Trump Threatens Trade War Over Interest Rates Amid Soaring Debt

The US government's debt has surpassed $40 trillion for the first time ever, and long-term Treasury yields have surged to their highest levels since 2007. President Donald Trump is ramping up pressure on interest rates, threatening to cut off trade with major deficit countries if rates are not lowered.

Trump's administration is staking everything on bringing down rates, but the Federal Reserve (Fed) seems to be pointing towards hikes instead. As of September 1, fed funds futures markets priced in a 68.2% probability of a 0.25 percentage point rate hike in September.

The US Treasury Department has already intervened in the bond market by buying yen with Japan and unveiling plans to double the size of its long-duration buyback program. However, experts warn that the bond market's power is strong enough to topple governments, citing the example of UK Prime Minister Liz Truss who was forced to resign after just 44 days in office due to a spike in gilt yields.

Ray Dalio, founder of Bridgewater Associates, has argued that resolving America's debt problem requires cutting the fiscal deficit from the high-5% range of GDP to 3%. His proposed solutions were threefold: tax increases, spending restructuring, and rate cuts. However, all three solutions are now faltering.