In a bold move, President Donald Trump has set a deadline of July 9, 2025, for trade deals to be finalized, warning that failure to do so will result in imposing controversial tariffs on some of the world’s largest economies.
While it is impossible to predict the exact economic climate on that date, the implications of Trump’s current economic policies are already jeopardizing American interests.
For instance, the US government debt has surged to an alarming US$36 trillion (£26 trillion), equating to approximately 123% of the country’s GDP, the highest percentage since 1946.
Other nations are experiencing high government debts, too; the UK stands at 104% of GDP, France is at 116%, and China is at 113%. However, the United States ranks among the highest of these countries.
The recently approved budget reconciliation bill, which President Trump characterizes as the ‘big beautiful bill,’ is projected to add another US$3 trillion to the national debt over the next decade.
Given these figures, it seems unlikely that the US will reverse this trend of increasing debt.
In 2024, the US government needed to borrow an additional US$1.8 trillion to cover spending that was not met by tax revenue, resulting in a budget deficit equivalent to 6.2% of GDP.
This deficit is expected to rise to 7.3% of GDP over the next 30 years, raising concerns about the sustainability of fiscal policies.
As a direct consequence of this financial mismanagement and the chaotic application of tariffs, interest rates on government borrowing have escalated dramatically.
For example, the yield on ten-year US government debt increased from 0.5% in mid-2020 to 4.3% today.
As yields rise, interest rates on various loans, including mortgages and corporate borrowing, are also likely to increase.
The United States has traditionally enjoyed a high level of trust due to the robustness, openness, and stability of its economy.
As a result, US bonds, commonly known as ‘treasuries,’ have long been deemed safe investments by institutions worldwide.
Moreover, the US dollar has maintained its status as the dominant currency for international payments and debts.
This position, sometimes referred to as ‘exorbitant privilege,’ offers significant advantages, such as making imported goods cheaper and allowing for substantial government borrowing without triggering immediate concerns about repayment.
Investment into US treasuries remains robust, as global investors typically buy as many bonds as required to fund public spending.
This significant role of the dollar in international transactions also provides the US with geopolitical leverage, including the ability to exclude countries like Russia from major global payment systems.
However, this privilege is under threat due to the current administration’s tariff policies, which have created uncertainty in the market.
Investor confidence is waning, as the unpredictable nature and scale of tariffs complicate investment decisions.
Under these circumstances, businesses may halt investments in the US economy while awaiting clearer guidelines on the future of these tariffs.
Since the beginning of this year, the dollar has lost 8% of its value, a decline that indicates growing investor skepticism about the US economy and subsequently increases the cost of imports.
Perhaps the gravest risk lies in a sudden rise in government debt yields.
In an environment of rising yields, investors might scramble to sell bonds before their market value decreases, creating a potentially volatile situation.
Should this scramble turn into a stampede, the financial markets could face severe ramifications.
Indeed, a notable spike in US yields occurred shortly after the announcement of new trade tariffs on ‘liberation day’ in early April, with yields on ten-year treasuries climbing by 0.5% in just four days.
Fortunately, this surge was curtailed on April 10, when tariff implementation was paused, likely due to the drop in both bond and share prices.
There were warnings from senior central bankers suggesting that financial markets were perilously close to a ‘meltdown.’
It is unlikely that the dollar will soon be replaced as the world’s reserve currency, as no alternatives currently present a more attractive option.
The euro, for instance, is tied to multiple EU countries, each with distinct government debt, while the Chinese yuan is subjected to government management that undermines its appeal.
Yet, since March, foreign central banks have begun to offload US treasuries, opting instead to hold gold as a safer asset.
Under Trump’s leadership, the reputation of the US dollar as the premier safe asset has sufferedeed, leaving the financial system more exposed and escalating borrowing costs for the government.
The current fiscal and economic policies, including the uncertain tariff strategy, appear to be steering the US toward a precarious financial future.
image source from：theconversation
