Trump is steering America towards a financial crisis

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A dangerous view is creeping into the markets that the US has already gone so far down the path of a debt compound trap that it dare not raise interest rates to control inflation.

The US Treasury has become acutely dependent on short-term funding from hedge funds, many tapping the $US8.3 trillion ($11.6 trillion) money market and some operating with up to 100 times leverage. The share of purchases coming from stable lenders, such as foreign central banks and sovereign wealth funds, has been drying up.

Steven Blitz, the chief US economist at TS Lombard, says the Federal Reserve cannot tighten hard without risking a chain reaction. Financing costs would “explode”.

“Raising rates today immediately impacts the cost of nearly 25 per cent of the federal debt, where issuance is growing fastest,” he said.

Meddler-in-chief: Trump is up to his old tricks again

Stephen BartholomeuszSenior business columnist

Senior business columnist

The US Treasury has to roll over $US6 trillion of debt every three months in an increasingly sceptical market, as well as issuing $US2 trillion of new debt annually to cover the worst structural deficit in US peacetime history.

Annual gross financing needs – the key warning metric watched by rating agencies and bond funds – was 26 per cent of GDP in 2010. The International Monetary Fund says the figure will reach 45 per cent this year and is on track for 60 per cent by the early 2030s on current policies. No great power has long endured at that sort of level.

Scott Bessent, the poacher-turned-gamekeeper now in charge of the US Treasury, has been concentrating ever more borrowing on short-term bills. It is a way to keep a lid on the spiralling interest cost of the US national debt, which has quadrupled to $US1 trillion in a decade,........

© The Age