At debt’s door: US superpower is waning and Trump’s part of the problem

In short order, Donald Trump has inflicted deep damage to three of the unique sources of American superpower. And he’s on the very brink of shattering a fourth.

The United States enjoyed the unique advantage of an alliance network of more than 40 countries. But an alliance is meaningless to Trump’s America. The US uniquely created and built the world trading system as a source of growth and prosperity. Trump is dismembering it.

Illustration by Joe BenkeCredit:

The US uniquely held in check war between great powers through its military might and strategic credibility. Its might remains. But American credibility started to slide under Barack Obama and today approaches the point of extinction.

Trump’s threats and promises are worth nil. Russia ignores his threats to stop the war in Ukraine. China successfully called his bluff over tariffs. Trump claims to have stopped an escalating war between India and Pakistan, but they say he had nothing to do with it.

Two newborn acronyms, both coined in the finance world, tell the story. One, coined by Financial Times columnist Robert Armstrong this month, is TACO – Trump always chickens out. The other, first reported by The Wall Street Journal last week, conveys investor sentiment about where to put money. It’s ABUSA – anywhere but USA.

Now Trump is on the cusp of surrendering a fourth unique source of US superpower, and perhaps the single most important – America’s “full faith and credit”. That is, the ability to borrow cheaply, to spend lavishly and to enjoy the “exorbitant privilege” of issuing the global reserve currency.

Fiscal vandalism: Donald Trump’s “big beautiful” bill will harm the US economy.Credit: AP

China’s foreign ministry last month described Trump’s America as a “paper tiger”. Now even its paper – in the form of its Treasury bonds – is under challenge.

It’s no secret that the US has been building a vast national debt for years. Indeed, it’s literally up in lights in the form of debt clocks at multiple bus shelters around Washington, DC, courtesy of the Peterson Foundation. The clocks show US government debt at $US36 trillion and ticking higher by the minute. That’s about $US106,000 for every man, woman and child in that nation. Before the pandemic, US debt stood at the equivalent of about 100 per cent of America’s GDP. Today, it’s 122 per cent.

Some investors are starting to doubt that the US ever will repay it. The doubters include Trump himself. In 2023, he was asked about the risk of a US sovereign default. He replied: “You might as well do it now because you’ll do it later.”

The worry is that “later” has arrived. Eleven days ago, the credit rating agency Moody’s cut the US government’s creditworthiness – for the first time since 1919 – to second-tier.

Of the 200 countries in the world, only 10, plus the European Union, are rated as risk-free by all three major credit agencies. The US is not among them. The AAA sovereigns are Australia, Canada, Denmark, Germany, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland.

There are signs of growing anxiety in the markets. The US dollar has been sold off in the past week and bond interest rates bid up. And now comes the fiscal vandalism that Trump likes to call his “big beautiful” bill.

He’s half-right. It’s big, but it’d be ugly. The domestic politics of the bill are ugly enough. The poor get poorer through cuts to food stamps and Medicaid. The rich get richer; Trump’s tax cuts for high incomes and corporations get extended.

But that’s their country, their business. Where it gets ugly for the world is its effect on the federal debt. The technocrats of the Congressional Budget Office calculate that it would add about $US4 trillion to the debt over a decade.

The bill was passed narrowly by the House of Representatives and now goes to the Senate. If this is passed into law, market reaction will be critical. A sudden sell-off of US bonds would create a financial crisis with unpredictable consequences.

Peter Orszag, head of the US investment bank, Lazard, and previously director of the Congressional Budget Office, said this month that, in the past, he had ignored “all the Chicken Little, kind of ‘the sky is falling’ fiscal stuff because all the dire predictions were not happening. But if you compare where we are now to where we were a decade ago, it’s a lot different. The deficit is twice as high. Interest rates are dramatically higher. I think it’s time to worry again about this trajectory”.

So does historian Niall Ferguson. In February, he proposed something he calls “Ferguson’s law”. It posits that “any great power that spends more on debt servicing than on defence risks ceasing to be a great power”.

He describes his proposed threshold as timely “as the US began violating Ferguson’s Law for the first time in nearly a century in 2024”. The Congressional Budget Office says that US net interest payments hit 3.1 per cent as a share of GDP last year, overtaking defence spending at 2.9 per cent.

Different agencies have slightly different estimates, but the broad point is that the US is now in Ferguson’s danger zone, which he calls “a useful predictor of the decline of a great power”.

How does this hurt a great power? Because there is less butter and fewer guns: “The debt burden draws scarce resources towards itself, reducing the amount available for national security and leaving the power increasingly vulnerable to military challenge.”

He also finds the “Ferguson limit” signals the internal fragility of a great power, as well as its external vulnerability. His paper for the Hoover Institution studies empires from Habsburg to British to support his thesis.

Ferguson doesn’t claim that US collapse is inevitable at this point. But if its political system plunges ahead into ever-deeper debt, the risk of a market panic rises. And a chaotic sell-off could indeed seal the fate of empire. There’s an old market adage: “Deficits don’t matter. Until the day they do.”

Peter Hartcher is international editor

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