Donald Trump is heading for his own Liz Truss moment

Telegraph

20-05-2025

Nigel Farage was recently asked whether Donald Trump would prove to be 'chump or champion' with his tariffs blitz. His response was that it was too soon to tell, but even a Trump acolyte like the Reform leader would surely concede that the early signs are pretty woeful.
The US president is erratic at the best of times but his trade war has been utterly indiscriminate. At times, the US administration's approach has resembled little more than a circus with Trump as the drunken ringleader utterly unfit to direct the show. Anticipating his next move is a fool's errand.
Parallels with the chaos that characterised Liz Truss's fleeting few weeks as prime minister are unavoidable. Like Truss, Trump has been forced into a humiliating retreat after trying to face down the financial markets and suffering an emphatic defeat.
And in much the same way that the spectre of Britain's shortest-serving leader still hangs over the UK economy nearly four years after her ejection, investor confidence remains desperately fragile despite America and China quickly agreeing to a truce on tariffs.
Trump's real Truss moment may still be to come, however, as investor fears shift from a devastating trade war with Beijing to his plans for a new era of sweeping tax cuts that could tear a fresh hole in federal finances.
The investment community's response was both swift and overwhelmingly negative to the approval of Trump's tax cuts bill by a key congressional committee on Sunday, following days of Republican infighting over spending cuts to Medicaid.
Indeed, the backlash had begun on Friday afternoon courtesy of Moody's. Anticipating a breakthrough that would put Trump's 'big, beautiful bill' on the path to possible passage in the House of Representatives later this week, increasingly nervous analysts stripped the US of its prized top sovereign credit rating.
The Trump administration's 'nothing to see here' response to the loss of a triple-A credit rating isn't remotely convincing. Ditto its lame attempts to lay the blame for this squarely at the door of Joe Biden on the same day that he was diagnosed with aggressive prostate cancer.
Yes, as US treasury secretary Scott Bessent argued over the weekend, the downgrade is something of a lagging indicator of fiscal health. 'We didn't get here in the past 100 days. It's the Biden administration and the spending that we have seen over the past four years that we inherited,' he pleaded.
Moody's was the last of the three major credit ratings agencies to reduce its assessment of the federal government's creditworthiness. Standard & Poor's made its first ever downgrade back in 2011, and Fitch Ratings followed suit in 2023.
Meanwhile, Moody's itself attributed the move to 'the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns'.
Bessent is being highly selective in his attempts to pin the blame on Biden – and he knows it. What the White House is less forthcoming about is that Trump's tax plans also played a major part in its decision with Moody's warning that the outlook for US finances was becoming bleaker.
'The US's fiscal performance is likely to deteriorate relative to its own past and compared to other highly rated sovereigns,' it said amid forecasts that Trump's massive tax and spending bill will add trillions to the federal debt over the coming years.
Nor can Bessent blithely brush off the downgrade as inconsequential. A triple-A credit rating is the gold standard and regardless of the extent to which previous administrations are to blame, its removal is a damning indictment of Trump's reckless plans and one that is likely to prove hugely costly.
Although the US still has one of the highest credit ratings in the world, the downgrade means that US government debt is now seen as higher risk, leaving Washington to confront the very real and immediate possibility that it will have to pay higher interest rates on future borrowing, further exacerbating its financial squeeze.
The S&P 500 and the Nasdaq fell as much as 1.1pc and 1.4pc respectively at the start of trading on Monday. The US dollar meanwhile slid 0.9pc against a basket of its peers including the pound and the euro, but the most notable feature of the reaction from investors was in the bond markets.
A sharp sell-off in US government debt pushed the yield on 30-year Treasuries above 5pc leaving long-term borrowing costs at their highest level since late 2023, compared to rates as low as 1.2pc just five years ago. Ten-year rates – the yield that Bessent insists he and Trump are most focused on as a gauge of America's economic health – are creeping back that way too.
Pooja Kumra, at TD Securities, described the reaction as 'another warning for a US administration already on bond vigilante alert'.
Markets are right to be nervous. America's national debt has been consistently rising over the past two decades, leaving borrowings at an eye-watering $36 trillion (£27 trillion), and the federal budget deficit sitting at close to $2 trillion a year – equivalent to more than 6pc of gross domestic product.
Trump's plans to extend his 2017 Tax Cuts and Jobs Act will add $4 trillion to the deficit over the next decade, or nearly 9pc of GDP by 2035, Moody's calculates. At the same time, higher debt interest costs and low tax revenue will push US federal government debt to 134pc of GDP over the same period, a big jump up from 98pc last year.
A 5pc yield on 30-year US government bonds is significant. As Deutsche Bank strategists point out, 'we are now reaching yield levels that previously seemed to trigger sensitivity from the US administration'.
The last time they reached such heights, Trump announced a 90-day pause on reciprocal tariffs, acknowledging that it was because investors were getting 'yippy' and 'afraid' – proof he is capable of behaving rationally after all.
As veteran asset manager Stephen Jen, of Eurizon SLJ Capital, has argued, it may be necessary to have a repeat of what happened to Truss 'to force everyone' in the White House 'to do the right thing' again.
Having already been forced into one embarrassing about-turn, the question is whether Trump can afford to reverse course a second time. Ultimately, however, it may be that the US economy can't afford for him not to.