At this moment, while the tariff debate gradually drops off the radar, markets are increasingly fixated on a more alarming issue — whether
US Treasury may soon be headed for a default.
As the world worries whether the US can pay back its $36 trillion-plus debt, the Trump administration drops a dramatic policy bombshell —
a “Big, Beautiful Bill” — adding $500 billion to the deficit each year.
This proposal — derisively called “Stimulus 2.0”—is it a last-ditch boost for growth, or a dangerous path toward a cliff?
Today, we break it down from 3 key angles.
I. Policy U-turn: From Tariffs to Deficit Spending Run-up
After the tariff war fell flat, Trump is now shifting from a “tariff-dominant” policy toward a “deficit-fueled” approach.
According to the latest budget proposal, the “Big, Beautiful Bill” will add another $500 billion in stimulus on top of the existing $2 trillion
annual deficit — effectively adding a whole Australia’s worth of spending (about $470 billion) each and every year. That means the US
deficit-to-GDP ratio will rise from 7% to over 8.5% — more than double the international alarm threshold.
This policy reversal underscores the complete collapse of the “333 Plan”—the ambitious policy package Trump originally pitched, which
aimed for 3% GDP growth, 3% deficit, and 3M barrels/day of oil production. Shale output fell 15% below its peak, Q1 GDP growth was a
weak 1.5% and the deficit ratio already ballooned to 7%.
Originally, the “333 Plan” was a combination of demand-side stimulus and supply-side reform:
Demand-side: Infrastructure projects — highway and clean energy — were expected to produce strong multipliers (1.8 for transportation, 1.5
for green energy), outperforming the 1.2 multiplier of the 2009 ARRA stimulus.
Supply-side: The policy relied on opening 2.3M acres of federal land for shale and removing 17 environmental regulations to boost
production. It also drew on the Defense Production Act to create 90-day inventories of key industries and secure supply chains.
But these measures faced hard constraints:
Debt cliff: IMF studies show policy multipliers diminish by 40-60% once government debt exceeds 100%. At 123% of GDP in 2023, the US
is well into the “efficacy failure” range.
Interest rate ceiling: The Fed raised its policy rate to 5.25%-5.5%. The 30-year mortgage jumped above 7%. Housing fell 15% in 2023,
directly dampening investment.
De-dollarization: The dollar’s share of world reserves fell from 73% in 2000 to 58% in 2023. Foreign holdings of US Treasuries fell below
40%. The ability to monetize deficits is weakening.
Therefore, the “333 Plan” fell victim to reality — forcing Trump to pursue a dramatic stimulus policy to mask deep structural weaknesses.
II. The 3 Death Grips: Labor Shortage, Debt Black Hole, and Confidence Crisis
A double squeeze in the labor market:
The US is experiencing a “human resources freezing”—deportations removed 420,000 workers (about 0.25% of the workforce), while the
baby boom generation is retiring at a rate of 100,000 per month.
This constitutes a massive drain of labor and a dramatic rise in Medicare and Social Security payments — growing 6% per year — adding
pressure to federal coffers.
Even if technology delivers 2% productivity growth, a shrinking workforce makes 3% growth a pipe dream.
Meanwhile, consumer confidence fell to its second lowest level since 2008. The combination — “making less, spending more”—is tearing at
the economic base.
Debt cliff ticking:
At $36.8 trillion, US federal debt stands at 123% of GDP.
In 2024, annual net interest exceeded $1 trillion — nearly $1.9M a minute — enough to lift 40M Americans above the poverty line.
Meanwhile, a maturity wall is closing in:
$9 trillion in Treasuries come due in 2025, $6.5 trillion in the first half alone.
Bond issuance jumped 37% in Q1, draining liquidity from the market.
Every US citizen now bears a $107,000 share of the national debt — a growing legacy for future generations.
Bond market’s confidence shock:
Three signals underscore a weakening bond market:
Mispriced risk: The 10-year real yield fell 80 basis points below its pre-pandemic level — reflecting pricing abnormalities and ignoring risk
signals.
Liquidity squeeze: The overnight reverse repo jumped above $2 trillion — a sign financial institutions are borrowing from each other just to
stay solvent.
Flight from Treasuries: Foreign holdings fell from 45% to 38%.
China cut $18.9 billion in US holdings in March — its lowest since 2009.
Meanwhile, on May 15, the 30-year yield surged to 4.95% — the largest weekly rise this century — prompting Moody’s to revise its outlook
to “negative” and warn that “fiscal discipline is eroding the dollar’s credibility.”
III. Policy’s Last Resorts: 3 Short-Sighted Remedies
As bond turmoil grows, the Trump administration is left with only 3 weak cards:
SLR exemption: Allow banks to exclude Treasuries from their leverage ratios — a temporary pressure valve — but this weakens bank
resiliency. The 2023 collapse of Silicon Valley Bank is a painful precedent.
Operation Twist 2.0: Selling short-dated and buying long-dated to keep long yields in check — a classic “robbing Peter to pay Paul”—but
policy space is tiny when short-dated paper already yields 5.2%.
International bailout: Attempt to align policy with European and Japanese central banks to provide dollar liquidity. But Saudi Arabia’s oil cuts
and Sino-Russian transactions in their own currencies undermine unity, reducing policy coordination.
The true face of the “Big, Beautiful Bill” is borrowing against the future — adding $500 billion in annual deficits to pursue a 3% “Imperial
growth” — while ignoring a shrinking labor base and weak investment.
The policy suffers from 3 internal contradictions:
Short vs. long: 70% of the stimulus (about $350 billion) comprises transfer payments and subsidies — consumption — not productive
investment.
State intervention vs. market: “Buy America” provisions raise project costs by 20-30%. The Inflation Reduction Act’s sourcing requirements
have raised vehicle production expenses by over $80 billion — dampening market efficiency.
Hegemonic ambitions vs. multilateral responsibilities: The policy effectively “exports” inflation — 40% of developing markets’ inflation in
2023 came from US policy — yet the US fails to shoulder the adjustment, weakening G20 mechanisms.
Once 10-year Treasury crosses the 4.5% “red line”, the Fed may be forced back into “unlimited Quantitative Easing”— threatening the dollar’s
reserve credibility.
For ordinary investors, this signals an opportunity to shift toward “de-Dollarized” assets — gold, non-US currencies — while for the world,
this underscores a dramatic showdown. The Wall Street debt binge, when the tide recedes, will reveal who has been “swimming naked.”
This vicious circle — “high debt, weak growth, high borrowing”— can be broken in 3 dimensions:
1. Structural reform — shifting from pay-as-you-go entitlements to a partial funded pension — to ease future pressure;
2. Innovation policy — investing in AI and green technology — to raise total factor productivity;
But this must avoid descending into electoral politics — policy must be forward-looking, not vote-buying;
3. International cooperation — reform the IMF framework to create a multilateral mechanism for orderly debt resolution.
This US policy crisis, stemming from the 2008 borrowing binge, will test its political resolve and institutional resiliency. Will this be a
“Reagan-style renewal” or a “Greek-style crisis”?
As the tide drops, we’ll soon find out who’s been swimming naked.
