(Daily Signal)—Hello, this is Victor Davis Hanson for The Daily Signal. I’d like to talk about debt, debt, debt.
All during the last few days, we’ve heard some startling news. Moody’s, the bond evaluator, for the first time in its history, since 1917, has lowered the credit rating of the United States government from Aaa to Aa1.
It didn’t do that during the 2008 meltdown. It didn’t do that during the Great Depression. It didn’t do that during 9/11. It didn’t do that during the Biden years when we borrowed $7 trillion. But it did it now.
At the same time, Jerome Powell, the head of the Fed, will not lower interest rates even though there’s been a good jobs report, a good inflation report, a good corporate profits report. Gross domestic product is gonna be evaluated, apparently, upward and there’s been low energy cost. That mortgage is still 4.25% Fed rate to 4.5%. And that means mortgages are still 6.5%, 7%. And that housing market is slowing as a result.
And this has got President Donald Trump very angry, that they’re doing this, given the prior administration borrowed $7 trillion and helped run up from $29 trillion in national debt to $37 trillion, and left Trump with a $3 billion-a-day interest payment. So, he’s jawboning all this and trying to get down. So, what is Trump trying to do? And is it working?
Well, he’s the first president since Bill Clinton and Newt Gingrich, the speaker of the House at that time, who’s talking about reducing a $2 trillion budget deficit, a $1.2 trillion trade deficit, and addressing a $37 trillion national debt. But is he actually doing it?
On the plus side of the ledger, you’ve got the Department of Government Efficiency. And DOGE in the first 100 days has identified about $160 billion in cuts. That’s encouraging if two things are following: if they can keep up that rate of identifying cuts and get up to the $500 billion or even $700 billion and maybe make 25% or 30% reduction in the $2 trillion deficit. And if the Trump administration exercises fiscal discipline.
The problem is twofold: that while he’s addressing verbally, rhetorically the debt and the deficit, you look at the big, beautiful bill under consideration and it’s going to have to pass or the Trump administration will be completely humiliated.
They need to get it through reconciliation but there are sizable increases in the defense budget from everything that’s justifiable, from salaries, from an Iron Dome-like missile defense—you name it. More drones—good. But it’s more money. And there’s more subsidies to farmers. And there’s not a lot of cuts—at least when balanced with the increases.
So, the budget deficit, for all the talk of DOGE and for all the talk of fiscal sobriety, might not actually go down. And if it doesn’t go down, the Fed may not lower rates. And if it doesn’t lower rates, then you still are stuck with a trillion dollars a year in interest payments. That’s killing us.
So, you’ve got to get that down. And the way Trump has to do it is just two ways: Either cut the budget or raise taxes—which will strangle the economy—or continue the tax cuts. And hope two things: that the tax cuts—the extension—will prime the economy, along with cheap interest rates.
And the question that we all have now: Is cutting taxes on tips, is cutting taxes on Social Security, is cutting taxes on first responder, etc.—all of which Trump has mentioned—is that really stimulus as opposed to, say, accelerated depreciation investment for businesses?
I don’t know the answer. But I do know, as a historian, that if you do not cut the deficit and the national debt and you have bond raters like Moody’s or the Fed that will not lower interest rates, you’re going to be in a crisis.
And in the antiquity—from Greece and Rome, through the Middle Ages, to the Renaissance—there were three ways of dealing with unsustainable debt and are not good. They’re all civilizational killers.
No. 1: As the Weimar Republic did in Germany, you pay back what you owe in cheap dollars. They inflated the marks. And bankrupt really helped cause the depression. You can do that, pay back the $37 trillion in inflated dollars. It’s not a good option.
No. 2: You can confiscate private wealth. People do that all the time throughout history. That destroys the legitimacy of the government. And it makes private investors hide their money.
When I say confiscate wealth, you can already see articles in financial left-wing journals that say, well, maybe the trillionaire, billionaire, whatever term they use, oligarchical class will get credit, some Social Security or get some kind of credit for us taking some of their 401(k) money. Something like that. That never works. It never worked in Athens. It never worked in Rome. It never worked in Renaissance Italy.
The third is the most drastic and it’s a killer too and we’ve seen countries in South America try it. And that’s to renounce the debt. Just say: You know what? All you bondholders, you guys have U.S. savings bonds—40% of them abroad, you know, here in America—you have so much money anyway. We’re just not gonna pay you back—the government. We’re gonna renounce it and start from zero.
Who would ever buy a bond again if we were to do that?
So, bottom line is incumbent upon the Trump administration to make real cuts and show progress that you’re reducing the annual budget deficit and more importantly, you have mechanisms to grow the economy.
Final note. We have a lot of confidence—this administration—that tariffs will give revenue and maybe also help reduce the budget deficit. I’m not sure that’s happening. Only 1% or 2%, maybe 3% of the $5 trillion in federal revenue today is made up by tariff income. Even with these huge new tariffs, if they’re actually reified, you might get a trillion dollars. You might get a trillion dollars over 10 years. That’s $100 billion out of $5 trillion in revenue. So, I’m not sure we can count on tariff income at all.
What we should count on is cut, cut, cut. Seek a balanced budget and grow the economy with tax cuts that encourage investment and economic expansion.
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