The Core Problem

The US faces a dangerous combination of massive tax cuts (extending 2017 cuts at a cost of $3.8-5.2 trillion over 10 years) with no credible funding mechanism. This is happening against a backdrop of already elevated deficits (6.4% of GDP) and record debt ($37 trillion, or 135% of GDP).

Failed Funding Strategies

Tariff Revenue Fantasy: Originally, tariffs were supposed to generate $600 billion annually to fund tax cuts. However, the administration has backed down from the highest tariff levels, using them as negotiating tools rather than revenue generators.

Spending Cuts Collapse: Elon Musk’s Department of Government Efficiency promised $2 trillion in savings but delivered chaos and perhaps only $160 billion (and even that figure is disputed). Musk eventually left the role, and overall spending actually increased 6.3% in early 2025.

Market Warning Signs

• Credit rating agencies (Moody’s, Fitch, S&P) have all downgraded US debt
• 10-year Treasury yields have risen to 4.6%, affecting mortgages and corporate borrowing
• Foreign investors are pulling out of US assets, with Asian and European currencies strengthening
• The federal deficit reached $1.1 trillion by April 2025, up from $904 billion the previous year

The Bond Market Threat

Khanna draws parallels to the UK’s 2022 crisis under Liz Truss, when unfunded tax cuts triggered a bond market meltdown. He notes that the US already experienced a taste of this in April when Treasury yields spiked from 3.9% to 4.5% in response to tariff announcements.

Proposed Solutions and Their Limitations

The Treasury is considering suspending banking regulations (the Statutory Leverage Ratio) to encourage domestic banks to buy more government bonds. However, Khanna argues this is merely a “band-aid” solution that won’t address the fundamental problem of excessive Treasury issuance.

The Bottom Line

The analysis suggests the US may face a choice between achieving credible deficit reduction or risking a financial crisis potentially worse than the UK’s 2022 experience. The political gridlock makes meaningful fiscal reform difficult, but market pressures may ultimately force the government’s hand.

This presents a sobering picture of how fiscal irresponsibility, even by the world’s largest economy, can create systemic risks that reverberate globally through bond and currency markets.

US Fiscal Pressures Under Trump: Comprehensive Analysis and ASEAN Impact

The Fiscal Crisis Anatomy

Core Structural Problems

The United States faces an unprecedented fiscal crisis characterised by three converging factors:

Massive Unfunded Tax Cuts: The proposed extension of 2017 tax cuts represents a $3.8-5.2 trillion commitment over the next decade without corresponding revenue sources or spending reductions. This represents approximately 15-20% of the current US GDP spread over ten years.

Revenue Generation Failure: The administration’s original funding strategy through “reciprocal tariffs” has collapsed. Peter Navarro’s projection of $600 billion annually in tariff revenue (equivalent to $6 trillion over a decade) has proven to be fantasy economics, with tariffs now being used as negotiating tools rather than revenue generators.

Spending Cut Mirage: Elon Musk’s Department of Government Efficiency promised $2 trillion in savings but delivered operational chaos and perhaps only $160 billion in questionable cuts before effectively dissolving. Meanwhile, actual spending increased 6.3% in early 2025, driven by entitlement programs, defence spending, and debt service costs.

Deteriorating Fiscal Metrics

The numbers paint a stark picture of fiscal deterioration:

• Current Deficit: 6.4% of GDP (already elevated by historical standards)
• NatioDebtDebt: $37 trillion (135% of GDP)
• Projected Debt: Over $40 trillion by 2030 under current policies
• Deficit Growth: From $904 billion to $1.1 trillion in the first four months of fiscal 2025

These metrics place the US in territory previously associated with fiscally distressed economies, with the critical difference being the dollar’s reserve currency status, which provides temporary insulation.

Market Stress Indicators and Bond Market Dynamics

Credit Rating Degradation

The unanimous downgrading by all three major rating agencies (Moody’s to AA1, following Fitch and S&P) represents an unprecedented loss of confidence in US fiscal management. Moody’s projection of deficits widening to 9% of GDP by 2035 suggests structural, not cyclical, fiscal problems.

Treasury Market Stress

The 10-year Treasury yield rising from 3.9% to 4.6% reflects fundamental concerns about fiscal sustainability rather than temporary market volatility. This yield increase has cascading effects:

• Mortgage rates are rising above 7% in many markets
• Corporate borrowing costs are increasing, affecting investment decisions
• Government debt service costs compound the fiscal problem

Capital Flight Evidence

The strengthening of the euro, Japanese yen, Taiwan dollar, Singapore dollar, and Korean won against the USD since April suggests coordinated capital flight from US assets. This represents both central bank reserve diversification and private investor reallocation.

Political Economy Constraints

Congressional Gridlock

The political reality makes fiscal adjustment extremely difficult:

• Entitlement Spending: Politically untouchable, representing the most significant portion of federal spending
• Defence Spending: Proposed 13% increase for FY2026, moving in the wrong direction fiscally
• Republican Resistance: Fiscally conservative Republicans demanding “deficit neutrality” clash with tax-cut priorities
• Regional Interests: Even proposed cuts to green energy spending face Republican opposition due to district-level benefits

Institutional Pressures

The Federal Reserve faces an impossible trilemma: maintaining price stability, supporting financial stability, and avoiding monetisation of fiscal deficits. Any return to quantitative easing to support Treasury markets would reignite inflation concerns.

Impact on Singapore: Multi-Dimensional Analysis

Financial Hub Vulnerabilities

Banking Sector Exposure: Singapore’s banks have significant exposure to US dollar funding markets and Treasury securities. Rising US yields increase funding costs and create mark-to-market losses on existing Treasury holdings. DBS, OCBC, and UOB collectively hold substantial US dollar assets that become more expensive to fund as rates rise.

Wealth Management Impact: Singapore’s position as Asia’s wealth management centre faces pressure as US bond volatility affects portfolio valuations. High-net-worth individuals and family offices may reduce US allocations, affecting Singapore’s asset management industry.

Currency Considerations: The Monetary Authority of Singapore’s exchange rate-based monetary policy faces new challenges. A weakening USD creates deflationary pressures, but MAS must balance this against imported inflation from other sources and regional currency movements.

Trade and Economic Linkages

Re-export Hub Dynamics: Singapore’s role as a regional trading hub means that US fiscal instability affects global trade flows. Reduced US consumer spending due to higher borrowing costs impacts Singapore’s re-export business, particularly in electronics and commodities.

Investment Flows: US fiscal uncertainty may paradoxically benefit Singapore as investors seek stable, well-regulated alternatives. However, this depends on Singapore maintaining its own fiscal credibility and regulatory standards.

Technology Sector: Singapore’s growing tech ecosystem, particularly in fintech and semiconductors, faces headwinds from reduced US venture capital and corporate investment as American companies face higher borrowing costs.

Policy Response Challenges

Reserves Management: Singapore’s sovereign wealth funds (GIC, Temasek) must navigate US asset allocation decisions carefully. Reducing US exposure too quickly could trigger losses, but maintaining exposure carries fiscal risk.

Regional Leadership: Singapore may need to take greater leadership in developing regional financial architecture, potentially accelerating ASEAN financial integration to reduce USD dependence.

ASEAN Regional Impact Assessment

Differential Country Impacts

Export-dependent economies(Thailand, Malaysia, Vietnam): Will experience the most immediate impact through reduced US demand and supply chain disruptions. These countries’ manufacturing exports to the US market will become less competitive as American consumers face higher borrowing costs.

Commodity Exporters (Indonesia, Brunei): They may benefit initially from dollar weakness but face longer-term demand destruction as US growth slows. Indonesia’s coal and palm oil exports and Brunei’s energy exports could see reduced demand.

Financial Centres (Singapore, to a lesser extent Thailand): Face complex tradeoffs between dollar funding costs and opportunities from capital flight from US markets.

Regional Financial Architecture Implications

ASEAN Payment Systems: The crisis accelerates incentives for regional payment system development, potentially boosting initiatives like cross-border QR payments and central bank digital currencies to reduce USD transaction dependence.

Reserve Currency Diversification: ASEAN central banks likely accelerate diversification away from USD reserves, potentially increasing holdings of Chinese yuan, Japanese yen, and regional currencies.

Capital Market Development: Regional bond markets may develop more as governments and corporations seek alternatives to US dollar funding. This could strengthen local currency bond markets across ASEAN.

Supply Chain Reconfiguration

Manufacturing Shifts: US fiscal instability may accelerate supply chain diversification away from US-centric models. Increased intra-regional trade and investment could benefit ASEAN countries.

Investment Patterns: Reduced US outward investment due to higher domestic borrowing costs may be partially offset by increased intra-ASEAN investment and investment from other regions seeking alternatives to US markets.

Scenario Analysis and Strategic Implications

Benign Scenario (30% probability)

US political system achieves fiscal compromise, implementing modest tax increases and spending cuts. Bond yields stabilise around 4-4.5%, providing a manageable adjustment for regional economies.

ASEAN Impact: There has been a gradual adjustment with limited disruption. Singapore maintains its role as a regional financial hub with enhanced diversification.

Crisis Scenario (40% probability)

Bond market revolt forces dramatic fiscal adjustment, similar to but larger than the UK 2022 crisis. US recession, dollar volatility, and global financial market stress.

ASEAN Impact: Severe short-term disruption but potential long-term structural benefits as regional integration accelerates and USD dependence decreases.

Chronic Instability Scenario (30% probability)

An extended period of high yields, periodic market stress, and gradual erosion of the dollar’s reserve status without an acute crisis.

ASEAN Impact: Gradual structural adjustment with Singapore emerging as an increasingly important regional financial centre as alternatives to US markets develop.

Strategic Recommendations

For Singapore

1. Accelerate financial market development to capture capital fleeing US volatility.
2. Enhance regional payment systems leadership to reduce USD transaction dependence.e
3. Strengthen fiscal buffers to maintain credibility during global uncertain.ty.
4. Develop alternative investment products for wealth management clients seeking USD alternatives.

For ASEAN

1. Fast-track regional financial integration, including payment systems and capital markets
2. Establish regional monetary coordination mechanisms to manage collective currencystabilityi.ty.
3. Diversify trade financing away from USD-centric systems
4. Strengthen intra-regional investment frameworks to reduce dependence on US capital

The US fiscal crisis represents both the most significant threat to global economic stability since 2008 and potentially the most significant opportunity for ASEAN economic integration and Singapore’s emergence as a truly global financial centre. The region’s response will determine whether this crisis catalyses positive structural change or merely inflicts economic damage.

The Trump Fiscal Crisis: A Comprehensive Review of Mounting Pressures and Regional Implications

Executive Summary

The Trump administration’s fiscal policies have created a perfect storm of unsustainable spending commitments, failed revenue strategies, and mounting market pressures that threaten both US economic stability and global financial markets. This review examines the mechanics of America’s deepening fiscal crisis, analyses its transmission channels to Southeast Asia, and evaluates the strategic implications for Singapore and ASEAN economies.

Chapter 1: Anatomy of the US Fiscal Crisis

The Scale of Fiscal Imbalance

The United States confronts its most severe peacetime fiscal crisis since the Great Depression. The proposed extension of 2017 tax cuts represents a staggering $3.8-5.2 trillion unfunded commitment over the next decade, equivalent to approximately 15-20% of current GDP. This massive fiscal expansion occurs against a backdrop of already unsustainable debt dynamics, national debt reaching $37 trillion (135% of GDP), and annual deficits exceeding 6.4% of GDP.

The Congressional Budget Office projects that under current policies, outstanding Treasury debt will surpass $40 trillion by 2030, representing a 43% increase in just five years. This trajectory places the US in fiscal territory previously associated with distressed European economies during the eurozone crisis, with the critical distinction that America’s reserve currency status has provided temporary insulation from market discipline.

Revenue Strategy Collapse

The administration’s original funding mechanism has proven to be built on fundamentally flawed assumptions. Trade advisor Peter Navarro’s projection of $600 billion in annual tariff revenue was predicated on maintaining punitive tariff levels that proved economically and politically unsustainable. The reality of “reciprocal tariffs” as originally conceived would have triggered severe economic disruption, forcing the administration to retreat to using tariffs as negotiating tools rather than revenue generators.

This strategic pivot has left a massive funding gap. Even at reduced levels, current tariffs generate perhaps $80-100 billion annually – a fraction of the projected $600 billion needed to fund tax cuts. The arithmetic simply does not work, creating what economists term a “fiscal cliff” scenario where promised benefits cannot be delivered without dramatic increases in borrowing.

The DOGE Debacle

Elon Musk’s Department of Government Efficiency represented the administration’s attempt to square the fiscal circle through aggressive spending cuts. The initial promise of $2 trillion in savings suggested a fundamental misunderstanding of federal budget dynamics. Entitlement programs (Social Security, Medicare, Medicaid) represent the largest spending categories and are politically untouchable. Discretionary spending, while more flexible, is insufficient to generate savings on this scale.

The DOGE experiment resulted in operational chaos across federal agencies, legal challenges, and ultimately Musk’s departure from government service. The claimed $160 billion in savings remains unverified and likely overstated, representing less than 8% of the original target. Meanwhile, actual federal spending increased 6.3% in early 2025, driven by rising debt service costs, defence spending increases, and continued entitlement growth.

Political Economy Constraints

The fiscal crisis occurs within a political system structurally incapable of addressing long-term challenges. Congressional Republicans face an impossible triangle: delivering tax cuts, maintaining spending on popular programs, and satisfying fiscal conservatives demanding balanced budgets. Democratic opposition ensures that any meaningful entitlement reform remains off the table.

Defence spending is far from being cut and is scheduled to increase by 13% in fiscal 2026. Even proposed reductions in green energy spending face Republican resistance due to district-level economic interests. This political gridlock makes the kind of comprehensive fiscal adjustment that markets increasingly demand extremely unlikely within the current political framework.

Chapter 2: Market Response and Financial Stress

Credit Rating Deterioration

The unanimous downgrading of US sovereign debt by all three major rating agencies represents an unprecedented loss of confidence in American fiscal management. Moody’s reduction to AA1, following similar actions by Fitch and S&P, signals fundamental concerns about debt sustainability rather than temporary political dysfunction. Moody’s projection of deficits widening to 9% of GDP by 2035 assumes no policy changes – a reasonable assumption given current political dynamics.

These downgrades carry practical consequences beyond symbolic impact. Insurance companies, pension funds, and sovereign wealth funds operating under strict investment mandates may be required to reduce Treasury holdings. International central banks, already nervous about fiscal sustainability, may accelerate reserve diversification away from dollar assets.

Bond Market Stress Indicators

Treasury market stress manifests across multiple indicators. The 10-year yield’s rise from 3.9% to 4.6% represents a fundamental repricing of fiscal risk rather than temporary volatility. This yield increase reflects investor demands for higher compensation for holding increasingly risky government debt.

More concerning is the inversion of typical crisis patterns. Traditionally, Treasury bonds serve as safe-haven assets during market stress. The current environment sees Treasury selling during periods of broader market uncertainty, suggesting that US government debt itself has become a source of systemic risk rather than a refuge from it.

The yield curve dynamics also signal distress. The spread between 2-year and 30-year Treasuries has widened dramatically, indicating investor concerns about long-term fiscal sustainability. This pattern typically precedes either a dramatic fiscal adjustment or a currency crisis in other economies.

Capital Flight Evidence

Perhaps most alarming is evidence of coordinated capital flight from US assets. The simultaneous strengthening of the euro, Japanese yen, Taiwan dollar, Singapore dollar, and Korean won since April suggests both central bank reserve diversification and private investor reallocation. This represents a fundamental shift in global capital flows that has historically underpinned American fiscal flexibility.

Foreign ownership of US Treasuries has declined from approximately 35% to 30% over the past year, representing hundreds of billions in net selling. China, Japan, and European central banks have all reduced Treasury holdings, forcing greater reliance on domestic buyers who may demand higher yields to absorb increased issuance.

Chapter 3: Transmission Mechanisms to Southeast Asia

Financial Channel Impacts

The crisis transmits to Southeast Asia through multiple financial channels. Rising US interest rates increase funding costs for regional banks with dollar exposures, affecting lending capacity and profitability. Singapore’s three major banks – DBS, OCBC, and UOB – collectively hold significant US dollar assets that become more expensive to fund as rates rise.

Regional currency volatility increases as central banks navigate competing pressures. The Monetary Authority of Singapore faces particular challenges in maintaining its exchange rate-based monetary policy framework while managing capital flows and inflation pressures. Similar pressures affect Bank Negara Malaysia, Bank of Thailand, and other regional central banks.

Asset management industries across the region confront portfolio reallocation pressures as clients seek alternatives to volatile US assets. Singapore’s position as Asia’s wealth management centre faces both challenges from market volatility and opportunities from capital seeking regional alternatives.

Trade and Investment Channels

US fiscal instability affects Southeast Asian economies through reduced American demand for goods and services. Higher borrowing costs for American consumers and businesses translate into reduced import demand, particularly affecting electronics, textiles, and other manufactured goods that comprise significant portions of regional exports.

Investment flows face disruption as American companies reduce overseas expansion due to higher domestic borrowing costs. This particularly affects technology sectors in Singapore, Malaysia, and Thailand that have relied on US venture capital and corporate investment.

Supply chain relationships require recalibration as US fiscal uncertainty encourages diversification away from America-centric trade patterns. While this creates short-term disruption, it may accelerate beneficial regional integration over the medium term.

Monetary Policy Spillovers

Regional central banks confront difficult policy tradeoffs as US monetary conditions tighten in response to fiscal pressures. Countries with significant dollar debt face particular challenges as higher US rates increase debt service costs and currency pressure.

The traditional policy response of matching US rate increases becomes problematic when American rate increases reflect fiscal rather than monetary factors. Regional economies with healthier fiscal positions face the prospect of importing American monetary tightness despite different domestic economic conditions.

Chapter 4: Singapore-Specific Impact Analysis

Financial Sector Vulnerabilities and Opportunities

Singapore’s banking sector faces immediate pressures from US rate increases and Treasury market volatility. The three major banks maintain substantial US dollar funding operations that become more expensive as rates rise. Trading revenues from fixed income and currency operations face volatility, while credit costs may increase if regional economic conditions deteriorate.

However, Singapore’s financial sector also confronts unprecedented opportunities. Capital flight from US markets creates potential for increased regional market share in asset management, private banking, and capital markets services. The city-state’s regulatory credibility and infrastructure position it to capture flows seeking alternatives to New York and London financial centres.

The insurance sector faces particular complexity as rising US rates affect both asset and liability valuations. Life insurers with long-term dollar obligations may benefit from higher investment yields, while general insurers face reserve adequacy pressures from market volatility.

Currency and Monetary Policy Challenges

The Monetary Authority of Singapore operates an exchange rate-based monetary policy that becomes more complex during periods of US dollar instability. MAS must balance competing objectives of maintaining price stability, supporting economic growth, and managing capital flows.

A weakening US dollar creates deflationary pressures that might typically call for monetary easing. Given Singapore’s role as a trade and financial hub, regional currency strength against the dollar may be appropriate. The policy response requires careful calibration to avoid either importing US instability or creating domestic economic distortions.

Singapore’s substantial foreign reserves provide policy flexibility during the crisis, but reserve management becomes more complex as US asset quality deteriorates. The Government of Singapore Investment Corporation and Temasek Holdings must navigate allocation decisions carefully to maintain returns while managing geopolitical and credit risks.

Economic Structure Implications

Singapore’s role as a regional trading hub faces both challenges and opportunities from the US fiscal instability. Reduced American consumer demand affects re-export trade, particularly in electronics and commodities. However, supply chain diversification away from US-centric patterns may increase Singapore’s importance as a regional distribution centre.

The technology sector confronts headwinds from reduced US venture capital and corporate investment, but may benefit from increased regional investment as American companies reduce overseas expansion. Singapore’s growing fintech ecosystem could gain competitive advantages as the US financial technology faces funding constraints.

Real estate markets face complex dynamics as international investment patterns shift. Commercial property may benefit from increased regional headquarters activity as companies diversify away from US operations, while residential markets could see both foreign buyer reduction and safe-haven investment increases.

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