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Debt or Alive?

15/11/2024

Many of Trump’s tax and spending promises made on the campaign trail will probably need to be scaled back to reflect the political, fiscal and economic realities.

On various policy fronts, it is still very early to say what the next Trump administration will try to do, let alone how successful it will be. In these early days of a new president-elect, it is always worth scrutinizing each and every appointment for early signs of both goals and competence. However, one constraint is likely to shape policy no matter who the specific decision-makers are going to be. We are talking, of course existing U.S. government debt.

As our Chart of the Week shows, U.S. Treasury Securities outstanding as a percentage of Gross domestic product (GDP) have tripled over the past 40 years. Not so long ago, this might still have appeared affordable, given how low long-term interest rates fell after the Great Financial crisis. In recent years, however, net interest on Treasury debt securities have risen above 3% of GDP, to levels last seen at a sustained basis more then 30 years ago.

If anything, that still understates the longer-term scale of the debt challenge. Back from the early 1980s onwards, both Inflation and long-term interest rates were falling. Nevertheless, there was a period in the early 1990s when bond traders drove up yields on 10-year Treasurys, forcing the new Clinton administration to scale back its spending ambitions.

Investment Traffic Lights

The monthly Investment Traffic Lights provide a detailed market analysis and our view on developments in the main asset classes.

Don’t panic about US debt sustainability… yet

^{*Gross Interest on treasury debt securities less Interest received by on and off budget trust funds, Other interest, Other investment income}
^{Sources: Bureau of Economic Analysis, US Treasury, Haver Analytics, DWS Investment GmbH as of 11/11/24}

By contrast, recent inflation has already boosted nominal GDP, while net interest payments still reflect coupons locked in before inflation reemerged. If deficits were to widen, Bond Vigilantes might well return, driving up refinancing costs further.

“Against this backdrop, we see some real constraints on implementing further fiscal loosening,” argues Christian Scherrmann, U.S. economist at DWS. “Keep in mind that a major priority is going to be to extent key provisions of the Tax Cuts and Jobs Act, passed during Trump’s first term, beyond their sunsets in December 2025. But given that people have gotten used to those lower taxes, that would merely avoid fiscal drag, rather provide new fiscal impulses.”

Of course, other revenues, such as implementing new tariff, deregulatory measures to boost growth or spending cuts could help narrow the deficit over the medium term. And as we said, it is still early days. Nevertheless, we think that many of the tax and spending proposals made on the campaign trail will probably need to be scaled back to reflect the political, fiscal and economic realities the new team will find itself confronted with, come inauguration day.

Chinese stimulus likely won’t boost German exports

China has steadily been moving up global value chains, not just in capital goods but also in related IT and services.

Chart of the Week

Find out more about current market trends and developments in our Chart of the Week, published each Friday.

Reaching Net Zero remains possible

Limiting temperature increases to 1.5-2.0 Celsius degrees is not an elusive dream if the growth rates in investments into energy transition of the last five years can be maintained.

This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. DWS does not intend to promote a particular outcome to the U.S. election which took place in November. Readers should, of course, vote in the election as they personally see fit. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Alternative investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients.

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Debt or Alive?

Don’t panic about US debt sustainability… yet

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