Trump is about to drop a multi-trillion bomb on the stock market

The CBO agrees. Its long-term analysis of the TCJA found that extending it will not only increase the national debt by $37 trillion over the next three decades, but reduce economic output by 1.8pc by 2054 – or $1.5 trillion in cash terms.

That’s because while lower taxes will provide a temporary sugar rush, the size of America’s debt will weigh more on growth – particularly through higher debt interest payments.

Ken Rogoff, another former IMF chief economist, points out that failure to renew the 2017 Trump tax cuts “would be regarded as a huge and disruptive tax hike” that could itself see market sentiment sour. However, the Harvard professor warns that the tax cuts could also spell trouble.

“Can America afford it? The US is on a very risky debt trajectory that likely will lead to another major burst of inflation over the next few years, though this may not be realised until the aftermath of the next big pandemic-level shock”.

Rogoff adds that the end of low interest rates has brought with it a reckoning: “Those many thought leaders who denied this would ever happen and argued debt was a free lunch had their heads in the sand.

“When the shock hits, someday it will absolutely weaken the dollar’s grip on the global economy. Trump’s tariff war and flouting of the rule of law have already done lasting damage.”

It’s a damning verdict but not an unusual one.

Matthew Amis, a bond manager at Aberdeen Investments, warns that there are consequences to not caring about getting debt down. “It just adds to the credibility question surrounding the US,” he says – referring to Trump’s steep “liberation day” tariffs on April 2 that sparked a combined collapse in stocks, bonds and the dollar.

Amis says: “What we saw in that first week in April was somewhat akin to the [Liz] Truss trade of 2022, where it just shows that the bond markets need to be on your side if you want to achieve your aims.

“You need to show that you’re on top of borrowing. I don’t think you necessarily have to bring it down to a great extent – but you have to be aware of it.”

He adds that market volatility in the wake of the tariffs offered a clear warning sign that the US “is not immune from the bond vigilantes”.

“Its exceptionalism has been questioned,” he says. “They’re not as special as they thought they were.”

Credit: Reuters

With this in mind, Republicans are pressing ahead with the “big beautiful bill”.

The GOP currently holds a three-seat majority with 53 seats. The remaining 47 are split between 45 Democrats and two independents.

They had initially promised Trump that they would finalise the bill by Memorial Day later this month, but that deadline has since been extended to July 4.

Many Republicans insist that a big chunk of the tax cuts can be paid for by revenue from higher tariffs, spending cuts and repealing net-zero tax breaks. But all are contentious.

For example, the energy and commerce committee, which oversees Medicaid – the organisation that helps people on low incomes to cover their medical bills – has been tasked with finding $880bn in spending cuts.

Officials say the insurance programme will have to bear the brunt of cuts if the numbers are to add up. That is out of the question for some Republicans.

Others have different demands. Senator Ron Johnson has said he will not vote for the bill unless it reduces spending to pre-pandemic levels, while fellow Republican Rand Paul has vowed to block any bill that significantly raises America’s debt ceiling.

Congressman Thomas Massie is also opposed to any bill that raises borrowing. “There’s actually almost no chance in hell I’m going to vote for this, because there’s no chance in hell they’re going to be fiscally responsible,” Massie told the Washington Post.

The IIF has also warned that tariffs could backfire and even “reduce government revenues if it triggers foreign retaliation”.

What’s evident is that Congress is running out of time and options.

“It’s not clear how to get the deficit down without Congressional resolve,” says Rajan. “It will require a mix of spending cuts and tax increases. Right now, this does not seem to be a central focus for Congress.”

But he warns that inertia has consequences. In a “worst-case scenario, foreign buyers of US Treasuries may end up shunning US debt, especially amid speculation about Fed independence, potential taxes on foreign holders, or even the risk of payment freezes to hostile governments. That volatility could spill over, straining bank capital.”

While he says the Federal Reserve has the power to calm markets by buying bonds if needed, even this has its limits. “The Fed can intervene, but doing so while inflation remains elevated, and when fiscal policy is the root cause, will complicate its task.”

Buyer beware.

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