Much ado is made in the press and by investment bank analysts of America’s public debt lately, as if a default is imminent. Headlines started to emerge after President Trump boasted about his Big Beautiful Bill (referred by Trump as “Triple B”, probably not realizing that this also is a rating category for borderline credits). It may be somewhat surprising that the issue is raised only now as at the start of last year’s election campaign it was already clear that under both presidential candidates the fiscals would deteriorate significantly (although by then Mr. Biden, given his state of mind, might have forgotten about debt altogether) as neither candidate announced plans to address the budget deficit.

According to projections by the Congressional Budget Office (CBO, January 2025), net federal debt held by the public will rise from 100% of GDP in 2025 (120% on a gross basis) to 118% in 2035. Historically, we only have seen high debt levels during wartime (debt reached 106% of GDP in 1946, for example) and major economic contractions (indeed, the run-up in debt accelerated after the financial crisis in 2008 and the pandemic in 2020). The budget deficit amounts to USD 1.9 trillion (6.2% of GDP) in 2025 and rises to USD 2.7 trillion (6.1% of GDP) by 2035, which compares to an average deficit of 3.8% over the last 50 years.

Let’s issue more $TRUMP to finance the government…

Although the U.S. carries a lot of debt, at least from a historical point of view, the question is whether the current debt level is too high. Why are investors not equally or even more worried about France (2025 net debt /GDP according to IMF: 108.2%), Italy (127.3%) or Japan (134.2%)? And why, instead, do they worry about Brazil (65.8%) or Indonesia (37.7%).

First, we need to consider whether the used metric, debt as percentage of GDP, is appropriate. Note that GDP is a flow measure whereas debt is a stock measure. This is akin to assessing debt servicing capability (debt affordability) but in a very imprecise way; is the annual national income, of which the government receives a share through taxation, sufficient to meet debt obligations (both interest and principal payments). It would be more appropriate to divide interest payable on government bonds by government revenues. Although this metric rose in recent years to 17.9%, it is similar to the number we saw in the period 1985-1995 (interest rate were much higher at that time) but is likely to increase as cheap debt rolls off and the budget remains in deficit for the foreseeable future.

Another metric that could be used would be one where debt is compared to the value of assets it is financing (loan-to-value). This how a bank would assess solvency for a mortgage taken out by a homeowner. Unfortunately, it may be difficult to put a value on many government assets (the arsenal of nukes, for example) and at times it may be arbitrary to determine what counts as a capital expenditure (e.g. road improvements). The Bureau of Economic Analysis (BEA) estimates the current (depreciated) cost of government assets at USD 20.8 trillion. We would think the market value likely to be higher as the replacement cost of many of these assets will be higher due to inflation. Although selling government assets may be used to repay debt, in practice many of these assets will be illiquid and potential investors may require a higher return to hold them, making Americans worse off.

Debt is typically measured at par value. It seems fair to take the market value of gross federal debt, which is USD 34.3 trillion compared to a par value of USD 36.2 trillion (source: FRB Dallas). But a more relevant number to look at would be the market value of the privately held gross federal debt (which excludes debt held by the government and the Federal Reserve) of USD 23.6 trillion (with a par value of USD 24.8 trillion). Likewise, if we use mark to market assets and liabilities then it also would be logical to adjust the budget balance (a deficit in Uncle Sam’s case) for inflation. The OECD forecasts 2025 inflation for the U.S. at 2.8%. The fiscal deficit would drop from USD 1.9 trillion to USD 1.1 trillion (or 3.5% of GDP) if an inflation adjustment is made. Calculation of the fiscal deficit is cash-based. The deficit would increase by about USD 0.5 trillion if calculated on an accounting basis (meaning including amounts earned but not collected and amounts incurred but no paid), implying, not surprisingly, that the government always pays late.

Note that some government liabilities are not reflected in debt numbers, like pensions and social security benefits (e.g. healthcare) that are handled on a pay-as-you-go basis. If you would capitalize these liabilities, then you wonder why investors are still worried about public debt as the present value of social benefits of USD 78.3 trillion dwarfs the market value of the privately held gross federal debt of USD 23.6 trillion. Mr. Trump is right to address the high healthcare costs (Medicare alone contributes more than USD 50 trillion and is likely to increase due to aging, unless Elon Musk delivers eternal youth pills or chips), although he is barking at the wrong tree (Those nasty Europeans again, who get cheap medicines at the cost of U.S. taxpayers! Instead, he should address high admin costs, price gouging and utilization rates of medicines and medical procedures). There are also contingent liabilities which only materialize if a non-government borrower defaults and the obligation is guaranteed by the government (e.g. student loans or bank deposits). Finally, debts of local government are not included, although these entities can and do levy taxes (note that in China most debt is at local level and at state-owned companies, whereas local governments only have limited capacity to levy taxes; thus, for China it would be wise to include these liabilities for debt analysis).

The conclusion is that America’s debt pile is high but more concerning is the pace of its debt accumulation if no corrective measures are taken. The U.S. Treasury estimates that over the next 75 years debt stabilization requires spending cuts or revenue increases (e.g. taxes) equal to 4.3% present value of GDP over the period. Non-interest spending will increase mostly due to social security, Medicaid and Medicare. These projections are highly uncertain and based on unchanged policies and interest rates; debt as percentage of GDP would increase to 200% by 2049. An important factor of debt sustainability is how the economy’s nominal growth rate compares to the interest rate. If these rates are the same, then debt will remain stable, all else equal. U.S. nominal economic growth in 2024 was about 5%, which is equal to today’s yield on 30-year U.S. Treasuries. However, growth in 2025 and 2026 is expected to decelerate (real GDP growth is forecasted by OECD at 2.2% and 1.6% respectively), whilst inflation might increase. Future growth and inflation are hard to predict as there are a lot of factors in play, like longer-term impact of AI and deregulation on growth, tariffs, immigration restrictions (making labour more expensive), the exchange rate, etc. but we wouldn’t count on a positive in this respect.

Although we are unsure whether current debt is too high (it doesn’t seem life-threatening yet), it is safe to say that there is little ammunition (that is, fiscal space) left to address a new shock to the economy (say an invasion of Taiwan by China or a bird flu pandemic) without investors in Treasuries realizing that the Federal Reserve again might apply a haircut to them through spiking inflation (similar to the inflation triggered after the covid19-pandemic). Investors start to realize that the prospect of lawmakers reducing deficits by making expenditure cuts (DOGE doesn’t seem to make the cut…) or tax hikes is low. Indeed, they reflect this in higher inflation expectations and demand higher risk premiums, making future borrowing by the government more expensive. Mr. Trump’s utterings about charging a fee to foreigners on existing U.S. Treasuries (which is likely to be considered a default), of course, are not very helpful and as 70% of U.S. debt is held by Americans would not be a very smart strategy in any case (which doesn’t necessarily stop Mr. Trump from pursuing it). On top of this, the government is likely to face higher expenditures in the coming years due to aging of the population (aggravated by migration policies) and climate change (though Mr. Trump undoubtedly will disagree). And then there is this ever-reoccurring cliffhanger related to the debt ceiling (the statutory debt limit of USD 36.1 trillion (the debt calculation for this purpose excludes a few special types of debt and is measured on an accrual basis) will probably be breached in August or September of this year). In an extreme case, investors might stop to buy Treasuries altogether.

The U.S., unfortunately, is not the only country with a debt issue. For example, Brazil and, especially, China face similar challenges. Brazil’s debt as percentage of GDP is much lower but its economy is weaker and less diversified. China is highly indebted after a property boom and bust and ill-advised, unprofitable, investments in infrastructure, whereas its population is shrinking fast. In any case, given the importance of the U.S. to the global economy, higher required yields on Treasuries are likely to result in higher required yields globally, especially for those Emerging Markets borrowing in dollars. Deficits today are a tax on future generations and crowd out private investment, thus reducing economic growth potential. This is why we think the U.S. (and other countries) should start to address its public finances rather sooner than later. Otherwise, the Big Beautiful Bill might transgress into a Big Budget Bomb…