Why America may never be great again

When J.P. Morgan’s Jamie Dimon said on Friday that a crack in the US bond market was “going to happen”, what was he warning about?

Essentially, he was saying there might be a future auction of US bonds – US government debt – where demand fell short of supply.

Jamie Dimon didn’t say that a crack in the bond market might happen. He said it would happen.Credit: Bloomberg

That would lead to a big spike in bond yields, with interests costs, not just for the government but all US borrowers, rising sharply because the government bond market provides the benchmarks for all US debt. There would be damaging impacts on the US economy.

It would also undermine confidence in the $US29 trillion ($45 trillion) US Treasuries market – historically the world’s financial haven – leading to an exodus of foreign investors and disruptions to global financial markets.

Dimon didn’t say that crack in the market might happen. He said it would happen.

“I just don’t know if it’s going to be a crisis in six months or six years, and I’m hoping that we change both the trajectory of the [US government] debt and the ability of market makers to make markets.”

Dimon’s disconcerting forecast of a crisis in the world’s most important financial market is primarily based on the long-term build-up in US government debt, an escalation that accelerated after the 2008 financial crisis and the pre-pandemic era of Federal Reserve Board ultra-low interest rates and quantitative easing.

The profligacy of the first Trump administration, and then the Biden administration, has seen the debt held in public hands explode from just under $US20 trillion when Donald Trump first won the presidency in 2016 to $US36.2 trillion today. Relative to US GDP, gross government debt has soared from about 104 per cent of GDP to more than 124 per cent.

America’s government finances are about to get a lot worse.

The “One Big Beautiful Bill Act” currently before the Senate, with its extension of Trump’s 2017 tax cuts, would add more than $US3.3 trillion to that debt within a decade and (because the spending measures are front-loaded, with expenditure cuts deferred) about 1.8 percentage points to the US debt-to-GDP ratio in its first year.

Donald Trump and his administration risk isolating America as they look to bully the rest of the world. Credit: Bloomberg

Concern about the increase in debt the bill would generate, along with the chaos created by Trump’s tariffs, has already caused US bond yields to rise significantly and produced some weakness in demand in auctions of bonds with longer durations. Bond investors want to be compensated for the perceived increase in risk of holding bonds for 20 or 30 years.

The demand-versus-supply challenge created by the sheer volume of debt the market is being asked to absorb is exacerbated by the changes to US bank regulation that were made after the 2008 financial crisis.

Dimon’s reference to market makers relates to the requirement that banks hold capital and liquidity against risks, with Treasury securities treated no differently to other assets.

In a crisis, and a big shortfall in demand for a US bond issue, the banks, as “primary dealers”, would be expected to step up and fill the void, but those requirements might prevent them from doing so.

The Trump administration has raised the prospect of bank deregulation, with the “supplementary leverage ratio”, which requires banks to hold a minimum 3 per cent of common equity relative to their total assets, likely to be lowered.

Dimon isn’t the only senior Wall Street figure worried about the potential for an implosion in the bond market.

Speaking at the same Reagan National Economic Forum in California as Dimon, Gary Cohn, a former Goldman Sachs president and adviser to Trump in his first term, said the US had “the most robust debt market in the world, until we don’t”.

“If there lacks interest from foreign investors, and there lacks interest from US investors ... rates will move out dramatically,” Cohn said. “One or two auctions later, you could be in a completely different system.

“And then, when the government gets to a point where it can’t efficiently finance itself, we have a completely different position. And when we’re there, it’s almost too late to deal with.”

The White House, of course, isn’t concerned, arguing that growth from its tax cuts and spending will expand the economy at a rate that will resolve the threat of rising deficits and debt and shrink the deficit and debt ratios.

Treasury Secretary Scott Bessent pushed back against criticism of the One Big Beautiful Bill Act impact on the deficits and debt.

“This bill is going to create growth. I’m not worried about the US debt dynamics because a change in the growth trajectory takes care of a lot of that,” he said, predicting that, within a year, the US economy would be growing at more than 3 per cent.

That might be somewhat optimistic. Trump’s tariffs, if he is allowed by the courts to impose them, or finds other mechanisms for doing so, will subtract from growth.

The US dollar is under increasing pressure.

It is also the case that the $US4 trillion-plus of tax cuts aren’t actually stimulatory cuts, but an extension of the 2017 tax cuts that were scheduled to expire in December. Their extension might avoid what would otherwise be contractionary tax increases, but it is stretching it somewhat to see them as turbocharging growth.

There’s also, given the nervousness of investors, particularly foreign investors, about the Trump administration’s love of destabilising tariffs and the blowout in government spending that would occur if the One Big Beautiful Bill is enacted, another potentially destructive element in the legislation.

Section 899 of the bill would enable the US Treasury to impose penalties on foreign investors or companies by imposing punitive income and withholding taxes on them – up to 20 percentage points on their US investments – if the US deems their governments have imposed unfair taxes on US companies.

The European Union, the UK, Canada, Australia and others with valued-added taxes (our GST) or digital sales taxes would be obvious targets.

Section 899 would apply to dividends, the interest on corporate (and possibly government) bonds and corporate profits and would also apply to the holdings of sovereign wealth funds that are currently exempt from taxes.

There’s already a “Sell America” trade under way. Even as US bond yields have risen, the US dollar has fallen almost 10 per cent this year, a reversal of the normal correlation.

Trump’s trade wars and the expected spending binge and deterioration in America’s public finances – a prospect that saw the US lose its last AAA credit rating last month – are the reasons there have been outflows of capital from the US this year.

If Section 899 were enacted – or if foreign investors thought it was likely to be enacted – there would be a real exodus of capital from the US. Interest rates would spike even more and investment and growth would shrink. The prospect of US Treasury calling a bond auction where no one turned up would strengthen.

If no one wants to buy US assets, or are scared away from the US markets and economy by the administration’s policies,  the dollar won’t remain dominant and America will never be great again.

Trump and his administration want to bully the rest of the world. They want to dictate other countries’ trade, tax and social policies while still seeking their investment – indeed, demanding that they invest more – to “Make America Great Again”.

They risk being shunned by the rest of the world and its capital, with unpleasant consequences for America’s public finances, its economy and for the dominance of the US dollar that has underpinned the transmission of American power around the globe.

If no one wants to buy US assets, or if people are scared away from the US markets and economy by the administration’s policies, the dollar won’t remain dominant and America will never be great again.

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