Is Donald Trump stoking another 2008-style debt crisis?

The benign view is that United States bond markets are throwing a hissy fit because new Fed chairman Kevin Warsh won’t “spoon-feed” them (signal the likely direction of monetary policy). The less-benign view is that Donald Trump’s tax and spending plans, which have pushed US debt to an eye-watering $40 trillion (€34.3 trillion), are coming undone, stoking a full-on fiscal crisis in the world’s most powerful economy. The US is the big beast of global bond markets with US government bonds serving as the financial industry’s benchmark for risk-free assets. The dollar has been the global reserve currency since the second World War, underpinning international trade and investment.It’s too big to fail, isn’t it. Yes, it probably is. But it’s not too big to have another 2008-style financial crisis.READ MORELast week’s surge in 30-year US bond yields – they touched 5.3 per cent, a level not seen since 2007 – sent tremors through financial markets and prompted a US government intervention to prop up the market.Treasury secretary Scott Bessent announced he was doubling long-term debt buy-backs to $4 billion to tame the spike in bond yields (in effect the US government’s long-term borrowing costs).The intervention came just weeks after Washington’s surprise intervention to buy Japanese yen, a move that was also designed to support US treasuries.Elevated inflation, a function of Trump’s seeming own-goal in attacking Iran and pumping global energy prices, is also souring sentiment.The speed at which US debt has grown is mind-numbing. It first reached $1 trillion in 1941. It hit $20 trillion in 2017, then doubled to $40 trillion in the intervening nine years.Both Trump and former US president Joe Biden are to blame. Since Trump took office, for a second time, in January 2025, the US debt load has increased by $3.8 trillion, for total growth of $11.6 trillion across his two terms. Public debt increased by $8.4 trillion during Biden’s term, driven by spending on Covid, infrastructure investment and clean energy subsidies.Washington’s inability to get control of its annual budget deficit is not unrelated to the polarised politics that surrounds it. Tackling it requires either cutting public spending or raising taxes or both, a political venture that neither Republicans or Democrats are willing to undertake, given the likely voter backlash. Both parties talk like fiscal hawks when in opposition and spend like drunken sailors when in office.While this political-head-in-the-sand routine goes on, the debt mounts.The cost of servicing it is now $1.2 trillion annually, bigger than the country’s defence budget.Whether the US on the brink of another 2008-like smash-up is, of course, impossible to say, but it seems to be reaching some sort of tipping point on debt.This time around it’s the US sovereign, rather than US households, that is dangerously over-leveraged. And the combustible material, instead of mortgage-backed securities, might be overvalued artificial intelligence (AI) stocks.“The build-up of US government debt and frailties in the treasury market has been one of key vulnerabilities for the global economy that the IMF [International Monetary Fund] and World Bank have been focused on in recent years,” Bank of Ireland chief economist Conall Mac Coille says.“The current account deficit, an aggregate measure of how far [day-to-day] spending exceeds income in the US economy, is expected to hit 4 per cent of GDP this year, the largest imbalance since just before the Great Financial Crash. “A clear fear is that a treasury market sell-off could expose leverage among hedge funds and also in the private credit market, leading to a broader equity market correction given stretched valuations on AI stocks.”Ultimately the US economy is living beyond its means and that represents a major imbalance for the global economy. The IMF has urged the US to take corrective action.The longer the situation goes on – or the longer Trump’s tries to correct it with US tariffs – the more severe the fiscal adjustment will have to be, potentially hurting the US economy.And that’s where Ireland comes in. Ireland Inc is tied into the fortunes of big US corporates like no other country. They supply most of the €33 billion corporate tax pot at the heart of the exchequer – and that’s before you consider the income tax their employees here pay. They dominate our export trade. Foreign-owned enterprises accounted for 87 per cent of the value of our exports in 2022, the Central Statistics Office has said.Higher US bond yields also tend to have a spillover effect in Europe, pushing bond yields here higher, which push up interest rates for mortgages, car and commercial loans, radiating negatively across the economy.Asked recently by a reporter whether Americans should worry about bond market volatility, Trump said: “I don’t think so at all. I think we have a very powerful country and we’re powering through these ridiculous interest rates – they’re ridiculous. Look, ‌when our country ⁠is strong, interest rates should go down.”The problem is they’re not going down.