US: Between Debt and the Dragon

Trump, Tariffs, and Geopolitical Unease

The media frenzy since Donald Trump’s arrival in the White House shows no sign of abating, leaving investors breathless. Fears of tariffs have strengthened the dollar and pushed up US Treasury yields, reviving levels of market pessimism not seen since October 2023.

Trump’s pledges to lower interest rates and oil prices went unnoticed by the markets. Instead, his more contentious remarks—on tariffs or withdrawing from NATO—sparked panic across media headlines.

Today, on Breaking Bucks, we decode the hidden implications of Trump’s actions and explore how to capitalise on the opportunities uncertainty creates in financial markets. Follow us on Twitter to stay ahead of the latest insights.

Beyond the Tweets: The Real Challenges

To make sense of the situation, we must keep a cool head and tune out the noise of Donald J. Trump’s pronouncements.

Despite his outsider rhetoric, Trump faces the same obligations as any president. While he talks of taking control of Greenland or the Panama Canal, these are mere second-order issues compared to the real challenges facing the US economy.

The issue of the war in Ukraine, with its strategic geopolitical implications, warrants its own analysis.

The Public Debt: 36 Trillion Reasons for Concern

The United States faces a fiscal equation that defies easy resolution. The Treasury confronts a deficit of 6.4% of GDP ($1.8 trillion) and annual interest payments on the national debt of $1 trillion—a sum that eats into the federal budget, even surpassing defense spending in 2024.

It’s worth noting that a certain level of deficit isn’t inherently negative, provided the outcomes justify it, as economist Stephanie Kelton argues in The Deficit Myth. The trouble lies in projections of US growth stagnating below 2% in the coming years.

Adding to the challenge, $9.2 trillion of the $36 trillion national debt matures this fiscal year—a staggering 31% of the country’s GDP. To this, one must add at least another trillion to cover the 2025 deficit, compounding the fiscal strain.

Bonds Under Pressure: Refinancing Chokes

To meet its obligations, the government will be forced to issue a massive volume of new bonds, increasing the supply of Treasury bonds and potentially driving up their yields.

Moreover, any refinancing will escalate annual interest costs. The current average interest rate on the debt stands at 3.2%—20% lower than the 4% paid on the 2-year bond and 25% below the 10-year bond’s 4.3%

Compounding this pressure is the Federal Reserve’s Quantitative Tightening (QT) program, which aims to reduce its balance sheet by $60 billion in bonds monthly. This initiative is set to continue until June 2025 unless conditions shift.

While the refinancing challenge itself isn’t catastrophic, it fuels an undesirable vicious cycle.

Labour Market and Housing: Unwitting Accomplices to Inflation

Underlying inflation remains stubbornly anchored at 3.3% since June 2024, while the PCE index has also failed to dip below 2.6%.

Both metrics will persist at these levels unless the housing market—a sector accounting for 33% of the inflation basket—cools significantly. Housing prices, rising between 4% and 4.7% annually (depending on the source), have held steady since July 2024.

Moreover, housing costs are unlikely to retreat while the labour market remains at full employment. January 2025 data shows wages continuing to climb between 4.1% and 4.7% year-on-year, varying by the indicator analysed.

The Race for Global Hegemony

This economic puzzle might have a solution—if not for China looming across the Pacific. In the scramble for dominance, China is accelerating at 5% annually without breaking a sweat.

With negligible inflation (0.2%), a $1 trillion annual trade surplus, and undisputed mastery of key technologies, China manoeuvres interest rates at 3.1%—2.9 points above the neutral rate—cementing itself as an economic fortress impervious to turbulence.

Meanwhile, the U.S. government finds itself trapped between the urgency to lower refinancing costs, fear of inflation, and the need to keep the labour market buoyant to stave off economic contraction.

Trump cannot afford to sink the economy to tame inflation, lest he fall behind in the global hegemony race. Yet he lacks the power to slash interest rates outright—any attempt risks sparking an inflationary spiral.

For the U.S., only one path remains, and Trump knows it. The first step is clear: tighten the fiscal belt—cut spending or boost revenues. The subsequent moves, however, could be textbook realpolitik: If you can’t beat your rival, join them. Will the U.S. adopt China’s playbook to avoid obsolescence? Can it disrupt the renewed “friendship” between China and Russia?

U.S. Strengths and the Technological Pulse

The silver lining for the U.S. economy lies in its manageable private debt levels, which, though moderately elevated, remain below alarming thresholds. A robust labour market further underpins stable domestic consumption.

On the technological front, the U.S. retains global leadership in key strategic sectors. Its strongest asset in countering China lies in innovation. Yet Beijing, acutely aware of this, is far from idle—pouring resources into research, development, and industrial policy to narrow the gap.

Final Stretch: Trump Prepares Uncle Sam

After dissecting the U.S.’s fiscal and monetary landscape, Trump’s proposals—to cut interest rates, lower oil prices, slash military spending, or impose tariffs—cease to be mere slogans. All converge on a single objective: to whip Uncle Sam into shape for a pivotal sprint that will redefine the global order.

In a forthcoming analysis, we will explore whether this rivalry between superpowers can evade Thucydides’s Trap—the “inevitable” clash between a rising and a declining hegemon, as framed by Graham Allison—or if the global chessboard is already primed for an abrupt reset.

Investing in Turbulent Times

In this climate, 20-year U.S. bonds (ETFs: TLT, DTLE, IS04) could offer a compelling opportunity if interest rates climb above 4.5% again—likely, given Trump’s potential to foster a rate-cut-friendly environment. These bonds represent a low-risk investment with guaranteed minimum returns via their coupons, making them, in my view, an attractive hedge for portfolios vulnerable to recession risks.

Crude oil is best avoided unless prices stray significantly from the $60–75/barrel range (West Texas Intermediate). Meanwhile, natural gas may present a short-selling opportunity if prices stay above $4.50 per cubic metre, as this contradicts Trump’s energy agenda. Additionally, the eventual resolution of the Ukraine war will likely flood markets with gas, further pressuring prices.

Currencies, battered by uncertainty, trade at depressed levels against the dollar and euro. This offers strategic plays should international tensions ease or domestic political strife within the EU weaken the euro.

I particularly favour the Australian dollar, which has softened despite resilient economic data and central bank signals indicating no urgency to cut rates—a disconnect ripe for exploitation.

For U.S. indices, sharp market dips should be seized—but only if investors can separate fact from the fog of fear. This week’s sell-offs, for instance, created an appealing entry point into the Nasdaq or S&P 500.