Trump at the wheel of an oncoming financial train wreck

Global investors spent much of 2024 fretting over China’s troubles with a property crisis and deflation. In the year ahead, it’s America’s turn on the hot seat.

Though Donald Trump’s trade war is getting the headlines, it’s the gaping disconnect between US net foreign investment versus federal debt that’s fast coming to a head.

And forcing the incoming Treasury Department team to devise a plan to stabilize US finances, lest the globe’s biggest economy pay a high price from both investors and credit rating agencies.

Until now, Washington has been able to avoid a reckoning — and live wildly beyond its means. Yet that current account imbalance may become harder to finance during the Trump 2.0 era.

One reason is that Washington’s chronic complacency is catching up with it. The bill for President Biden’s post-Covid-19 borrowing binge to juice consumption is coming due just as foreigners show less appetite for US assets. Another is the risk emanating from Trump’s planned supersized tariffs.

These two dynamics are about to collide in spectacular and unpredictable ways — and at a moment when the buyers of US national debt are reluctant to increase exposure to a shaky US dollar.

As Biden prepares to pass the baton back to President-elect Trump, he leaves the incoming administration with a US national debt topping US$36 trillion. Trump angling to make the $1 trillion-plus tax cuts from his first 2017-2021 term permanent and add new ones will exacerbate the problem.

At present, the magnitude of the US net foreign investment position – the difference between foreign assets that Americans own and those assets owned abroad — is nearly the size of US GDP. It’s negative $24 trillion compared with negative $18 trillion when Trump left