Just So You Know, Trump’s Erratic Behavior Makes Life More Expensive for Everyone Else

The interest rate on 30-year bonds rose to 5.4%, the highest rate since July of 2003. It’s not clear exactly why the rate rose, but expectations of higher inflation do not seem a plausible explanation. The interest rate on inflation-indexed bonds has been rising pretty much in tandem with the rise on 30-year bonds. This means we are looking at higher real interest rates.

There are several plausible reasons why real interest rates would increase. A standard explanation is higher government budget deficits. I have always been skeptical of any direct link between deficits and interest rates, but if investors believed that the Fed would respond to deficits by pushing the federal funds rate higher in future years, that would lead to higher interest rates, whether or not a larger deficit was directly the cause.

And we are certainly looking at larger budget deficits now than at the start of the year, due to the war on Iran. This has led to large expenditures to fund the war and will almost certainly lead to larger expenditures in the future, as President Donald Trump seeks to replenish depleted weapon stockpiles and reconstruct bases destroyed in the war. He is requesting a budget of $1.5 trillion, almost 5% of GDP, which would be $600 billion more than the last Biden budget.

There is also the Trump-crazy premium. There are many ways in which the world was reasonably predictable before Trump but no longer is.

The trillions of dollars that the hyperscalers plan to spend building data centers also creates huge demand for borrowing. This spending can also play a role in pushing up rates.

There is also the Trump-crazy premium. There are many ways in which the world was reasonably predictable before Trump but no longer is.

Under Trump, US trade agreements are no longer meaningful. He openly ignores them at will, saying they were signed by “dumb” presidents, including the agreements that he negotiated. Trump has also threatened wars or military actions all over the world, including against longstanding US allies like Denmark and Canada. And he has shown a lack of respect for domestic law, repeatedly violating orders from judges when he disagrees with them.

This erratic behavior almost certainly adds a substantial cost to borrowing. While under other presidents it would have been virtually inconceivable the United States would default on its debt, that is no longer the case. It is entirely plausible that Trump would at least selectively default, not paying off the interest and principal to bondholders he didn’t like. As Trump is fond of saying, he can do whatever he wants.

While that may be fun for him, Trump’s erratic behavior makes life more expensive for everyone else. He has pushed mortgage rates over 7%, making homeownership ever more unaffordable. Higher rates also mean that people have to pay more on car loans and credit card debt, as well as the interest rates businesses and state and local governments have to pay.

The basic story is that while Donald Trump is apparently having a good time, the rest of the country is paying a big price in the form of higher prices for gas, food, electricity, and many other items, as well as higher interest rates. Trump apparently hasn’t noticed this reality, and any of his aides who have are too scared to tell him. It’s very MAGA!