Defusing Debt Bombs: Trump May Impact A Crisis Of Investor Confidence

This article originally appeared on Forbes.com.

As a pro-bitcoin Trump transition team takes shape and the exchange rate of bitcoin reaches all time highs, it’s easy to get excited for the promise of an administration that is friendly to financial innovation. However, a sober look at the economy of the U.S. will temper any undue exuberance.

There is a fiscal storm on the horizon that is projected to make landfall in the first quarter of 2025. The way the new Trump administration and Congress respond will partially determine the policy choices available to transition the U.S. to a more financially innovative and responsible economy, after years of stagnation and spending.

Ballooning deficits, soaring debt service costs, and an over-reliance on short-term Treasury bills have created a precarious situation. The first major challenge faced by the next administration will be to deal with the fallout.

The Danger Of A Debt Spiral

Under the Biden-Harris administration, federal spending surged to $6.5 trillion annually, up from $4.5 trillion in 2019. Much of this increase stems not from mandatory programs like Social Security or Medicare, but from COVID-era policies and associated interest costs. At least $500 billion of the annual increase stems from interest payments on the national debt, a burden that will grow if rates continue rising.

Compounding the problem is the Treasury’s reliance on short-term debt. Treasury bills, maturing in less than a year, now account for 22% of the federal debt, up from 15% in 2018 – a roughly 50% increase.

Short-term debt requires constant refinancing, leaving the U.S. vulnerable to interest rate risk. When short-term debt matures, it must be refinanced at prevailing market rates. If interest rates rise, this debt will become much more expensive to service.

Vice President-elect J.D. Vance has warned that this issue, combined with a $2 trillion annual deficit, has left the country dangerously exposed. The Treasury must issue between $500 billion and $1 trillion in new debt in the first quarter of 2025 alone, and the Federal Reserve’s Overnight Reverse Repurchase Agreement (ON RRP) facility, which has helped offset liquidity pressures, is nearly depleted.

Lessons From The U.K.

The U.K.’s 2022 bond market turmoil serves as a recent example of what can happen when things go awry. It ended with the well-intentioned, liberty-oriented Liz Truss becoming the shortest-serving Prime Minister in British history.

Truss’s government proposed significant tax cuts that were “unfunded,” meaning that her proposal did not include a credible plan for how to make up for the resulting loss in revenue to the government.

Without a clear picture of how the government would stay solvent, investors lost of confidence in British debt and began selling their bonds. This caused the supply of bonds to increase sharply, which in turn raised yields and the cost of servicing debt. Under the resulting pressure, Truss’s government collapsed in less than two months.

This example underscores the fragility of market confidence and the speed with which fiscal missteps can snowball into political and economic crises. Foreign investors and geopolitical rivals could similarly target U.S. Treasuries, forcing yields higher and destabilizing the economy.

Immediate Priorities For Stabilizing The Bond Market

Vance identifies two initial steps to address the crisis: Staffing the Treasury Department with competent professionals, and implementing flat tariffs.

Competent leadership at Treasury could inspire market confidence, while tariffs could generate revenue and support domestic economic activity. However, these measures alone are insufficient to address the scale of the problem.

The new administration must also communicate clearly and transparently about the inherited debt crisis. Explaining the roots of the problem in relatable terms – such as connecting rising debt to everyday issues like inflation and retirement security – could rally public support for policies that cause inevitable short-term pain but are nonetheless necessary to fix the problem. Framing the crisis as the result of Biden-era mismanagement, while outlining a path forward, is crucial.

Policy actions must then follow this narrative. The administration could work with Congress to cap discretionary spending outside of defense, Social Security, and Medicare at 2024 levels, with gradual reductions over time. This approach would avoid cuts to politically sensitive programs while signaling fiscal discipline to bond markets.

Rebalancing The Debt

Next, the debt portfolio of the U.S. must be carefully shifted from short-term bills to longer-term bonds in order to mitigate interest rate risk. Although bonds carry higher yields, they provide stability by locking in borrowing costs over extended periods.

This rebalancing requires careful timing and a credible commitment to fiscal discipline. Without these assurances, markets may demand higher yields even on long-term bonds, exacerbating borrowing costs.

Coordination with the Federal Reserve is also key. Although Trump has historically been critical of Federal Reserve Chair Jerome Powell, aligning monetary and fiscal policies will be vital for managing market expectations. Pressuring the Fed for aggressive rate cuts or quantitative easing could backfire, stoking inflation fears and eroding investor confidence. The key here will be for the administration to get ahead of the inevitable handwringing in the media about the Fed being subject to political pressure, and instead demonstrate a focused, unified, and collaborative approach.

Communicating With Key Players

The bond market is dominated by sophisticated institutional players such as pension funds, central banks, sovereign wealth funds, and primary dealers. These entities are less influenced by media narratives than your typical voter or retail investor. They are attuned to direct signals from fiscal and monetary policy. To reassure them, the administration must prioritize actions over rhetoric.

Regular briefings with primary dealers and major bondholders can provide transparency and build trust. Appointing a Treasury Secretary with a reputation for pragmatism and competence would help, as would high-level diplomatic engagement with foreign bondholders including those in China and Japan.

Transparency should extend to the broader market. Publishing quarterly updates on debt management, spending reductions, and fiscal reforms can demonstrate accountability and reinforce the administration’s commitment to stability.

Avoiding Populist Impulses – And A Debt Snowball

The greatest risk lies in triggering a self-reinforcing cycle of rising interest rates and higher borrowing costs.

Populist measures like unfunded tax cuts must be avoided in favor of fiscal responsibility in early budget proposals. If market participants perceive that the U.S. lacks a credible plan to manage its debt, they may demand higher yields across the board.

At the same time, targeted spending cuts of wasteful and redundant programs would result in real savings as well as market confidence. The Department of Governmental Efficiency, a special initiative spearheaded by Elon Musk and Vivek Ramaswamy, has been given ownership of this activity. We will soon see if the management approach that was used so effectively to turn X (formerly Twitter) and Tesla into world class companies can be applied to the federal government.

Trump’s First Test Of Leadership

The looming debt crisis must be confronted with both policy and PR. Reassuring the bond market requires a delicate balance of clear communication, disciplined execution, and strategic coordination with the Federal Reserve.

The stakes extend far beyond the Trump administration. Navigating this fiscal crisis will not only define the immediate trajectory of the U.S. economy, but could also mark the beginning of a broader transformation. Our debt-based financial system, reliant on fiat money controlled by the Federal Reserve, could give way to an equity-based system founded on sound money like bitcoin. Such a transformation holds the promise of unleashing unprecedented prosperity – if we can weather the storm.