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Will bond vigilantes come for Donald Trump?

Market worries over the high levels of US government debt have been exacerbated by Donald Trump’s win in the presidential election. With a range of economic policies centred on inflationary tariffs and tax cuts, investors see an increased risk of higher deficits and inflation – and have pushed the yields on government bonds dramatically higher in recent weeks. US public debt is already close to 100% of GDP (standing at $26 trillion) and is currently projected to rise to 122% by 2034. The US national debt (a broader measure that includes intragovernmental debt) is already $35 trillion. That’s a real-term tripling in 30 years and a doubling as a proportion of GDP to 123%, more than all but the most free-spending European nations. It’s also far above the 90% level that was famously (if controversially) posited by economists Carmen Reinhart and Kenneth Rogoff as the point beyond which a nation’s debt tends to act as a drag on economic growth.

Is the US national debt a concern for America’s economy?

Apparently not, to judge from the recent election campaign, when the issue was barely mentioned. This is despite fiscal policies from Trump that would raise the deficit from the current level of 6% – “exceedingly high for a country at peace” – to 12%. That compares with 4.4% in the UK, 2% in Germany. Why are the Americans so relaxed? Partly, because when it comes to the risks of running up a gigantic debt pile, the US does still benefit from the “exorbitant privilege” of issuing the world’s primary reserve currency, the dollar.

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