In the United States, public debt now stands at 99% of GDP. The Congressional Budget Office (CBO) expects it to reach 107% of GDP by 2029 – surpassing the record set at the end of World War II – and to continue rising indefinitely.
But until when? As Herbert Stein, who served as Chair of the Council of Economic Advisers under President Richard Nixon, famously quipped, “If something cannot go on forever, it will stop.” But what will that “stop” look like?
A country can move off an unsustainable debt path in six ways: faster economic growth, lower interest rates, default, inflation, financial repression, or fiscal austerity.
In the case of the US, one might be tempted to scratch all six off the list, one by one. But that would leave us in violation of Stein’s Law. So, which is it?
Faster economic growth is certainly the most appealing option. At least since the time of Ronald Reagan, US presidential candidates have promised to deliver it, thereby increasing tax revenues and reducing fiscal deficits, while cutting taxes.
But these rosy scenarios rarely materialize. And, today, a substantial growth acceleration looks even less likely than in the past.
The US labor force is shrinking. The baby boomers are leaving the workforce, young families are having fewer children, immigration is being curtailed, and deportations are being ramped up. This will slow GDP growth.
While AI may partly offset the shrinkage, the sector’s likely impact on growth remains far from clear, especially considering the bubble dynamics that are currently shaping it.
In any case, with the CBO projecting long-term US growth of just 1.6%, not even an AI miracle is likely to raise it much above 2%.
Lower interest rates
Substantially lower interest rates are similarly unlikely. As recently as 2021, the US Treasury’s annual interest bill was only 1.5% of GDP. But the very low interest rates of that era were never going to be permanent.
Already, the federal government is spending more on interest than it spends on defense or non-defense discretionary spending, with the bill estimated to total 3.2% of GDP in 2026. Only Medicare and Social Security cost more.
Now, we are getting to the less favorable outcomes. It is said, including by US President Donald Trump himself, that investors need not fear default from a country that borrows in its own currency, because it can always print the money to pay investors.
But international investors could eventually seek to curtail a country’s ability to borrow in its own currency, as they have with many developing countries.
Already, credit-ratings agencies have downgraded the US – partly in response to the country’s political gridlock – and doubts about Treasury securities’ status as a safe-haven asset are intensifying.
In this sense, the market response to Trump’s “Liberation Day” tariffs last April may have been a harbinger of a new era, in which the mighty US confronts the constraints that other debtor countries have long faced.
Printing dollars is not the get-out-of-jail-free card some seem to think it is
And contrary to the impression given by Trump – the self-styled “king of debt,” with a long history of corporate bankruptcies – default would not be an attractive solution, which explains rising political pressure on the Federal Reserve to keep interest rates low.
Moreover, printing dollars is not the get-out-of-jail-free card some seem to think it is.
It amounts to inflating away the real value of the public debt, as the Continental Congress, which lacked the power to tax, did during the American Revolution. But inflation would be as bad for the federal government as explicit default.
Financial repression
The next possible scenario is financial repression – the use of heavy-handed financial regulation to force domestic banks to swallow government bonds at artificially low interest rates.
Countries with weak financial sectors, particularly developing economies, regularly pursue financial repression, sometimes alongside capital controls to prevent money from leaving the country.
The US, with its global financial dominance, would not in normal times consider such a move.
Trump’s advisers have proposed actions like charging “user fees” to foreign central banks that hold US debt
But little about the Trump administration is normal. Trump’s advisers, especially Stephen Miran, have proposed actions like charging “user fees” to foreign central banks that hold US debt; taxing foreign investment in the US; and forcing foreign central banks to hold 100-year US bonds without coupon payments, instead of the T-bills they now hold.
These proposals would constitute a restructuring of the US debt – a drastic step, essentially equivalent to default.
Fiscal austerity
There is one possibility left: severe fiscal austerity. The US government’s primary budget deficit (excluding interest payments) is currently more than 3% of GDP, taking into account Trump’s recent legislation permanently extending the 2017 tax cuts that had been set to expire.
With nominal growth of 5% (2% real growth with 3% inflation – an optimistic scenario) and a long-term interest rate of 5%, putting US debt on a sustainable path would require the government to eliminate its primary deficit entirely.
Eventually, in the unforeseeable future, austerity may be the most likely of the six possible outcomes - Donald Trump
Such austerity is politically difficult even in the best of times. To illustrate, it would require eliminating almost all defense spending or else almost all non-defense discretionary spending.
There was a time when a tolerable bipartisan solution to America’s fiscal woes seemed within political reach. But it never materialized.
US President Bill Clinton did manage to restore budget surpluses in 1998-2001, with no help from congressional Republicans, using the strategy President George H.W. Bush had pursued in 1990: slightly higher taxes, slower spending growth, and a PAYGO provision (Pay As You Go).
But Clinton’s successor, George W. Bush, immediately squandered the surpluses he had inherited on tax cuts and defense-spending increases, putting the US back onto an unsustainable debt path.
For now, and in the foreseeable future, even if they get back into power, Democratic politicians will be reluctant to sacrifice spending on treasured programs, knowing that it could enable Republican successors once again to give away the savings to the rich in the form of new tax cuts, reversing hard-won fiscal consolidation.
Eventually, in the unforeseeable future, austerity may be the most likely of the six possible outcomes.
Unfortunately, it will probably come only after a severe fiscal crisis. The longer it takes for that reckoning to arrive, the more radical the adjustment will need to be.
Jeffrey Frankel, Professor of Capital Formation and Growth at Harvard University, served as a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research.
