The US Is Not Broke
A contrarian call on America’s fiscal outlook.
“I’m the king of debt. I’m great with debt. Nobody knows debt better than me.” – Donald Trump
When private sector companies become distressed, an entire ecosystem of experts springs into action. Turnaround specialists from firms like Alvarez & Marsal swoop in to replace management teams, cut spending, and negotiate with creditors. A sophisticated set of tools is deployed with vigor, much like triaging patients in hospital emergency rooms. Identifying which companies will survive has enriched many a bond investor, and executives experienced in navigating workouts are highly sought after.
The question of solvency is rarely clear-cut, and filing for bankruptcy is often a strategic decision. Companies can remain insolvent for some time but never file, while others seek court protection long before all options are exhausted. Deciding if and when to act is more of an art than a science, as demonstrated by the divergent paths chosen by Ford and General Motors during the global financial crisis.
By any measure, the current US fiscal situation is highly distressed. Total public debt outstanding exceeds $36 trillion, double what it was just a decade ago and more than 120% of gross domestic product (GDP). Annual interest expense is set to surpass a staggering $1 trillion. The federal deficit was $1.8 trillion for fiscal year 2024, or 6.4% of GDP. Respected analysts argue the US is already in fiscal dominance, defined as “an economic condition that occurs when a country’s debt and deficit levels are sufficiently high that monetary policy can no longer effectively control inflation.”
Lurching rapidly towards this wall of worry is the looming wave of debt refinancings confronting newly confirmed Treasury Secretary Scott Bessent. The situation was exacerbated by his predecessor, Janet Yellen, who relied heavily on short-term debt to finance deficits during her tenure. Dan Oliver of Myrmikan Capital described the predicament in his most recent (and highly insightful) research note:
“Yellen’s policy also had the effect of issuing fewer long-term bonds than expected, which supported their prices, creating artificially lower rates in the 10-year bond, which is the reference point for mortgages and other long-term credit. Now Trump’s anointed Treasury Secretary Scott Bessent must decide how to roll the $6.7 trillion in Treasury bonds coming due in 2025. He is well aware of the problem, having written about it in his investor letter dated January 31, 2024…
If Bessent reverts to standard Treasury practice, issuing only 15%-20% in bills, the 10-year financing reference rate will drift higher, and a falling short-term rate risks enticing money back into the Fed’s reverse repo facility, sending a tightening shock through markets and the economy. Even if he were to continue Yellen’s policy, she has timed it such that the reverse repo facility is drained—the Treasury no longer has much ability to neuter the Fed’s balance sheet shrinkage.”
Perhaps no US president has been more familiar with the bankruptcy code than the current occupant of the Oval Office, a man who previously boasted of using such laws “brilliantly” in the corporate setting. To wit, the first three weeks of his presidency bear the telltale signs of an experienced executive navigating a turnaround with urgency and direction. Contrary to the constant alarmism about America’s irreversible slide into insolvency, the country is far from broke, and Trump has considerable flexibility at his disposal. Let’s review the options and set a few markers for success.