Trump's economy is already in trouble

Not all of it is his fault, but warning lights are flashing, and his policies aren't helping.

Over the past 35 years, Americans have become used to a particular cycle of macroeconomics and presidential politics. First, a recession will strike during a Republican President’s term in office, and disgruntled voters will bring in a Democrat to fix things. This happened when Clinton came in after the recession of 1991 (which was more severe than people tend to recall), and when Obama got elected after the financial crisis hit in 2008. It might be a stretch, but you could even think of Biden’s election after Covid as an example of this. Anyway, the second part of the cycle happens when the economy recovers under the Democratic President, and the nation turns its attention back to culture wars once again — and brings in a Republican, because America is a fairly socially conservative place. This is what happened in 2000 with Bush, and in 2016 with Trump.

This cycle neatly explains why the economy typically does better under Democrats¹:

Source: JEC

A little bit of this is probably due to Democratic policies, like Obama’s stimulus. But the most important reason for the pattern, I think, is just that Democrats tend to get elected when the economy is bad, and the economy tends to bounce back on its own.

At first glance, Trump’s election in 2024 might seem to break this pattern. Despite steady growth, a good labor market, Americans were still extraordinarily pessimistic about the economy. Some of that might have been simply displaced anger over sociocultural issues, but some of it was probably just lingering anger over the inflation of 2021-22, which reduced most Americans’ purchasing power. For the first time since 1980, people brought in a Republican, rather than a Democrat, to fix things.

But this isn’t 1981, and Trump isn’t Reagan. There are three big differences:

• Unlike in 1981, inflation had already come down by election day. This leaves little further room for improvement.

• Trump’s policies are looking much more inflationary than Reagan’s, for a number of reasons.

• Unlike in 1981, the U.S. economy is strong, and is thus more likely to surprise on the downside.

• The national debt is becoming a huge problem, for the first time since the early 1990s.

Not all of this is Trump’s fault, obviously. Some of Biden’s policies created underlying inflationary pressures that Trump now needs to do the hard work of cleaning up. The enormous national debt, which is now incurring skyrocketing interest costs, is only partly from Trump’s first term — most of it was built up during previous administrations. And like some of his Republican predecessors, Trump happens to be coming into office at the peak of the macroeconomic cycle.

So the deck is a bit stacked against him. But so far, Trump’s proposed policies — big tax cuts, tariffs, and yelling at the Fed to cut interest rates — look exactly what America doesn’t need in order to keep inflation down and growth high.

So Trump is in danger of piling self-inflicted wounds on top of existing bad luck. As a result, the Trump economy could end up as a severe disappointment. Already, warning signs are flashing.

The national debt is a huge problem again

I’ve been warning for a couple years now that the national debt was about to become a problem again. For two decades, Americans didn’t worry much about the debt, because interest rates were low. If interest payments are low, you basically don’t even notice debt piling up, because it doesn’t do anything — it just sort of sits there as a number in Microsoft Excel.

But when rates go up, you have to start rolling over your debt at those higher rates. When a 10-year Treasury bond matures, the government has to go out and borrow more money in order to pay the principal on that bond. So the interest it pays on that little slice of debt immediately jumps from whatever the rate was on the old Treasury bond to whatever the Treasury rate is today. If rates are higher today than when the old bond got issued, then there’s a sudden jump in the federal government’s monthly interest payments.

That’s happening to the U.S. right now, and it’s happening fast. Interest rates started going up three years ago, and the average maturity of the national debt is about 6 years. Every day, more of that debt is rolled over at the new higher rate of over 4%, and the government’s interest costs go up and up.

Here’s a chart that should scare the crap out of you: