America’s highly compromised public finances require that it do everything to promote economic growth to help manage the debt burden.

H istory is likely to harshly judge the Trump 2.0 administration’s handling of the economy in its first six months of office. Seldom before have so many basic macroeconomic policy mistakes been made in so short a space of time. This is more than likely to have serious adverse consequences for both the economy and the financial markets in the run-up to next year’s midterm election.

Let’s start with the most serious policy mistake of them all — Trump’s One Big Beautiful Bill Act (OBBBA). At a time when the country’s budget deficit was already running at 6.4 percent of GDP and when the public debt in relation to the size of the economy was on course to exceed its end of World War II level, the responsible policy action would have been to come up with serious public spending cuts and revenue-enhancing measures to put the public debt on a more sustainable path. Unfortunately, the OBBBA does exactly the opposite.

According to the Congressional Budget Office, over the next decade, Trump’s budget bill will add $3.4 trillion to the budget deficit. That will take the public debt to GDP ratio to 127 percent by 2034 or to a level like Greece’s in 2009, which, along with revelations that the country’s public deficit would be far higher than claimed, triggered the country’s sovereign debt crisis.

A key vulnerability of the U.S. economy is that it is heavily reliant on the kindness of strangers to finance its budget and trade deficits. Currently, foreigners own $8.5 trillion, or nearly one third, of the $28.1 trillion of all U.S. Treasury bonds outstanding. Under these circumstances, it is essential that the government does everything to maintain investors’ confidence that it will not try to inflate or tax its way out of its debt problem. Seemingly oblivious to this requirement, Trump seems to now be undermining investor confidence by calling for the firing of Federal Reserve Chair Jerome Powell and for aggressive interest rate cuts. He is doing so even at a time when inflation is running above the Fed’s 2 percent inflation target, and when the recently released producer price numbers suggest that Trump’s tariff increases will soon add to inflation..

The Trump administration is also making the mistake of undermining foreign investor confidence in the country’s willingness to meet its debt servicing obligations by periodically musing about the desirability of a tax on interest payments to foreign bondholders and of the forced conversion of foreign bond holdings into a 100-year zero-coupon bond. The recent firing of the head of the Bureau of Labor Statistics will also do little to inspire foreign investor confidence in U.S. economic policy management. Similarly, the downsizing of the Internal Revenue Service raises questions about the government’s ability to avoid shortfalls in tax revenue collections.

America’s highly compromised public finances require that it do everything to promote economic growth to help manage the debt burden. However, here too the Trump administration has been making major economic policy mistakes. The aggressive and chaotic way in which import tariff policy has been conducted has engendered economic uncertainty, reduced the economy’s long-run competitiveness, and limited the benefits that America might otherwise have derived from international trade.

All of this would suggest that it is not a matter of if but a matter of when the United States will have its day of economic reckoning, either in the form of a bond or a dollar market crisis. Maybe Trump will be lucky and the day of reckoning will be postponed for his successor. Signals coming from the dollar, gold, and bond markets, however, would suggest that a financial crisis is likely to occur on Trump’s watch. Since the start of the year, the dollar has lost around 10 percent of its value, gold prices have increased by around 25 percent, and long-term Treasury bond yields have not declined despite increased market volatility and lower Federal Reserve interest rates.

Trump would do well to heed the market’s early warning signs and make an early economic policy U-turn to avoid a day of economic reckoning. Unfortunately, judging by the many economic policy mistakes his administration has made so far, I wouldn’t count on that happening.