Trump’s Claim That U.S. Debt Calculation May Be Fraudulent Could Put the Economy in Danger
Our research has shown that there is no universally accepted threshold where debt becomes unsustainable. Instead, each case requires context-specific analysis looking at macroeconomic fundamentals such as inflation and unemployment, financial crises as well as the (potentially self-fulfilling) market expectations.
Trump’s Take
Recently, Trump has questioned not only the size of federal debt but also the integrity of the methods used to calculate it, without presenting any evidence. He claims that the Elon Musk-led Department of Government Efficiency (Doge) has uncovered potential fraud. If confirmed, these findings could significantly alter perceptions of the country’s financial position.
Reports have also highlighted his controversial allegation that the US is “not that rich right now. We owe US$36 trillion … because we let all these nations take advantage of us.” These claims are puzzling, as the large size of US debt reflects decades of fiscal policy decisions in the wake of numerous shocks to the economy. Debt itself is not a cause of alarm for analysts.
While the amount of US federal debt held by foreign stakeholders has risen over time, it is currently less than 30% of GDP. This is down from an all-time high of 35% during Trump’s first term back in 2020 during the pandemic.
Of the US federal debt held by foreign countries, the largest amounts are owned by Japan, China, and the UK. Yet, when other countries hold US federal debt, it has nothing to do with “taking advantage” of the US.
In fact, the US dollar is the world’s dominant vehicle currency. It is on one side of 88% of all trades in the foreign exchange market, which has a global daily turnover of US$7.5 trillion.
As such, the US benefits from a so-called “exorbitant privilege”. This advantage comes from the international demand for the “safe haven” status of US Treasury securities and the US dollar, and has allowed the US to issue debt at a relatively low interest rate.
Research suggests that this “safe haven” status of the US dollar has increased the maximum sustainable debt for the US by around 22%. What’s more, it’s estimated to have saved the US government 0.7% of GDP in annual interest payments.
These advantages rely on the fact that US Treasury bonds are traditionally viewed as risk-free assets. This is particularly the case during times of global financial stress, as they are backed by the full faith and credit of the US government. The US has a longstanding record of meeting its debt obligations.
But Trump’s comments risk shaking the confidence of financial markets, leading traders to reassess the reliability of official data and the potential risks associated with US Treasury bonds. Whether truth or tale, such remarks touch on sensitive issues regarding fiscal responsibility and transparency in government.
Any suggestion that the US government’s debt figures are unreliable could be destabilizing. This is because they could call into question the reliability of the US fiscal system among the international investors and foreign governments that hold these securities.
Much like Trump’s tariff threats, alleging other countries who hold a substantial portion of US federal debt have been opportunistic could be risky.
The president could end up straining diplomatic bilateral relations with key creditors, which may cause broader uncertainties in global financial markets.
With Trump in the White House, distinguishing between politically charged rhetoric and fiscal sustainability of the US federal debt will be essential for maintaining trust in the US economy and the health of the global financial system.
Gabriella Legrenzi is Senior Lecturer in Economics and Finance, Keele University. Reinhold Heinlein is Senior Lecturer in Economics, University of the West of England. Scott Mahadeo is Senior Lecturer in Macroeconomics, University of Portsmouth. This article is published courtesy of The Conversation.
