Who knows where President Trump will be after January 2029, but I am confident that he won’t be in the Oval Office.  Still, the damage he has done will continue to plague America for many years thereafter and most of it cannot be easily fixed.  What I want to focus on, however, is the soaring national debt and rising interest rates because they can have a dramatic effect on most Americans’ finances.

It is hard to wrap your head around the $40 trillion U.S. national debt that has constantly been in the news this month.  It’s helpful to know, however, that it has two components.  The most important one is “debt owed to the public” totaling $32.26 trillion.  This is the amount held by individuals, institutions, pension funds and foreign governments.  The other component is intra-government debt, owed to trust funds like those for Social Security and Medicare.

Many economists believe the national debt is causing worried investors to drive up interest rates on U.S. Treasury bonds, particularly the bell weather 10-year bond, which recently hit a 19-year high of 5.167%.  The rate on this bond is considered the world’s most important because it not only establishes interest rates for U.S. government borrowing, it influences rates for mortgages, car loans, credit cards and most other borrowing by businesses and consumers.

Economists are also concerned that debt owed to the public is currently 101% of the U.S. economy (GDP).  They fear that interest rates will soar if Congress fails to lower yearly deficits and slow the increases in the national debt.  Some are warning of a possible fiscal crisis that would force Congress to drastically increase taxes and cut spending, even on Social Security and Medicare.

Why didn’t this happen in the early 1980s when the Arab oil embargo caused high inflation and interest rates spiked to a staggering 19%?  Well, the difference between then and now is that the debt was much smaller compared to the economy then.  The debt to GDP ratio was only around 31% in the late 1970s and early 1980s instead of the 101% it is today.

The national debt, however, is just one factor that causes investors to demand higher rates to commit their money.  Others include persistent inflation and a dysfunctional Congress that has no plan to reduce deficits, which we experiencing today.  Another factor that juices interest rates is the competition for investment dollars caused by massive borrowing by tech companies in their efforts to beat China in the artificial intelligence (AI) race. 

There are two realities that are no doubt concerning Treasury Sec. Scott Bessent as he tries to lower interest rates: Trillions of the current national debt were borrowed with bonds at near zero interest rates in the 2010s.  When they mature in the coming months, Bessent will have to replace them at much higher yields, possibly 5% or more.  Secondly, investors are no longer willing to accept lower interest rates on the “exceptionally safe” U.S. bonds, according to a September 16 Economist article.  It opined that this is “an expensive privilege to lose when America must raise trillions of dollars in the bond market annually.”

When Trump was asked about Bessent’s efforts to lower interest rates on August 21 he claimed that he could use the military to stage an “intervention” on the bond markets in order to bring down soaring interest rates on U.S. Treasuries.  You can’t make this stuff up; I watched a video of him saying it. 

Obviously, Trump believes the U.S. military is the most powerful force in the world, but it is no match for the bond market.  The interest rates it establishes can force any debtor nation to its knees, including the highly indebted United States.  And no one can control its raw financial power, not even Trump.

In conclusion:

The current 101% debt to GDP ratio, persistent inflation and a dysfunctional Congress are rattling investors and causing them to demand much higher yields on U.S. Treasury bonds.  And massive borrowing by AI companies puts further upward pressure on interest rates.

The debt to GDP ratio could grow to 130% by 2036 according to a top JP Morgan analyst, which is absolutely alarming.

If the Treasury Department is forced to keep increasing yields on Treasury bonds, particularly the 10-year bond, this will not only greatly increase yearly budget deficits and the national debt, it will significantly drive up all borrowing costs for businesses and individuals.

I recommend watching the 10-year bond interest rate very closely for the next 12 months or more.  If it stays above 5% that will cause much higher deficits and depress the stock markets.  If it continues to go up significantly, say to 9%, a fiscal crisis becomes a real possibility.

Even if Democrats control Congress next year, there will be a long, tough road ahead in recovering from the horrific damage Trump has done to America, both domestically and internationally.  I hope Democrats do not promise too much because it’s unlikely they can deliver the results voters demand.  Rather, they should call on all Americans to get engaged in the recovery process.  Like Jack Kennedy urged in a radio address 65 years ago, “Ask not what your country can do for you – ask what you can do for your country.”

Still, I am confident that Americans can surmount any obstacle if they will just work together.