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US Debt ... Good, Bad or Both? [1]

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Date: 2025-06-06

I just finished a journey through AI that started when I read lots of comments to the general effect that Trump "had to" impose tariffs because the American budget deficit was out of control and "something had to be done". In other words, there is a compelling urgency to act. There are countless other writings that suggest that America's unique position as the world's reserve currency means that the situation is far from dire and tariffs are just a costly and damaging mistake.

After multiple questions and followups with several long reports (20+ pages), and a switch to another AI to repeat and build on the answer, just to be sure, I found that there is a solid kernel of truth in both arguments and, although it seems contradictory, they are really two sides of the same coin. The emerged consensus is that the US financial system is in tension between two opposing feedback cycles. One is positive and supportive of US wealth and the other posing a dangerous threat. I'll start with the positive.

For decades, the rest of the world has eagerly bought the Treasury bonds that the US issued. They were seen as abnormally safe and they were readily available and easily traded. Ironically, it was the fact that the US issued so many that made them so attractive. It meant that the bonds were liquid even in a crisis. Foreign nations and banks often didn't even care much about their interest rate. They were valued as a safe, liquid place to stash large amounts of excess money that could be accessed and converted to cash on a moment's notice.

It may seem counterintuitive, but the more debt the US issued, the more pragmatically useful it became ... to the point that it now seems indispensable. This view held up under pressure on many occasions. In several recent crises, when US debt might have been questioned, demand for Treasuries actually went up. It appears that, even if US Treasuries are no longer seen as being quite so perfectly safe, they are still safe enough and easy to get, that they remain the pragmatic investment of choice. This couldn't have happened if there were competing assets from another country, but there weren't. In effect, America's annual deficit is weird sort of factory that makes a commodity (US Treasuries) that is in steady demand from all over the world for a host of mostly practical reasons. IOW, US debt is a feature, not a bug.

The negative vicious cycle is the one Trump's supporters cite most often. If rising debt ever does cause foreign investors to lose confidence in American Treasury safety, they would finally start demand higher yields to offset the extra risk. That would increase US borrowing costs and expand the US government deficit and grow the debt even faster. They worry about a possible "debt spiral" that could lead to a "run" on Treasuries and eventual financial collapse. There has been virtually no evidence of this vicious cycle over the past few decades, but that doesn't mean it isn't hiding in the weeds, ready spring out and grab the US economy.

The general consensus is that, as long as global growth is faster than US debt growth, there's no problem. A growing world economy will soak up American Treasuries as quickly as they are printed. If global growth slows down, or American Treasuries meaningfully lose their utility, the vicious cycle could take over and cause US financial disaster.

President Trump has applied large tariffs to clamp down on US imports, often citing the growing US debt as a justification. My big fear is that the resulting trade conflicts will reduce the rate of global growth and so reduce the demand for US Treasuries. That would draw the negative cycle out of hiding and possibly trigger the debt crisis many years before it might otherwise occur.

American Presidents have worked for decades to keep us on the positive track and away from the negative spiral. Now President Trump has used the (so far theoretical) threat of debt disaster as an excuse to make that same debt disaster far more real and imminent.

Not good.

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