Trump’s debt plans are an affront to economic reason, says a commentator in Handelsblatt. In 40 years, the US national debt ratio could reach 200 percent. That will not end well. Another commentator in the same newspaper goes so far as to say in an ‘essay’ that the president is weakening the world’s strongest economy ‘at breathtaking speed’ because the new law represents an ‘incalculable debt gamble’.

But these are all prejudices from a world that has long since ceased to exist. Ninety-five percent of economists and an estimated 99 percent of business journalists cling to the fiction that there are other sectors of the economy that would shoulder the inevitable debt if the state withdrew. However, most of them do not even know that saving cannot exist unless someone else borrows the same amount at the same time. Economics is still a disguised business administration, a subject that fights tooth and nail against reaching the intellectual level of the overall economy and thus that of economic reason (as shown here and in my new book, hopefully soon out in English).

Whatever one may think of Trump’s legislative package (I don’t think much of it because the distributional effects are unspeakable), the resulting increase in government debt is inevitable anyway. A simple but hardly refutable calculation shows that a government debt ratio of 200 per cent will be reached in the United States well before 2040 – largely regardless of what Donald Trump plans in terms of ‘debt excesses’.

The initial data

The savings rate of private households in the US is currently around 4 per cent of GDP. American companies also have a positive savings rate, which fluctuates but has been around 1 per cent of GDP in recent years. To this we have to add the US current account deficit, which means that other countries are saving ‘for the US’ or, respectively, are taking demand away from the US – to the tune of at least 3 per cent of GDP. All in all, this amounts to 8 per cent of GDP (or more than two trillion US dollars) in lost demand in the world’s largest economy every year.

What should the government do? Let us assume, for the sake of argument, that it is absolutely realistic for the United States that the primary goal of every elected president is to avoid recessions and rising unemployment. If he (or she) wants to avoid a recession, the president must close the demand gap, by whatever means necessary. To do this, there is no way around it, the government demand boost must amount to 8 per cent of GDP, which means that the US needs a government deficit of 8 per cent every year to make ends meet. Whether this will actually generate growth is an open question. It is only the minimum needed to avoid falling into recession.

Trump cannot be blamed for trying to defuse the problem somewhat by making efforts to significantly reduce or even eliminate the foreign trade deficit. If he succeeds, government deficits would only have to be 5 per cent of GDP year after year. That’s something, at least!

The government debt ratio is rising enormously

But what does this mean for the US government’s debt ratios? With a current government deficit of 8 per cent and (purely fictitious) growth of 2½ per cent, the US government debt ratio will exceed 250 per cent in 2040. If growth is only 1½ per cent, the 300 per cent mark will already be exceeded in 2040.

If, on the other hand, the current deficit is only 5 per cent, the US will be far from a debt level of 250 per cent in 2040 with growth of 2 ½ per cent; it will then be only slightly above 170 per cent. 250 per cent would then only be reached in 2055.

As you can see, the simple calculation is brutal and already exceeds the imagination of most observers. But all these observers fail to understand an economy in which, on balance, companies are no longer borrowing but saving. Those who cry murder because government debt is rising but fail to address the role of companies (as savers) simply have no idea (or do not want to have any idea) what they are talking about.

What follows?

Fears of a crash due to US government debt are completely misguided. The American government is only doing what everyone expects it to do, namely ensuring that the economy remains on a positive growth path and that full employment is achieved. Strangely enough, the markets know this, even though the opposite is repeatedly claimed (as in the above-mentioned Handelsblatt essay). Long-term interest rates (10-year government bonds) in the US are very close to short-term interest rates, just as they are in Europe (and Germany). Where else would they be?

If there were fears of a default on US bonds, they would have to be well above short-term interest rates, at least in comparison with Europe. The fact that it is higher than in Europe is completely irrelevant; it is merely a reflection of different monetary policies. And the American monetary policy is keeping interest rates higher because growth remains strong and full employment has been achieved.

If no solution is found for companies that are saving (corporate tax cuts are exactly the opposite of what should be done), the market economy will, in the long run, be not only controlled by the state, but also permanently propped up by it. Libertarians may foam at the mouth, but they are only proving that they do not know what they are talking about.

The widespread belief that growth can prevent an increase in government debt is also naive. For this to happen, growth would have to exceed the demand gap created by saving. This is only possible in exceptional cases, when a country manages to keep its savings gap very small through current account surpluses – at the expense of other countries, of course. Germany actually achieved this during the golden age of Wolfgang Schäuble (with current account surpluses of 7 to 8 per cent of GDP). Trump is showing that the other countries are no longer so stupid to accept that.