Trump Facing New Inflation Warning     06/01 06:17

   The world is getting more uptight about lending money to President Donald 
Trump's government -- causing interest rates to climb in ways that are 
worsening affordability pressures, hampering economic growth and creating a new 
risk for Republicans in November's midterm elections.

   WASHINGTON (AP) -- The world is getting more uptight about lending money to 
President Donald Trump's government -- causing interest rates to climb in ways 
that are worsening affordability pressures, hampering economic growth and 
creating a new risk for Republicans in November's midterm elections.

   The energy price spike triggered by the Iran war has seeped into the price 
of bonds that help fund the U.S. government. Interest rates on a 10-year U.S. 
Treasury note are topping 4.44%, up from 3.95% before the war started at the 
end of February. Average mortgage rates have climbed to their highest levels in 
nine months, while auto sales are slumping.

   The challenge is global in scale, as interest rates have risen for multiple 
countries as the world has been adjusting to the prospect of higher inflation, 
mounting questions about the sustainability of government debt and a dramatic 
surge in investment in artificial intelligence.

   Trump has tried to assure Americans that he has a plan to trim the roughly 
$1.8 trillion annual budget deficit. In the past, he has pointed to revenue 
from tariffs, payments from foreigners for his "Gold Card" visa, spending cuts 
made by the Department of Government Efficiency, and faster economic growth. 
Last week, he said the fraud task force led by Vice President JD Vance would be 
the key to unlocking massive savings.

   "If he does really great, we'll have a balanced budget without having to do 
anything," Trump said.

   Economists say this is probably unrealistic

   Economists say Trump's strategies to meaningfully curb the deficit are 
unlikely to deliver the promised results.

   The cost of servicing the national debt has tripled since 2021 to more than 
$1 trillion annually, said Jessica Riedl, a budget and tax fellow at the 
Brookings Institution.

   "President Trump signed a tax cut bill that will likely add $5 trillion to 
10-year deficits -- and tariffs are offsetting only a small fraction of those 
costs," she said. "Budget deficits are still projected to soar past $4 trillion 
annually within a decade under current policies."

   Deficits are expected to grow over the next decade as the costs of Social 
Security and Medicare outstrip tax revenues.

   The 10-year U.S. Treasury rate climbed as high as 4.67% in the middle of May 
and has since eased as negotiations over the Iran ceasefire continued -- just 
as rates initially climbed in 2025 because of Trump's "Liberation Day" tariffs 
and then began to decline once Trump backed off the most extreme increases.

   When Kent Smetters, faculty director of the Penn Wharton Budget Model, broke 
down the math tied to rising 30-year Treasury yields, he estimated that 60% of 
the increase had come from the expectation that America will continue its 
outsized borrowing and the other 40% was tied to the inflation driven by the 
Iran war and Trump's tariffs.

   Glenn Hubbard, a former chairman of the White House Council of Economic 
Advisers during the George W. Bush administration, worries that the U.S. may no 
longer have the same borrowing capacity as before to effectively combat an 
economic crisis, such as the 2008 crash or the coronavirus pandemic.

   "I don't think we have the space that we had in 2008 or 2020 to deal with 
it," said Hubbard, now a professor at Columbia University's Business School. 
"Washington doesn't seem to be full of ideas -- good or bad -- to solve it."

   Interest rates are a concern for voters

   Higher interest rates are giving Democratic candidates in the races to 
determine control of the House and Senate another line of attack at a time when 
voters are concerned about high costs for food and gasoline.

   In Colorado's fifth congressional district, Democrat Jessica Killin is 
leaning into the message that the persistent deficits and higher interest rates 
make it harder to buy or renovate a home, afford a new car or manage credit 
card debt.

   "Things are already expensive," said Killin, an Army veteran who was a top 
aide to Doug Emhoff, the former second gentleman. "We can already talk about 
gas, but the cost of borrowing only makes that worse."

   Joe Reagan, an Army veteran also seeking the Democratic nomination, said in 
an email that he is talking "a lot about fiscal stewardship" in his campaign. 
"Every dollar spent paying interest is a dollar that isn't being invested in 
infrastructure, education, veterans' services, or economic growth," he said.

   They are challenging Republican Rep. Jeff Crank in a district that their 
party views as a potential pickup. Killin said the deficit is an example of how 
"Trump says one thing and does the opposite."

   In his March 2025 address to Congress, Trump declared that "in the near 
future, I want to do what has not been done in 24 years: balance the federal 
budget. We're going to balance it."

   Crank, the Republican incumbent, did not reply to requests for comment.

   Cutting fraud is the new deficit strategy

   The administration maintains that it is going to steadily reduce budget 
deficits. As a share of the overall economy, the deficit last year was lower 
than it was in 2024, though that drop depended in part on tariff revenues that 
are subject to refunds after the Supreme Court ruled them to be illegal.

   Treasury Secretary Scott Bessent last week cited a report showing that there 
was as much as $500 billion annually in fraudulent government spending that 
could be eliminated, "so that would reduce the deficit substantially."

   Bessent appeared to draw that conclusion from a 2024 report by the 
Government Accountability Office that estimated there had been between $233 
billion to $521 billion each year in fraudulent spending. But those numbers 
were drawn in part from the pandemic era when the government borrowed heavily 
to stabilize the economy.

   The White House and Treasury did not respond to questions about the source 
of Bessent's claims.

   On deficits, Bessent told reporters at the White House that the 
administration was essentially dealt a bad hand from former President Joe 
Biden, a Democrat. "We inherited the worst budget deficit in history -- in 
history -- when we were not in a recession or not at war," Bessent said.

   Bessent had previously announced that the administration would aim to reduce 
the annual deficit to 3% of overall U.S. gross domestic product. It's roughly 
double that percentage currently and Bessent did not directly answer a question 
about the timeline for hitting his target.

   As of now, investors continue to buy shares in U.S. companies, causing the 
stock market to increase in value in a sign of confidence in America's economic 
potential. But the increase in interest rates also suggests that investors view 
the national debt as a vulnerability for the U.S.

   The financial markets might be able to inflict enough pain with higher rates 
in order to compel political leaders to address the systemic imbalances. 
Multiple economists said they expected that markets would force the deficit 
issue before voters would.

   Hubbard emphasized that the whole bond market system rests on the trust that 
the debt will be repaid. He noted that the word "credit" is linked to a Latin 
term that is also the root of the word creed about a system of beliefs.

   "That is what debt is about: I believe you will pay me back," Hubbard said. 
"That works until it doesn't."