Trump Has Turned America Into a Credit Risk

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0:24Hello, and welcome to the weekend edition of The David Frum Show. I'm David Frum, a staff writer at The Atlantic. Today, I'd like to talk to you about what is going on with the cost of borrowing in the United States. The cost of debt shows up in almost every transaction of every American life. Home mortgage, car loan, student debt. It shows up in your taxes because the cost of servicing the government's debt is now a cost bigger to the taxpayer even than the cost of national defense. On Wednesday, as you've no doubt noticed, the Federal Reserve raised the federal funds rate by a quarter point.

0:56Many experts expect another rise sometime in the fall. That drives up the cost of commercial credit. That shows up in all kinds of ways. But it's not the most fundamental of all debt costs. Those debt costs, the costs of longer-term debt, are set not by the Federal Reserve, but in the marketplace. The United States government now pays 5 % for 10-year debt. It does so on the day anyway that I recorded this podcast. In the past, whatever the United States government paid for 10-year debt was the lowest price or just about paid by anybody on the planet. The United States is the strongest society in the world, the strongest economy in the world, and the safest economy.

1:32You would expect the cost of America's debt to be the lowest because it was the safest. In today's America, that is no longer true. The American rate for 10-year money is higher than is paid by Canada, a country that the United States keeps threatening to break up and attack and is waging trade war upon. It's higher than the cost paid for 10-year money by most of America's major trading partners, France, Germany, and Italy, and Japan. It's higher than the cost that is paid even by smaller countries. Greece, for many years considered a debt basket case that had to be bailed out by the European Union.

2:05Greece now pays less for 10-year money than the United States does. Estonia, the country on the front line, a country that the Russians keep threatening to invade and annex and destroy. Estonia pays less for 10-year money than does the United States. What can possibly be going on? Credit is about trust. The first question anybody would have before lending money to any borrower, whether that's a fellow worker who needs to be tided over until payday or the United States government, is will I be paid back? And the second question is, will I be paid back in money that's worth approximately what the money I lent in the first place was?

2:39That is a doubt that more and more people feel about the United States. American inflation is running hot. Americans are paying more for food, for fuel, for all kinds of costs driven by changes in the global marketplace. many of them set in motion by Donald Trump's own policies, especially the war with Iran. But, you know, America's trading partners also face higher costs for food and for fuel. Greece is paying more for food and for fuel, and yet it is paying less for credit than does the United States. And the reason for that goes to other questions of trust that go beyond inflation. There is widespread doubt about the ability and the willingness of the United States to repay the money it borrows.

3:16Partly that's because the American debt load is now so big relative to the American economy. The debt load is the highest level of debt ever attained before in American history, which was the debt that was used to fight and win the Second World War relative to the size of the American economy. The cause of that rising debt is driven by America's high spending, but also by a series of tax decisions the United States has made that seem now pretty locked in. And people who observe the American political system can see that no political party is talking about doing anything about the debt or the deficits.

3:46In fact, everybody who is inactive in politics, his plans to tax less and keep spending the same or even more. So there's questions about, will the United States be able to service the debt? There's an even deeper question about the kind of country that the United States is. If you're trying to get news today, you'll find a lot of biased algorithms, rage bait, and AI noise. Thanks, social media. That's where Impress comes in. It's a social platform on top of factual journalism, not the other way around. Track your reading and earn points. It's like Strava for your brain. Plus, you can connect with other users in your city who share your genuine curiosity.

4:24Ditch the echo chamber for reality with InPress. Download it today for iOS or Android at InPress.app. That's I, N as in news nerd, press. Trust reflects trustworthiness. And under President Trump, the United States has become a less trustworthy country, with a government that is more authoritarian, more whimsical, and spectacularly corrupt. A government that also is increasingly relying on desperate and dubious gimmicks to manage its debt. The Treasury Secretary has intervened in financial markets to try to outwit bond traders. He's told them, I am the house as if you were running a casino instead of the borrowing of the largest economy in the world.

5:03A lot of people look at this and say, what kind of people are in charge? What kind of government does the United States have? Can they be trusted? You know, there are many technical issues in debt markets, the length of the term and inflation rates and things like that. But debt is ultimately cannot be severed from moral questions. There's a famous exchange about debt that is recorded in Ron Chernow's history of the Morgan Bank, the House of Morgan. It's 1912, and J.P. Morgan, the great famous banker, creator of the Morgan Library and other important institutions, the man to whom the Morgan Stanley name is ultimately traced back, J.P.

5:37Morgan was testifying before Congress in 1912 about credit. And he was asked by the counsel of the committee that he was testifying before, a man named Samuel Untermyer. Untermyer asked Morgan, which was more important in assessing the creditworthiness of a buyer? Was it cash, money, or was it hard assets, property, money or property? Which was more important in deciding the soundness of a loan? And Morgan replied, and the story is told, as I said, in Wancher and I's book. Morgan replied, no, sir. The first thing is character. Well, this seemed a kind of surprising answer. and Undermeyer pressed on.

6:10I didn't ask about character. I said, which is more important, money or property? And Morgan repeated, the first thing in credit is character before money or anything else. And money cannot buy character. A man I do not trust could not get money from me on all the bonds in Christendom. I think that is the fundamental basis of business. Trump is doing to the United States government what he did to his own enterprises. As a private businessman before he entered presidential politics in 2016, Donald Trump was maybe the least bankable name in New York real estate. Most major banks would not lend to him at all.

6:46It's ironic. During the campaign of 2016, he often said he would run the United States the way he ran a business, and he's sort of done that. He's making the United States a less creditworthy borrower, not as uncreditworthy as Trump's own companies were before Trump became president, but less creditworthy than France, less credit worthy than Canada, less credit worthy than Germany, less credit worthy than Italy, less credit worthy than Greece, less credit worthy than Estonia. As you look at the havoc that Trump is creating, the havoc of the torn down East Wing and this crazy ballroom he's building, the apparent threat to demolish the Kennedy Center and leave a big hole in the ground there, the chaos of his war, the chaos of our politics, it is all reflected in the price that everybody must pay, the price of debt.

7:30And that price is driven by the falling creditworthiness, trustworthiness of the United States government and the people in charge of it. It's a worrying thing. And the way to fix it is not just with fiscal measures, although those are necessary, to bring the books back into balance, or closer into balance than they were before, but with a restoration of integrity at the top of the government. As J.P. Morgan said, character is where it all begins. And if you lack that, The other assets of the state, those are highly dubious, highly uncertain, and may not be relied upon. Thanks so much for watching this weekend episode of The David Fromm Show.

8:06See you on Wednesday for the long-form edition of The David Fromm Show. Bye-bye.

8:25If you're trying to get news today, you'll find a lot of biased algorithms, rage bait, and AI noise. Thanks, social media. That's where Impress comes in. It's a social platform on top of factual journalism, not the other way around. Track your reading and earn points. It's like Strava for your brain. Plus, you can connect with other users in your city who share your genuine curiosity. Ditch the echo chamber for reality with Impress. Download it today for iOS or Android at impress.app. That's I, N as in news nerd, press.