Some say governments should manage budgets like families must. But governments are different. They can borrow and keep rolling over loans indefinitely — as long as the interest costs are manageable.
They were, for a long stretch, but lately central banks have raised interest rates to combat inflation. So when a past government-issued bond with, say, a 2% interest rate comes due, refinancing it might cost 4% or more.
America already has a rapidly growing $38 trillion national debt, about 120% of GDP, with budget deficits adding $2 trillion annually. About half is interest, a cost constantly rising, with higher interest rates on expanding debt.
The interest rate bond purchasers require to loan money to the government reflects the risk. The bond market shrugs off (for now) the risk of default. The more likely risk is inflation. If a bond pays 4% interest while 5% inflation lessens the dollar’s value, that’s a losing proposition. So they’d require higher interest. Since rates are still only 4-5%, the market is judging that risk low too.
But if at some point the debt, and associated interest cost, become too large, the market will say, “Uh oh. This is no longer sustainable.” That increased risk will drive up interest rates, further busting the budget, in a vicious circle.
Meantime the budgetary problem is aggravated by rising lifespans meaning higher pension and health benefit costs, etc. Social Security and Medicare will go kablooey in 2033-34, without a big fix, which grows costlier with each passing year. There’s no political appetite for tackling this.
Then too our birth rate has fallen below replacement level, presaging population shrinkage. Leaving fewer future people to cope with the debts run up by a previous larger population. For a while, immigration helped there, but now we’ve virtually shut the door.
Some imagine economic growth is the salvation. However, debt is rising faster than any conceivable economic growth rate. Which may be boosted by AI — but that could raise unemployment, adding to government spending. Furthermore, The Economist recently presented a sobering analysis, explaining that more growth will prompt more investment, thus more competition for funding, another upward pressure on interest rates. So while more economic activity does increase government’s tax revenue, that would be offset by higher interest costs.
Reduced spending and/or higher taxes are politically toxic non-starters. Everybody hates tax rises. Voters generally favor lower spending — but only in the abstract, they squeal at cuts to programs they like (which is nearly all). And Trump’s spending cuts associated with DOGE and the government shutdown are nowhere near what would be needed.
Another possibility is to inflate away the debt, repaying loans with dollars of reduced value. Rather than borrowing more, the government can just print money, causing inflation that lowers the dollar’s value. Voters hate that too, but it can creep up on us unwittingly.
Or else we can simply default on the debt. Many countries have done that. Nobody really expects it of America, even though we’ve actually come close, with last minute debt ceiling deals. The rising political embitterment reflected in the current government shutdown standoff bodes ill for the next debt ceiling deadline, expected in 2027. The harm of shutdowns is pretty limited; and while the immediate impact of a debt default might seem so too, it will be akin to losing virginity. Making it far harder —and costlier — to continue financing our debt through borrowing. Something will have to give. Bigly.
America is not alone in sliding toward a debt crisis; some European nations are too (especially with more generous social spending). This raises the stakes even more, given the world economy’s interconnectedness. The blow-up seems only a matter of time. Democracies already stressed by stroppy voters susceptible to populist demagogues may not fare well.