Trump and his Tax Cuts, and Who Will Finance Our Deficit as It Gets Worse, and Can He Make Friends with the Rest of the World?
American Eclectic posts articles twice a month, on the 1st and 15th. This is the third year of publication; previously published articles can be found on my site.
May 1, 2025
The Trump tax cuts debated in Congress are tied to developments in which foreign governments and investors display growing concerns about buying United States government securities. This article focuses on how to look at the tax cuts, the likelihood of federal deficits increasing, foreign buyers financing our deficit through buying government securities, and where we are headed.
Regarding the proposed tax cuts, the Congressional Budget Office (CBO) estimated that government deficit spending would increase. The CBO has done several reports addressing tax cuts. Admittedly, it takes time to read and understand these reports since these reports are usually based on certain assumptions about projections regarding economic growth, inflation, revenue collection from individual income taxes, payroll taxes, and corporate income taxes, and government expenditures, particularly associated with Medicare, Social Security, and defense spending. While television news shows usually point to or refer to a specific dollar amount where the deficit will be several years from now, that dollar amount they reference is typically a midpoint between projected high and low points. The high point can show the deficit as even worse than the midpoint, while the low point can show a deficit that is a significant improvement over the midpoint (so lower). Try imagining where your favorite baseball team will finish the season this year, then try to guess where it will finish the season five years from now. The number of variables you must consider when making projections for the 2030 season can seem insurmountable. Nevertheless, these CBO projections are helpful and provide insight into the impact of tax cuts on deficit spending.
The House of Representatives and the Senate will work out their differences, and Trump’s tax cut will pass. This refers to the 2017 Tax Cuts and Jobs Act (usually referred to as the Trump tax cut), which is set to expire this year.
Whether the tax cuts are presented as just a continuation of what passed in Trump’s first term as President or as a new wrinkle in how we understand government spending and future deficits, Republicans will oversell them as solving various economic issues.
A title of one of the chapters in a CBO report from May 2022 shows that estimating where the deficit is headed is difficult. The title states, “Budgetary Outcomes Under Alternative Assumptions About Spending and Revenues.” Expect deficits to increase—that should not be a surprise based on the history of tax cuts, particularly Trump’s in his first term. Usually, if deficits are expected to go up, the government will increase its sale of government securities to cover the cost of deficit spending. During Trump’s first term, our national debt increased by 40 percent. Much of that was between 2019 and 2020 to address the COVID-19 pandemic. Hopefully, the bird flu does not become a problem during Trump’s second term and lead to a significant increase in government spending. But then he and his Secretary of Health and Human Services, Robert Kennedy, Jr., might be willing to wish it away and not spend the money to confront it.
Remembering the Reagan Presidency is instructive to the present and provides both a contrast with the present and probable problems to come. When Ronald Reagan became President in 1981, he had a tax cut, and as with Trump’s tax cut, it brought with it deficit spending. As a Washington Post article put it at the time:
The Reagan administration has welcomed foreign capital inflow to cover high government deficits without taking funds from the private capital markets needed for industrial investments.
Japan, or more specifically, Japanese investment firms, bought many United States government securities, which means this buying financed our deficit spending. On January 5, 1981, just before Reagan was sworn in as President, it took 205 Japanese yen to buy one American dollar. The Japanese had to convert the yen into dollars to buy our government securities. By October 4, 1982, almost two years into the Reagan Presidency, it took 267.7 yen to buy one American dollar. There was some fluctuation in how many yen it took to buy a dollar, but on February 25, 1985, 260.35 yen could buy a dollar.
Initially, Reagan saw this as good for Americans—the dollar was seen as “strong,” and foreign investors wanted it. Reagan saw a strong dollar as meaning that the Japanese were investing in America’s future. However, Reagan changed his mind when he heard from American companies selling their products in foreign markets.
A strong dollar also meant that American goods cost too much, and firms like Caterpillar saw themselves losing sales to foreign competitors. As one study stated:
Caterpillar, one of the world's largest heavy-equipment manufacturers, has been beset by two major problems: competition from Komatsu Ltd. of Japan and a fluctuating U.S. dollar. The 30 percent strengthening of the dollar against the yen in 1989 and early 1990…made Japanese goods less expensive in the United States and third-country markets, giving Komatsu a substantial competitive advantage, and in early 1990, for the second time since 1981, Caterpillar executives tried to plot a strategy on how to cope with the strong dollar.
Caterpillar concentrates in the worldwide production and sale of heavy equipment and engines. It manufactures products in wholly owned or affiliated plants In the United States, Brazil, Canada, France, the United Kingdom, Australia, Belgium, Indonesia, India, Italy, Japan, and Mexico. It also has contract manufacturers in the United States, Finland, Norway, South Korea, the United Kingdom, and Germany. Products are manufactured under license in eight countries, and parts warehouses and distribution facilities are located in the United States as well as in nine foreign locations. Parts and components are shipped worldwide for final assembly in combination with other parts and components manufactured or purchased locally.
February 25, 1985, was the high-water mark for the yen's value against the dollar. After that date, the number of yen it took to buy a dollar went down, and by December 21, 1987, it took 126.12 yen to buy a dollar. Since then, there have been fluctuations in the yen value to the dollar, with a recent climb, so by June 3, 2024, it took 156.69 yen to get a dollar.
The drop in the yen's value to the dollar was an outgrowth of the Plaza Accord. This was a meeting at the Plaza Hotel in New York City on September 22, 1985. Representatives from the United States, France, West Germany, Japan, and the United Kingdom met to drive down the dollar's value against the currencies of these other countries. One study stated:
The exchange rate of the dollar, which had plummeted to its weakest level ever only seven years earlier and required a massive rescue operation, doubled in value in the five years before the Plaza [Accord]. As a result, the international competitiveness of the United States was decimated and protectionist pressures exploded in Congress, jeopardizing the global trading system.
This was a different time. The United States had experienced severe inflation through the 1970s, and to break the back of inflation, the Federal Reserve kept raising interest rates to force people to stop buying. As a result of both inflation and the actions of the Federal Reserve, interest rates on government securities went up. On January 3, 1977, during the Jimmy Carter administration, the interest rate on a one-year Treasury bill was 5.24 per cent. However, the actions of the Federal Reserve drove the interest rate up so that by September 21, 1981, it was 16.44 per cent. Today, interest rates on the one-year Treasury bill hover just below 4 percent, up significantly from 2008 to 2014 when it stayed under one percent, but well below where it was back in September 1981.
In the second half of the 1970s, taking an International Trade and Finance course was normal for an undergraduate economics major. This course focused on how foreign trade made the dollar's value go up or down. What changed with the Reagan situation regarding Japanese buying of our government securities was that trade and finance became somewhat divorced. Here, foreign investors searching for high-interest rate investments drove up the dollar's value, and it had nothing to do with trade.
How does all this relate to where we are now?
Foreign buying of our government securities has helped finance our deficit spending. Foreign buyers are part of the public buying. The “public” is a broad term covering both domestic buyers (individuals, banks, insurance companies, and others) and foreign buyers (governments and investors). The public holds approximately $29 trillion of our debt; foreign buyers hold 30 percent (roughly $8.7 trillion). In 1970, foreign buyers held 5 percent of the public holding of our debt. Since then, there has been a significant growth in dependence on foreign governments and investors willing to finance our deficit spending. Not all deficit financing, however, is carried out through the public buying of our debt. The government buys our debt and holds approximately $7.2 trillion (through intragovernmental debt). The government owns 21 percent of our debt while the public owns 79 percent. Both government-owned and public-owned debt have increased in the last ten years. Still, the greater increase in the public buying over the last decade of our debt (118 percent) compared to what the government owns (42 percent) needs to be watched closely, particularly since foreign buyers are part of the public. Just realize that foreign buyers hold more of our debt than our government.
Since Trump decided to fight with China, there has been the issue of whether China might dump its holdings of our securities. Currently, China owns approximately $759 billion in US government securities. There is a fear that China is willing to unload much, if not all, of its holdings. If there were a significant sell-off of US government securities, the Treasury Department would need an increase in interest rates to attract buyers. To keep it simple, raising interest rates would drive up mortgage and car loan rates, which could adversely affect the American economy. In addition, the global economy will be affected by Trump’s trade war with the rest of the world. The International Monetary Fund (IMF) has reduced the forecast for global economic growth over the next year. An April IMF report stated:
[T]he landscape has changed as governments around the world reorder policy priorities and uncertainties have climbed to new highs. Forecasts for global growth have been revised markedly down compared with the January 2025 World Economic Outlook (WEO) Update, reflecting effective tariff rates at levels not seen in a century and a highly unpredictable environment. Global headline inflation is expected to decline at a slightly slower pace than what was expected in January.
Intensifying downside risks dominate the outlook, amid escalating trade tensions and financial market adjustments. Divergent and swiftly changing policy positions or deteriorating sentiment could lead to even tighter global financial conditions. Ratcheting up a trade war and heightened trade policy uncertainty may further hinder both short-term and long-term growth prospects. Scaling back international cooperation could jeopardize progress toward a more resilient global economy.
How quickly the IMF saw change in just four months between January and April, Trump’s first months as President.
On April 10th, Trump increased tariffs on Chinese goods from 54 percent to 145 percent, and China responded with a 125 percent tariff on US imports. Regarding this tit-for-tat, the Chinese Ministry of Finance stated, “With tariff rates at the current level, there is no longer a market for US goods imported into China…. If the US government continues to increase tariffs on China, Beijing will ignore [them].”
This sounded like a significant shift in decoupling trade relations between the United States and China. There has been a steady development in that direction, as China has reduced the American share of its total exports from approximately 21 percent in Trump’s first term (2017—2020) to 15 percent today. Whether this is a tit-for-tat or a decoupling underway, it undoubtedly impacted why the IMF adjusted its global forecast downward.
The 10-year Treasury note is being closely tracked to gain insight into where we are headed. Like the one-year Treasury bill, the 10-year Treasury note is one of our government securities. It is used to gauge whether mortgage rates are going up or down and is “the most liquid and widely traded bond in the world.” On July 26, 1982, the 10-year Treasury note was 13.68 percent, and the 30-year fixed mortgage rate hovered around 15 percent, so you can see that the interest rate on the 10-year Treasury note, and mortgage rates can (unfortunately) go together in ways that can hurt your pocketbook. Somewhere between April 4th and 11th last month, signs indicated severe economic problems were on the horizon as interest rates on the 10-Year Treasury note went from 4.01 percent to 4.58 percent and then fell back to 4.50 percent. As one article stated, “That’s a major swing for the bond market, which measures moves by the hundredths of a percentage point.” On April 17th, the interest rate was 4.34 percent and rose to 4.40 percent by April 23rd. By the end of the month, it was at 4.183 percent. A Morgan Stanley report stated:
Evolving market perceptions of the trajectory of the U.S. economy and policymaking are taking the global economy and markets to unprecedented levels of uncertainty.
However, to put this in a larger perspective, on September 16, 2024, the rate was 3.63 percent and rose to 4.79 percent on January 13th, a week before Trump took the oath of office, for a second time. The steady increase, however, spread out over four months, might be different than the rapid change surrounding both sides of that 4.01 percent figure, where on March 28th the rate stood at 4.27 percent, then fell to 4.01 percent on April 4th and rose to 4.48 percent on April 11th. Might we see more wild fluctuations as Trump changes his tariff policies, which can seem incoherent? This is what investors, whether domestic or foreign, wonder about. As with the rest of us, investors are trying to figure out what is going on with U.S. trade policies, despite Trump’s statements that he knows what he is doing and where it is all headed. Recent data, however, shows that foreign investors are buying our government securities. In the first half of April, foreign buyers increased their securities purchases over the same period in March. But, then again, we are only at the 100-day mark of the Trump Presidency.
Where are we, and what do we need to be aware of?
First, the Reagan tax cuts showed us that deficits needed to be financed, and we are reliant on foreign investors, whether foreign governments or foreign investors. While it is lovely and wonderful to discuss balancing the federal budget, do not expect it to happen, at least not without tax increases.
When it goes into effect, Trump's tax cut will show signs that deficit spending is worsening. The 2017 Tax Cuts and Jobs Act increased business investment in America, but the expected economic growth from this act was smaller than expected. We can expect much the same from an extension of this act, and when deficits occur, Trump will look around to see who he can blame. As one study stated about this act, which cut corporate taxes, “large corporate tax cuts are expensive and increase[d] the deficit substantially.”
Second, a significant increase in the deficit will require the Treasury Department to find buyers for our 10-Year Treasury note. Probably beginning next year, we will see signs that this act was, once again, oversold as to what it could accomplish, so the question becomes: Will the Treasury Department issue a large amount of securities that need to be sold to finance the new and improved deficit and will interest rates go up which will lead to the dollar going up in value, like it did against the yen during Reagan’s time? As with Reagan, trade will not be a driver for the dollar going up in value, but interest rates on Treasury notes will.
Third, if the United States has problems selling its securities because Trump and his erratic policies shake the faith of international investors, will that be a problem in attracting investors for our securities? If interest rates on the 10-year Treasury note go up to attract buyers, that can have the adverse effect of making the dollar “strong” (to use Reagan’s term), so our foreign trade will be severely affected. If the dollar goes up and there is a decline in foreign consumers for American (expensive) goods, will the trade deficit increase? The dollar is in decline right now, with its most significant drop since 2008, so our trade picture should improve (well, maybe), but I am looking ahead to what we might see happening within the following year. Like Reagan’s first term as President (1981-1984), a strong dollar would hurt our foreign sales, as it did to Caterpillar in Reagan’s time. What will happen to American companies selling abroad if the dollar rises, and how long will the problem last?
Will Trump get countries to work with the United States, like Reagan did with the Plaza Accord, to improve our trade outlook by driving the dollar down? Considering that Trump is doing everything he can to burn as many bridges as possible with a variety of countries on the planet, who will work with us? I am sure Greenland will step forward to save us from ourselves.
Fourth, I wonder about Japan and its buying of our government securities. The Japanese Prime Minister met with Trump in February at the White House. He pledged to increase Japan’s investment in the United States to approximately $1 trillion. Currently, Japan has invested $783.3 billion in the United States. At this conference, Trump pointed to a trade deficit with Japan and said he would consider raising tariffs on Japanese products coming to the United States to help address the issue.
After Trump was elected but before assuming office the second time, there was concern about the impact of Trump’s tariffs on Japanese car makers. As one Japanese economist stated:
In 2023, Japan exported 1.5 million vehicles to the U.S., with an export value of ¥4.8 trillion. …The Japanese domestic car market has a volume of 5 million units, while North America’s is 16 million units, making it a market more than three times the size of Japan’s, and thus critically important.
Trump imposed tariffs on imported cars and car parts, including from Japan. Japan certainly hoped for an exemption from Trump’s tariffs, which is probably why the Prime Minister made a big deal about increasing Japanese investment in the United States to $1 trillion. So much for holding out a fig leaf. The Prime Minister called this tariff a “national crisis.” Unlike China, which imposed retaliatory tariffs on the United States, Japan’s significant imports from the United States are natural gas and agricultural items. As one analyst said, a retaliatory strategy would be “self-defeating.”
Japan, however, is the largest foreign buyer of our government securities. Japan holds about $1.06 trillion of United States government securities, well above the amount held by China. I wonder whether any severe economic impact on the Japanese economy caused by Trump’s tariff will lead Japan to reduce the amount of our securities it buys. Again, anticipating that our deficit will go up, thanks to Trump’s tax cuts being extended, and the need to have the Treasury Department increase the selling of our securities (which I expect will happen), will a “national crisis” affecting the Japanese economy have blowback on us.
Fifth, I have read articles and watched TV news segments addressing whether voters have “buyer's remorse” because they voted for Trump. I find most of these rather foolish because it is too early to see the effects that Trump and his policies can have on Americans. Some issues are beginning to be seen, with businesses wondering how to navigate the problems they see with Trump’s tariffs. However, where our economy will be in six months and how voters react then might tell us more than any questioning of Trump voters now. Often, these articles and TV news segments are based on speculation about where we are headed. Speculation can seem very abstract, different from feeling the adverse effects of Trump’s policies. I wonder about problems such as a shortage of goods in stores, price increases affecting consumers, car prices increasing, and business costs. How will hardcore Trump voters react and interpret what they see and feel, and what will the impact be on their pocketbooks? I see economic problems ahead, but I doubt that die-hard Trump supporters will ever see Trump and his policies as the cause of the issues. So many of them have been willing to believe that transgender athletics constitute a significant plague upon our land, even though there might be no more than a hundred such athletes spread out at the high school and university level. Then there is critical race theory, which is believed to be taught by teachers at the elementary or secondary school levels, corrupting the minds of America’s young, even though I doubt many K-12 teachers can clearly explain it, let alone teach it. Since so many of these voters are willing to buy into the nonsense about these inflated issues, why am I supposed to believe they can suddenly see Trump as a serious threat to their well-being? Unfortunately, what I have addressed in this article takes time to understand and think about clearly. I do not expect (as I have pointed out in previous articles) that television news will do a good job of attempting to help viewers understand issues that matter to them. I realize that our deficit associated with selling government securities, and all tied to international finance, is addressed in many publications and by various policy analysts. Still, a broad cross-section of the public is left behind in understanding issues that can matter. Americans broadly need to understand topics such as those I raised here, and it would be nice if TV news shows treated their audiences with intelligence and took the time to help them understand issues such as this. Still, no worry, if serious problems arise, Fox News will be there to talk about transgender issues or revive an old favorite: The drag queen reading hour.
NOTES
10 Year Treasury Rate-54 Year Historical Chart, Macotrends: https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
Stuart Auerbach, “Reagan Asks End to Barriers To International Investment,” Washington Post (September 9, 1983): https://www.washingtonpost.com/archive/business/1983/09/10/reagan-asks-end-to-barriers-to-international-investment/6b9453a0-f46e-4a7b-b36d-c796ac7be145/
Elizabeth Beattie, “Trump tariffs could have a significant impact on Japanese exports,” The Japan Times (November 11, 2024): https:// www.japantimes.co.jp/business/2024/11/11/economy/trump-japan-economy/
C. Fred Bergsten and Russell A. Green, “Overview,” in C. Fred Bergsten and Russell A Green, eds., International Monetary Cooperation: Lessons from the Plaza Accord After Thirty Years (for the Peterson Institute for International Economics; New York, Columbia University Press, 2016): https://www.piie.com/publications/chapters_preview/7113/overviewiie7113.pdf
Case: Caterpillar and the Fluctuating Dollar (April 3, 2017): https://exporting-trading.blogspot.com/2017/04/case-caterpillar-and-fluctuating-dollar.html
Gabriel Chodorow-Reich, Owen Zidar, and Eric Zwick, “Lessons from the Biggest Business Tax Cut in History,” Journal of Economic Perspectives, Volume 38, Number 3 (Summer 2024): https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.38.3.61
Bernard Condon and Stan Choe, “Freak sell-off of ‘safe haven’ US bonds raises fear that confidence in America is fading,” AP (April 11, 2025): https://apnews.com/article/treasurys-bond-market-yield-tariff-46b4818710f01b8cc93fd002081167b0
Sean Conlon, “10-year Treasury is lower as investors look ahead to economic data,” MSN (April 29, 2025): https://www.msn.com/en-us/money/markets/10-year-treasury-yield-is-lower-as-investors-look-ahead-to-economic-data/ar-AA1DP4uj?ocid=msedgdhp&pc=U531&cvid=05a780879efe4e0e8eda814f990fd344&ei=13
Congressional Budget Office, The Budget and Economic Outlook: 2022 to 2032 (May 2022): https://www.cbo.gov/system/files/2022-05/57950-Outlook.pdf#page=111
Federal Debt & Debt Management, U.S. Government Accountability Office: https://www.gao.gov/federal-debt
Financial Audit: Bureau of the Fiscal Service’s FY 2024 and FY 2023 Schedules of Federal Debt, GAO-25-107138, U.S. Government Accountability Office (November 7, 2024): https://www.gao.gov/products/gao-25-107138
Erika Giovanetti, “Historical Mortgage Rates: See Averages and Trends by Decade,” U.S. News & World Report (March 21, 2025): https://money.usnews.com/loans/mortgages/articles/historical-mortgage-rates
Akihisa Ota and Shinji Abe, “Ishiba Pledges to Boost Japan’s Investment in the U.S. to $1 Trillion: Trump Says Meeting with Nippon Steel Execs Scheduled,” The Japan News (February 8, 2025): https://japannews.yomiuri.co.jp/politics/politics-government/20250208-237666/
Wolf Richter, “Who Holds the Ballooning US Government Debt, even as the Fed and Foreign Holders Unloaded Treasury Securities in Q4?” Wolf Street (March 18, 2025): https://wolfstreet.com/2025/03/18/who-holds-the-ballooning-us-government-debt-even-as-the-fed-and-foreign-holders-unloaded-treasury-securities-in-q4/
Hilary Schmidt, “Is China Engaging in Large-Scale Dumping of US Treasury Securities?” International Banker (April 23, 2025): https://internationalbanker.com/finance/is-china-engaging-in-large-scale-dumping-of-us-treasury-securities/#:~:text=Long-term%20yields%20for%20US%20Treasury%20securities%20spiked%20dramatically,against%20its%20trading%20partners%2C%20is%20a%20prime%20suspect.
Jessica Sier, “Japan paralyzed by Trump’s double tariff hit,” Financial Review (April 4, 2025): https://www.afr.com/world/asia/japan-s-car-markers-paralysed-by-trump-tariff-hit-20250404-p5lp4q
“U.S. debt by president: dollar and percentage 2025,” Consumer Affairs: Journal of Consumer Research (November 7, 2024): https://www.consumeraffairs.com/finance/us-debt-by-president.html
Karishma Vanjani, “New Data Show Foreign Investors Are Still Buying U.S. Treasuries,” Barron’s (April 24, 2025): https://www.barrons.com/articles/us-treasury-bond-allotment-report-76a4e9d4?mod=googlenewsfeed&st=mLY3CE
World Economic Outlook, A Critical Juncture Amid Policy Shifts, International Monetary Fund (April 2025): https://www.imf.org/en/Publications/WEO/Issues/2025/04/22/world-economic-outlook-april-2025
If you have an interest in wanting to learn about how the Treasury Department conducts auctions to sell securities, the following pieces help:
—Michael Brown, “Understanding Treasury Auction Results,” Pepperstone (February 7, 2024): https://pepperstone.com/en/analysis/navigating-markets/understanding-treasury-auction-results/. This piece quickly explains the terms associated with the auction.
—Kenneth D. Garbade and Jeffrey F. Ingher, “The Treasury Auction Process: Objectives, Structure, and Recent Adaptations,” Federal Reserve Bank of New York, Current Issues, Volume 11, Number 2 (February 2025): https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.html. This is the longest of the three articles listed here, but it is only 11 pages. It is a bit more analytical than the other two, so read it after reading the other two.
—Mark Koba, “Treasury Bond Auctions: CNBC Explains,” CNBC (January 24, 2013): https://www.cnbc.com/2013/01/24/treasury-bond-auctions-cnbc-explains.html. The auction and the differences between competitive and non-competitive bids are clearly explained.
