US long-term borrowing costs eased this week after touching multi-year highs, but Nobel Prize-winning economist Joseph Stiglitz warned that markets may still not be fully reflecting the scale of America’s fiscal challenges.
“I think we’ll be able to finance the US government,” Stiglitz told CNBC’s Steve Sedgwick at the annual Ambrosetti forum in Italy. “A real indicator of the market not thinking things are being well managed” was the rise in projected real interest rates over the next decade, from 2% to about 2.5%, he added.
“I agree with that perspective, and I think markets are slow to react,” Stiglitz said.
He argued that investors had yet to properly account for the impact of tariff policies under President Donald Trump. “They haven’t fully taken on board, for instance, [Trump’s] claim that tariff revenues are going to finance the deficit,” Stiglitz noted. “What [he] doesn’t understand is it takes a while for firms to readjust their supply chains… but, you know, it’s like gravity. Firms are going to find the way they can [to] import goods at the lowest tariff, and as soon as that happens, tariffs go down.”
“So I think the US financial position will be worse than these straightforward projections we see for the moment, [with] tariff revenue quite high,” he added.
Yields on global long-dated bonds retreated in the second half of the week after spiking on Tuesday (September 2), when the US 30-year treasury briefly touched 5%. That move followed a federal appeals court ruling that most of Trump’s tariffs on imports are illegal, raising the prospect of Washington having to refund billions of dollars already collected.
Concerns about America’s fiscal trajectory have deepened this year, with several analyses suggesting Trump’s budget plans would add trillions to the deficit over the next decade, at a time when it already exceeds 6% of GDP.
Jason Furman, former chair of the Council of Economic Advisers under President Barack Obama, said the Trump administration had effectively locked in high deficits.
“They passed a law that cut taxes and cut spending, then they did tariffs. All of that is roughly fiscally neutral,” Furman said. “But remember, fiscally neutral says that we’re okay with a budget deficit of about 6% of GDP, rising to 7% of GDP, we’re okay with debt continuing to rise as a share of GDP.”
He said it would be “overstating the case” to suggest this would cripple the US economy, but warned of negative consequences, including higher mortgage rates and tougher conditions for business investment. “No one knows exactly where the tipping point would come for higher US borrowing to tip into crisis territory,” Furman added.
Stiglitz also criticised the recent US-EU trade agreement, saying Brussels had come away disadvantaged. “[The EU] may be making the best of a bad situation, but it’s not just about trade,” he said. “Europe should have gotten the better deal. Europe got a bad deal, absolutely. But what was this about? Defence. Europe is at war. They know they’re at war. The US knows that it’s at war. Europe has not gotten the defence capacity to fight on its own.”
“Everybody should have been aware that the US was not a reliable partner back in 2017, when Trump came to power first, but they didn’t take on board that lesson. And this is the best deal they could get,” he added.
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First Published: Sept 5, 2025 7:24 PM IS
