Donald's Dreams of Debt and Deficits
The President and some in Congress have made some Preposterous statements lately.
Based on news reports this weekend - apparently Donald Trump is under the impression that some of the US’s $36 Trillion dollar debt is not real. According to a Reuter’s story, the President said “It could be that a lot of those things don’t count. In other words, that some of that stuff that we’re finding is very fraudulent, therefore maybe we have less debt than we thought.”1 This was said to reporters by Trump on Air Force One. Nobody reported a lack of oxygen on the plane, but still some White House people were apparently interested in walking back Donald’s statement.
DEBT DREAMS In the past, even when he was running in 2016, Mr. T was interested in “refinancing” the US debt. He considers himself, apparently, a “King of Debt”. With a long history of screwing over people who have lent his real estate projects money, perhaps Mr. T wants a shot at ruining the credit of the United States. In a debt restructuring, a lender might make a loan at, say 6%, and the borrower comes back later and says ‘I can’t do it - I can maybe pay you back at 5%’. Maybe Trump never really looked closely at the debt his young protege Elon has sent his Wrecking Crew into the Treasury (the small team included a 19 year-old boy whose onscreen name is ‘Big Balls’), the debt breaks down as follows”
Total federal debt as of Feb. 1, 2025 $36.220 Trillion
Total federal debt Held by Public 28.911 Trillion
Total federal debt - Intragovernment 7.308 Trillion
All this debt is in the form of various T-bills, notes and bonds that pay interest to the buyer. As of this writing, if you bought a 10-year bond from the Treasury you’d be paid interest at a bit over 4.53% a year, which is not a lot when you think about it. The reason our government can borrow so easily is because people believe in the US Treasury’s ability to pay its debts; it can tax the people more if need be. Now this third category above, Intragovernmental debt, is bonds held by various trust funds of the government, that are required - by law - to keep their money in non-tradeable Treasury securities, and the Treasury is required - by law - to pay interest to the funds. The trusts includes such things as the Social Security Fund ($2.6 Trillion), the Military Retirement Fund, the Medicare Trust Fund, the Highway Trust Fund. Even the FDIC which insures your deposits at banks owns (has lent) over $80 billion from buying these Treasury debts.
In short, all this “Intragovernmental debt” is owed to people, overwhelmingly to the American people. Debt “held by the public” is what also includes debt that is owed by foreign governments and banks. The US is in no position to “renegotiate” debt held by the Public. It would be a default event, would severely damage the US’s credit rating and ability to borrow so easily. (Companies like Moody’s and S&P would evaluate a failure by the US Treasury to honor the terms of its debts, though I imagine they are subject to political pressure and goons as anyone else appears to be.) However, suppose someone who plays fast and loose wants to alter or even disavow funds that are held “Intragovernmentally” - only their own gall, or conscience, would stop them. It is hard to know what Trump and company are up to: they have suggested things like massive layoffs of government employee, breaking contracts, starting a “sovereign wealth fund2”, having a strategic reserve of bitcoin. Of course, they have stopped and restarted on tariffs three weeks in. It is really difficult to know what they are capable of doing. For now, we have new tariffs on steel and aluminum.
DEFICIT DREAMS Cutting taxes is part of Trump’s agenda. In fact, the 2017 Tax Cuts and Jobs Act tax rates are still in effect (and were throughout Biden’s term) but expire at the end of Fiscal 2025. At a minimum, Trump wants to restore those, plus he wants to, supposedly: not tax tips, not tax overtime, not tax social security income. Additionally he wants to remove the existing $10,000 limit on the deductibility of state and local taxes, the so-called SALT deduction. These used to be unlimited but in 2017 the Republicans wanted to stick it to the blue states who have higher taxes and generally more valuable homes. The SALT cap from 2017 made it more expensive for lots of people to itemize deductions3 and now, in 2025, all houses are overpriced so more people would benefit from SALT deductibility and the ability to get over the hurdle to be able to itemize their home mortgage interest expenses.
So all Mr. Trump’s tax plans, and I have not even discussed what he wants to give to rich people, are going to cost a lot of money. Now he and Elon might try to tell you they fired a whole bunch of government employees so we have all this money freed up. I would not believe them if I were you. If Trump and Elon were able get rid of half the Federal workforce (a stretch, and a nightmare scenario for the country); they could save maybe $125 billion a year4. We are on track to have a $2 trillion budget deficit5 this year, so it may help, but would probably cause a recession if done hastily.
Naturally, Congressional Republicans want to agree with Trump’s plans as much as they can. Anytime there is a change to spending or taxes, the government has to forecast how much the change is going to cost. At first glance one would think that if you cut taxes at all, the federal deficit would be larger. Now, some types of spending or tax cuts can be undertaken for stimulative reasons - they are viewed as at least making the economy (GDP) bigger in addition to raising a deficit. Some people go so far as to claim that if you cut taxes, the economy grows so much that it pays back a part of the tax cut (you really need to be in a recession for a tax cut to be this stimulative.) Amazingly, there are even people out there who’ll claim a tax cut will “pay for itself”. In preparation for Trump taking office, Republican party planners (in Mar-a-Lago, FL) were kicking around numbers like that a large tax cut will bring $3 trillion in new tax revenue! The Committee for a Responsible Federal Budget had an interesting take on this, calling it “fantasy math”.6 Anyway you cut it, large cuts in taxes or spending aren’t necessarily good things - they can be inflationary - despite what the new in-crowd wants to tell the country. With money, with the government, people used to say ‘it depends on whose ox is gored’ or with this crowd, depends on whose pocket is lined. We’ll see what other stories the new administration has for us.
N.B. The White House announced a halt in the production of pennies, which already may be the singular positive achievement of the entire second Trump regime.
Reuters, February 9, 2025
Very few countries have a sovereign wealth fund. Oil producers like Norway, Saudi, and the Emirates have them. They usually make straightforward investments, although the Saudi’s $2 billion investment in son-in-law Jared Kushner’s “fund” can make one pause to consider the implications and possibilities of self-dealing.
To itemize deductions on ones’ federal income tax, the sum of things like home mortgasge expenses, proterty tax, statte taxes, and some parts of medical expenses has to exceed certain thresholds to be deductible. If the $10K limit on SALT deductions were eliminated, more people, certainly more homeowners could itemize, reducing their tax obligation to Uncle Sam.
I arrived at this number assuming a cost, including benefits, of $125,000 per worker per year.
Remember a deficit is the gap between what the government spends and what it brings in each year and and shortfall is made up by selling Treasury bonds, which adds to the Debt.
Feb 7th, https://www.crfb.org/blogs/3-trillion-dynamic-feedback-fantasy-math