debt — driven overwhelmingly by repeated Republican giveaways skewed to big corporations and the wealthy.”

    By contrast, Republican lawmakers have said that borrowing during the Biden administration contributed to the 2022 spike in inflation rates that dragged down the Democratic president’s approval ratings.

    Akabas said, “There is growing concern among investors and rating agencies that the trajectory we’re on is unsustainable — when that turns into a more dire situation is anyone’s guess.”

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  • Germany is having a budget crisis while the economy struggles

    Germany is having a budget crisis while the economy struggles

    FRANKFURT, Germany — German Chancellor Olaf Scholz vowed Tuesday that his government will work “as fast as possible” to solve a budget crisis, but he offered few details on how he would achieve his goals of promoting clean energy and modernizing the struggling economy after a court decision struck down billions in planned spending.

    Scholz and his quarrelsome governing coalition must decide what to cut next year after Germany’s top court ruled that 60 billion euros ($65 billion) in funding for renewable energy projects and relief for consumers and businesses from high energy prices caused by Russia’s invasion of Ukraine violated debt limits set out in the constitution.

    Cuts that need to be made next year could further slow down what is already the world’s worst-performing major economy.

    Germans “need clarity in unsettled times,” Scholz said in a speech to parliament. He promised that the government would not abandon its goals of sharply reducing carbon emissions from fossil fuels and protecting social spending.

    Speaking over outbursts of derisive laughter from opposition members, Scholz said it would be “a serious, an unforgivable mistake … to neglect the modernization of our country.”

    In terms of where to reduce spending, he said a cap on consumers’ utility bills is no longer needed because energy prices have fallen, although the government would act if they rose again. “You’ll never walk alone,” Scholz said, quoting the song title in English.

    The now-banned spending was aimed at some of the long-term problems plaguing growth in Europe’s largest economy, such as the need to invest in new sources of affordable renewable energy like wind, solar and hydrogen and to support battery and computer chip production.

    That has led to calls from some to loosen the debt limits because they restrict the government’s response to new challenges.

    But Scholz’s coalition of Social Democrats, Greens and pro-business Free Democrats doesn’t have the two-thirds majority to do that without the conservative opposition, the Christian Democrats, who brought the legal challenge in the first place.

    Opposition leader Friedrich Merz criticized Scholz as a “know-it-all” who wasn’t willing to change course and “lacked any idea of how the country should develop in the coming years.” He vowed to uphold the debt limits.

    There was a lack of details from Scholz on what could be cut next year. On top of that, a long-term solution could take years, possibly until after the next national elections scheduled for 2025.

    Economists say spending cuts will only add to the challenges facing Germany after Russia cut off the cheap natural gas that fueled its factories, squeezing businesses and raising the cost of living for households paying more for energy.

    The constitution limits deficits to 0.35% of economic output, though the government can go beyond that if there’s an emergency it didn’t create, such as the pandemic.

    Germany’s constitutional court said the government could not shift unused emergency funding meant for COVID-19 relief to boost wind and solar projects, help with energy bills and encourage investment in computer chip production.

    Some of the banned spending has already been used. To comply with the ruling, the government is changing the 2023 budget by declaring an emergency, citing Russia’s natural gas cutoff.

    The question now is next year’s budget. The government would have to scramble to cover shortfalls of roughly 30 billion to 40 billion euros — plus 20 billion to 30 billion euros for 2025 — compared with earlier plans, according to Holger Schmieding, chief economist at Berenberg bank.

    Some spending can be moved to public-private partnerships or taken over by the country’s development bank. But those fudges will only go so far.

    Ultimately, spending may be reduced by as much as 0.5% of annual economic output for the next two budget years, Schmieding said.

    The debt limits were enacted in 2009 after the government piled up debt paying to rebuild former East Germany after Germany reunified at the end of the Cold War and when tax revenue dropped during the 2007-2009 global financial crisis and Great Recession.

    For years afterward, Germany balanced its budget or even ran small surpluses as the economy lived large on cheap Russian natural gas and booming exports of luxury cars and industrial machinery, with rapidly growing China serving as a major market. Economists say the government skimped on investment in infrastructure, renewable energy and digitalization — gaps it is now trying to make up.

    The fallout has left Germany projected to be the worst-performing major economy this year, shrinking by 0.5%, according to the International Monetary Fund.

    Prospects for next year are only a little better. Industry is struggling with energy prices and a lack of skilled labor, while Chinese automakers are challenging Germany’s Volkswagen, BMW and Mercedes-Benz and have plans to expand sales across Europe.

    The budget debate is ironic because Germany has the smallest long-term debt pile of any of the Group of Seven advanced democracies, with debt of 66% of gross domestic product. That compares to 102% in Britain, 121% in the U.S., 144% in Italy and 260% in Japan.

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  • Trump’s Rivals Pass Up Their Chance

    Trump’s Rivals Pass Up Their Chance

    “We’ve become a party of losers,” the conservative businessman Vivek Ramaswamy declared during the opening minutes of tonight’s Republican primary debate in Florida. He bemoaned the GOP’s lackluster performance in Tuesday’s elections, and then he identified the Republican he held personally responsible for the party’s defeats. Was this the moment, a viewer might have wondered, that a top GOP presidential contender would finally take on Donald Trump, the absent frontrunner who hasn’t deigned to join his rivals on the debate stage?

    Of course not.

    Ramaswamy proceeded to blame not the GOP’s undisputed leader for the past seven years but Ronna McDaniel, the party functionary unknown to most Americans who chairs the Republican National Committee. After calling on McDaniel to resign, Ramaswamy then attacked one of the debate moderators, Kristen Welker of NBC News, before turning his ire on two of his onstage competitors, Nikki Haley and Ron DeSantis.

    The moment was a fitting encapsulation of a debate that, like the first two Republican primary match-ups, all but ignored the candidate who wasn’t there. Five Republicans stood on the Miami stage tonight—Ramaswamy, Haley, DeSantis, Chris Christie, and Tim Scott—and none of them are likely to be elected president next year. The candidate of either party most likely to win the election is Trump, who held a rally a half hour away. His putative challengers barely uttered his name.

    Yair Rosenberg: The preemptive Republican surrender to Trump

    NBC’s moderators tried to force the issue at the start. Lester Holt asked each of the candidates to explain why they should be president and Trump should not. Haley and DeSantis, who are now Trump’s closest competitors (a modest distinction), offered some mild criticism. The Florida governor chastised Trump for increasing the national debt and failing to get Mexico to pay for his Southern border wall. “I thought he was the right president at the right time. I don’t think he’s the right president now,” was the most that Haley, who was Trump’s ambassador to the United Nations, could muster. Only Christie, the former New Jersey governor who has become Trump’s fiercest GOP critic on the campaign trail, assailed the former president with any relish. “Anybody who’s going to be spending the next year-and-a-half of their life focusing on keeping themselves out of jail cannot lead this party or this country,” Christie said.

    And with that, Trump became an afterthought for the remainder of the debate. The evening featured plenty of substance, as the candidates offered mostly robust defenses of Israel in its war with Hamas, denounced rising anti-Semitism on college campuses, and disputed how much support the U.S. should give Ukraine. At the behest of moderator Hugh Hewitt, they spent several minutes discussing the optimal size of America’s naval fleet.

    The spiciest exchanges involved Ramaswamy and Haley, who made no effort to hide their disdain for one another. Ramaswamy drew boos from the audience after he criticized Haley’s hawkish foreign policy by calling her “Dick Cheney in three-inch heels.” Later he invoked her daughter’s use of TikTok to accuse her of hypocrisy on China’s ownership of the social-media platform. “Keep my daughter’s name out of your voice,” Haley shot back. “You’re just scum.” Ramaswamy and Haley also went after DeSantis, though in less personal terms.

    That Ramaswamy would target Haley was not a surprise. She came into the debate as the challenger of the moment, having displaced Ramaswamy, whose candidacy has lost momentum since his breakout performance in the first GOP primary debate in August. He can partly blame Haley for his slide: Her mocking retort—“Every time I hear you, I feel a little bit dumber”—was the highlight of the last everyone-but-Trump pile-up in September. The former South Carolina governor’s consistency across both debates has helped her overtake DeSantis for second place in New Hampshire and gain on him in Iowa. Haley also fared the best in a hypothetical general-election match-up with Biden in a batch of swing-state polls released this week by The New York Times and Siena College.

    Read: ‘Every time I hear you, I feel a little bit dumber’

    As my colleague Elaine Godfrey reported this week, Haley is appealing to primary voters who are “yearning for a standard-issue Republican”—a tax-cutting, socially conservative foreign-policy hawk who won’t have to spend the next several months fighting felony charges in courtrooms up and down the Eastern Seaboard. Her performance tonight—as steady as during the first two debates—seems unlikely to hurt her standing. The problem for Haley, as for the other contenders on tonight’s stage, is that less than half of the GOP electorate wants a standard-issue Republican. Trump still has a tight grip on a majority of GOP voters, and his lead over Biden in recent polling undermines his rivals’ argument that his nomination could cost the party next year’s election.

    If nothing else, each of these Trump-less debates offers his opponents a free shot to make the case against him, a platform to criticize the frontrunner without facing an immediate rebuttal. For the third time in a row, Haley and her competitors mostly passed up their chance. If they’re angling to be Trump’s running mate or emergency replacement, perhaps they’ve advanced their cause. But if their goal is to dislodge Trump as the nominee, opportunities like tonight’s are slipping away.

    Russell Berman

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  • Zombie firms are filing for bankruptcy as the Fed commits to higher rates

    Zombie firms are filing for bankruptcy as the Fed commits to higher rates

    In the U.S., 516 publicly listed firms have filed for bankruptcy from January through September 2023. Many of these firms have survived for several years with surging debt and lagging sales.

    “The share of zombie firms has been increasing over time,” said Bruno Albuquerque, an economist at the International Monetary Fund. “This has detrimental effects on healthy firms who compete in the same sector.”

    Zombie firms are unprofitable businesses that stay afloat by taking on new debt. Banks lend to these weak firms in hopes that they can turn their trend of sinking sales around.

    “A really healthy, well-capitalized banking system and financial sector is one of the most important factors in ensuring that unhealthy firms are wound down in a timely way rather than being propped up,” said Kathryn Judge, a professor of law at Columbia University.

    Economists say that zombie firms may become more prevalent when banks or governments bail out unviable firms. But the Federal Reserve says the share of firms that are zombies fell after the Covid-19 emergency stimulus measures were implemented. The Fed says banks are refusing to keep weak firms in business with favorable extensions of credit.

    The Fed economists point to healthy balance sheets at U.S. firms, despite the increasing weight of interest rate hikes. The effective federal funds rate was 5.33% in October 2023, up from 0.08% in October 2021.

    “The biggest implication of the rapid rise in interest rates that we’ve seen the last five or six quarters, actually, is that it reestablished cash,” said Lotfi Karoui, chief credit strategist at Goldman Sachs. “That actually puts some constraints on risk assets.”

    The Fed says it thinks interest rates will remain higher for longer. “Given the fast pace of tightening, there may still be meaningful tightening in the pipeline,” Fed Chair Jerome Powell said at an Economic Club of New York speech Oct. 19.

    Watch the video above to learn more about the Fed’s battle with unviable zombie firms in the U.S.

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  • Kenya seeks more Chinese loans at ‘Belt and Road’ forum despite rising public debt

    Kenya seeks more Chinese loans at ‘Belt and Road’ forum despite rising public debt

    NAIROBI, Kenya — Kenya’s President William Ruto sought $1 billion more in loans from China Monday, despite rising public debt that has now reached $70 billion in the Eastern African country, according to National Treasury figures for 2022/2023.

    President Ruto was was one of a number of global leaders in Beijing to attend the tenth anniversary meeting of China’s Belt and Road Initiative, the ambitious plan that aims to connect Africa, Asia and Europe through massive infrastructure and energy projects.

    A statement from Kenya’s State House Spokesman Hussein Mohammed said “the president will deliver a keynote address headlined ‘Digital Economy as a New Source of Growth’ at the High-Level Forum.”

    “Additionally, the president will participate in a Kenya-China investors roundtable to emphasize Kenya’s standing as an investment hub for Chinese companies,” said the statement.

    One of the signature BRI projects in Kenya is the Standard Gauge Railway line, which runs from the port city of Mombasa to the Rift Valley via the capital, Nairobi. It cost $4.7 billion dollars to build but has faced numerous challenges, including delays and a low uptake of its freight service.

    The SGR which started operations in 2017, was initially intended to go all the way to neighboring Uganda to the west, as well as serving other landlocked countries in eastern and Central Africa. However, those plans were cancelled after Kampala pulled out and opted instead for partnership with a Turkish firm for the construction of its main line.

    Kenya’s SGR was mainly constructed using Chinese banks loans and last week, Deputy President Rigathi Gachagua told a local radio station that the president will be asking Chinese officials “to repay the loans slowly, while also borrowing a little money to finish stalled road projects.”

    “The Kenya SGR desperately needs cross-border expansion to make it a financially sustainable project. This is another key element in Kenya’s negotiation,” said economist Aly Khan Satchu.

    “ The SGR as is is a dud. To make it sustainable it needs to connect Uganda’s oil to the sea and (Congo) minerals. Therefore, to take the SGR from a negative return on investment into a positive ROI, he needs to increase leverage,” added Satchu.

    Kenya has been struggling with ballooning public debt, with $6 billion owed to Chinese creditors, according to national data. Some of the loans will mature in the 2023/2024 fiscal year, putting further pressure on the government. However, it’s not clear if President Ruto and his delegation will be granted a restructuring or extension of the interest payments.

    “The Ruto administration pivoted quite violently away from China and back towards the West but has been so far been diligent in paying its Chinese loans and therefore will be leveraging its track record as it seeks concessions,” Satchu said.

    Meanwhile, a weakening of the Kenyan shilling, high global fuel prices and the repayment of foreign debt have continued to dominate politics.

    Domestically, Ruto has announced restrictions on foreign trips and asked all ministries to cut their budgets by more than 10% as he aims to reduce government spending. But his critics, mainly in the opposition, say the president himself has reneged on his promise by continuing to borrow heavily despite the economy struggling.

    Last week, legislators tabled a motion asking the government to reveal details of all the loans it had accumulated since President Ruto came into power in September 2022. The figures are yet to be submitted to the national assembly.

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  • Thailand’s new prime minister tells Parliament his government will urgently tackle economic woes

    Thailand’s new prime minister tells Parliament his government will urgently tackle economic woes

    BANGKOK — Thailand’s new Prime Minister Srettha Thavisin vowed to act quickly to relieve the country’s economic problems in his inaugural speech to Parliament on Monday, following four months of political uncertainty while parliamentarians were unable to agree on a government.

    Srettha entered politics after a career as a major real estate develope r, and his government is facing high expectations and pressing demands to address a range of economic, political, social and environmental problems in its four-year term.

    Thailand’s economy has slumped after the COVID-19 pandemic all but crippled its lucrative tourism industry. Public debt rose to more than 60% of GDP in 2023, while household debt spiked to over 90% of the GDP this year, he said.

    Thailand’s post-pandemic economy is like “a sick person,” with a sluggish recovery that puts the nation “at risk of entering a recession,” Srettha said.

    He vowed to quickly take measures to relieve debt problems, mitigate rising energy costs and boost tourism, without going into detail.

    He also said the government would work immediately to implement a campaign promise — a 10,000-baht ($280) handout for all Thais 16 and older to stimulate the economy by boosting short-term spending. Details were not given, though he’s previously said it would cost up to 560 billion baht ($15.8 billion) and will be ready to deliver by the first quarter of next year.

    The promise drew major interest in the election campaign, but critics have questioned whether it would have a sustainable effect.

    Long-term goals cited by Srettha include boosting international trade, supporting start-up businesses, investing more in transport infrastructure, improving agricultural production, empowering local government and increasing access to land ownership. The government would also seek to amend the current military-installed constitution through a process that allows public participation.

    These steps would allow the economy to grow and its people to be able to “live with dignity,” he said.

    The results of Thailand’s elections in May revealed a strong mandate for change after nearly a decade under military control.

    But Parliament failed to endorse a coalition formed by the progressive Move Forward party, which won the most seats in the May polls, because members in the appointed and conservative Senate were alienated by its calls for minor reforms to the monarchy.

    Srettha’s Pheu Thai party, which ran a close second in the election, then formed a broader coalition without Move Forward and was able to win Senate support. But it succeeded only by including pro-military parties and several parties that were part of the previous government, reneging on a campaign pledge not to do so. The deal raised skepticism over Pheu Thai’s ability to fulfill its election campaign promises while having to accommodate its allies that come from all along the political spectrum.

    Reforms to the military — a powerful political player that has staged two coups since 2006 — were part of the platforms of both Move Forward and Pheu Thai, Srettha addressed the point diplomatically in his speech, promising “co-development” with the military to end mandatory conscription, reduce the excessive number of generals and ensure transparency in defense ministry procurement procedures. The ministry is headed by Pheu Thai’s Sutin Klangsang, one of the few civilians to hold the portfolio, usually controlled by veteran senior military officers.

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