We pose Trump the Gretchen question ...

Once again, I wonder how to grab our readers' attention. Our team constantly discusses the topics we want to bring to our readers and clients. This time, after much deliberation, we settled on the U.S. debt issue. Trumponomics is a hot topic, and as we know well here in Austria, a country's budget deficit and national debt relative to its economic output are always significant. Even in Germany, where Chancellor Merz broke a campaign promise: farewell to the debt ceiling! Financial markets celebrated this decision with a stock market rally for German shares, but for German bonds, it was a painful experience.

So, what is the Gretchen question now? According to Wikipedia, a Gretchen question refers to a direct query that aims to uncover the intentions and character of the person being asked. It usually makes the respondent uncomfortable, as it seeks a confession previously unspoken. Well, Trump wouldn't be bothered by the question, as nothing seems to faze him, but it would reveal his intentions regarding U.S. fiscal policy until the next U.S. presidential elections in 2028. In the case of Trump, the Gretchen question would be: "Now tell me, how do you deal with the deficit? You propose massive cuts. Yet, your track record shows you don't value it much."

No penny-pincher

Trump's initial budget proposal in his second term includes a $163 billion cut, overshadowing promised tax breaks. But how was it during his first term? The budget deficit rose steadily under his tenure. In 2016, under Obama, the deficit was at 3.11% of GDP, climbing continuously under Trump. By 2019, the increase was 4.57%, peaking at 14.67% in 2020 due to Covid. Although the deficit has decreased under Biden, at 6.28%, it still remains far from 3%, a level many economists find sustainable. The U.S. isn't facing EU deficit procedures. Trump wasn't re-elected to balance the budget—no one expected that of him—but to "make America great again." Cutting state spending massively won't achieve that. The U.S. debt-to-GDP ratio has significantly worsened in recent years, standing at 126.2%, compared to Germany's 63.2% in 2025.

Are the U.S. facing bankruptcy?

Some voices in Europe suggest the U.S. might be on the brink of bankruptcy, including Hans-Werner Sinn, former president of the renowned ifo Institute for Economic Research until 2016. However, in the U.S., there's a different perspective. Alan Greenspan, former Fed chair, pointed out post the credit rating downgrade from AAA to AA- in 2011: "The U.S. can repay all debts by printing money to do so. Hence, the likelihood of insolvency is 0%." Warren Buffett seems to agree, investing his liquidity reserves in U.S. Treasury bonds. Yet, he also deems the current U.S. deficit unsustainable in the long run.

Loss of trust on the horizon?

Financial markets still trust the U.S., willing to continue financing its debts. Unlike the Eurozone periphery crisis over a decade ago, the U.S. is far from a similar situation. U.S. Treasury bonds in USD remain highly liquid. However, there are concerns, with major foreign creditors like Japan and China hinting at reducing U.S. bond holdings amid trade tensions. Credit Default Swaps (CDS) to insure against U.S. insolvency have risen since Trump took office, but at 57 basis points, they remain lower than during the 2008-2009 financial crisis and the 2023 budget standoff.

What conclusions can we draw?

An immediate debt crisis in the U.S., as some economists predict, is not evident. The current U.S. national debt level is not sustainable in the long term but may persist for years. Whoever takes on the task of putting the U.S. budget on a sustainable path faces a daunting challenge. Warren Buffett, in his well-deserved retirement, won't take on this job, though he aptly notes: "It's a job I don't want, but it's a job I think should be done."

This information is a marketing communication from Kathrein Privatbank Aktiengesellschaft. It does not contain a direct or indirect recommendation for the purchase or sale of securities or an investment strategy. When investing in securities, price fluctuations due to market changes are always possible. Past performance figures do not provide reliable conclusions about future results. Despite careful research and data collection, no liability or guarantee can be assumed for the accuracy of the data.