The Federal Debt Crisis
No Question: It’s the Biggest Economic Issue We Are Facing Right Now
You don’t need an economics degree to know that when governments spend more money than they have, that debt is paid in one of three ways: the destruction of taxpayer wealth through hyperinflation, the destruction of taxpayer wealth through massive recession, or the deus-ex-machina salvation of significant GDP growth, which governments cannot create, though they can lay the groundwork for it by doing three things:
* Lowering taxes (especially on the wealthy and businesses)
* Drastically reducing government spending
* Massively deregulating commerce
The US government has been significantly spending money it doesn’t have since the Civil War. But there was always a reasonable expectation that the US could repay the debt it was accruing until 1971, when Nixon detached the value of the dollar from the price of gold. Since then, the federal deficit has been on a progressively steeper decline. Now it stands at $36 trillion. No economist I know – including those with Conservative or Libertarian perspectives – believes this is going to end well.
Murray Sabrin and David Stockman are two economists I’ve been reading recently as they have been regularly covering and commenting on news that impacts the federal debt and the danger of hyperinflation. Some examples of what they’re saying:
* “Hyperinflation starting? Money printing never has a good outcome.”
Murray Sabrin channels his inner Weimar historian, warning that Federal Reserve money printing makes pennies cost more than pennies – literally four cents each. His inflation dissertation from 1974 seems prophetic now. His prescription: Buy gold, silver, and maybe hoard nickels from your local bank before they disappear too. Click here.
* “More Trumpian Tariff Hallucinosis”
David Stockman imagines Treasury Secretary Bessent suggesting tariff threats as bond market therapy – hit Apple with 25%, Europe with 50%. Trump’s “art of the deal” backfires as Apple flees to India and Vietnam, not America. Stockman’s diagnosis: Trump’s trade tantrums are economic theater, not genuine policy solutions. Click here.
And since I’m quoting Stockman and Sabrin, here’s what they have to say about the bill the Republicans are calling Big and Beautiful…
* Stockman: Instead of slashing trillions in deficit, Republicans are adding more red ink to the $36 trillion debt mountain. Click here.
* Sabrin: Socialists/economic fascists in the White House and in the Congress are taking us further down the welfare state road and a managed economy. Click here.
But What’s This… Data Suggesting Trump Was Right?
As I said above, Trump’s policy on making tariffs “fair again” has been criticized as inflationary by economic “experts” from both sides of the political divide.
As a devotee of Milton Friedman, I’ve long seen the logic in his perspective on tariffs: They are not fair and equitable because they are designed to protect one sector of the economy by penalizing others. And they are inflationary because, in the end, all consumers in the tariff-imposing country end up paying more for what they buy.
Most Leftists and Legacy Media critics make these charges without understanding what they are saying. (How else to reconcile their stance against tariffs with their general preference for governmental manipulation of banking and the markets?)
When economists and other serious thinkers criticize Trump’s trade policies, they do so with the advantage of understanding the economic theory. But they seem, at least to me, at least partially blinded by the assumption that Trump himself doesn’t understand what he is doing. (You can get that to some extent in the links above.)
What they don’t consider, it seems to me, is the possibility that Trump knows exactly what he’s doing and is using his usual threats and bluster to achieve certain political aims.
Beginning on Jan. 21, Trump called for all sorts of tariffs on all sorts of trade partners for all sorts of reasons, only a small portion of which are about reducing the US trade imbalance.
The tariffs he first ordered against Mexico and Canada were meant to force those countries to take more responsibility in preventing aliens to pass into the US. And it worked. He achieved a substantial amount of cooperation from the leadership of both countries very quickly.
Trump then expanded his “trade policy” by threatening to impose even greater tariffs on China, Russia, and Europe to achieve other political and social objectives. After several weeks of strong opposition, many of these countries have been quietly falling in line.
In fact, since the beginning of the year, the US trade deficit has fallen considerably. For example, the monthly goods-and-services deficit was $62 billion in March, down from over $95 billion at the start of 2022.
That is quite a drop. And it feels like a good thing to me. But I am also aware that it stems not from a manufacturing boom or export surge, but largely from weakened US demand for foreign goods. In other words, the drop may reflect the fact that Americans are importing less because they’re spending less, especially on big-ticket items.
We will come back to that in a future report. For the moment, I think it’s fair to say that any movement in this direction should be a good thing, but we’ll have to wait a few months to find out.
As for inflation, the consumer price index (CPI) rose 3.4% year-over-year in April – a significant improvement over the 9% peak in 2022. Trump credits this stabilization to tighter tariffs and domestic production incentives. However, inflation progress predates Trump’s second term, and key categories like food and services remain stubbornly high. The Fed’s preferred measure, core PCE inflation, has also leveled out but remains above the central bank’s 2% target. That said, keeping inflation steady in the mid-3s – after pandemic-era spikes and amid persistent supply shocks – is no small feat. Whether this reflects sound policy or sheer luck remains debated, but the numbers are no longer careening upward – and for most Americans, that counts.
Consumer sentiment, meanwhile, has begun to rebound. The University of Michigan’s index hit a two-year high in May, driven by lower inflation expectations and stable fuel prices. Gas prices, hovering around $3.60 per gallon nationally, are down from last year but remain high by historical standards. Trump’s energy policies – particularly expanded drilling permits and reduced regulation – may be partially responsible for the recent dip.
In short: the numbers aren’t fake, but neither are they slam dunks. The trade deficit is narrowing for reasons that might not bode well. Inflation is stable, but not low. And while the public is feeling better about the economy, it’s far from a euphoric recovery. Still, compared to the pandemic and inflation turbulence of the early 2020s, the current situation is better in one regard: If there is any chance for a cure to the debt through an economic rebound, it’s much more likely to happen under Trump’s leadership than it would if Kamala were in the White House.