The Precarious Fiscal Situation of the United States: A Looming Crisis for Markets, Economy, and Future Generations

The United States is at a critical juncture, facing a fiscal dilemma that can no longer be ignored. For over 20 years, successive governments—both Republican and Democratic—have postponed addressing the ballooning national debt, passing the burden onto future leaders and taxpayers. This is no longer just a matter of budget imbalances.?

What we’re facing is a potential financial reckoning that could ripple through markets, stall the economy, and leave future generations to address the consequences of today’s inaction.

The Long-Term Debt Cycle: An Unsustainable Path

At the heart of the issue lies the long-term debt cycle—an economic concept that spans decades, sometimes as long as 50 or 75 years. During this time, economies tend to accumulate debt faster than they grow. As debt increases, managing it becomes progressively harder, eventually forcing economies to deleverage through painful methods like austerity, inflation, or even debt restructuring.

For the United States, this cycle has been building for years. As of October 1st, 2024, our national debt has ballooned to over $35 trillion—more than our entire economy produces in a year, with GDP around $28 trillion. While debt can be an effective tool for growth and investment, when it's used primarily to cover recurring expenses, it can also become a ticking time bomb enabled by fiscal stupidity.

Figure 1 - Total Federal Debt (Last 10 Years)

In short, every day we don’t address this problem, we’re mortgaging our future, and our children’s futures to pay for expenses we’ve already incurred or promised to incur. We have nothing left over to invest in the key areas of growth and innovation that will enable successive generations to enjoy the prosperity that prior generations have been fortunate enough to enjoy.?

As a nation, it is our responsibility to make the difficult choices that will allow us to continue to compete on the world stage as an incubator for the innovative technologies that will define what it means to be a great power in the 21st century.

Borrowing to Fund the Deficit: Treasury Issuance and Its Consequences

Think of the U.S. government like a household constantly applying for new credit cards to pay off old ones. In 2023 alone, the government issued trillions in new debt to cover a significant budget shortfall. Unfortunately, this has become the norm rather than an exception. Every time more Treasury bills, notes, and bonds are issued, the government is borrowing against the future.

Figure 2 - Projected Deficit and Interest Cost

Here’s where this becomes dangerous. As the market becomes saturated with U.S. Treasuries, investors demand higher interest rates (yields) to compensate for the increased risk of lending to a heavily indebted country.?

This is a classic supply and demand problem. The more Treasuries the government issues, the less valuable they become, pushing up the yields investors expect. As a result, the cost of servicing the debt increases, driving the government to borrow even more to keep up.

Rising Treasury Yields: Crowding Out Private Investment

Higher Treasury yields don’t just burden the government—they also have a ripple effect throughout the economy. Treasury yields act as benchmarks for interest rates across the financial system, meaning that when they rise, so do borrowing costs for households, businesses, and other institutions. Mortgages, credit card rates, and corporate borrowing all become more expensive.

One of the most significant consequences is "crowding out." As Treasury yields rise, investors flock to safer government bonds instead of riskier assets like corporate bonds and stocks. The logic is simple: why take on more risk when you can get a reliable return from a government bond? As a result, businesses find it harder and more expensive to raise capital for innovation, research, and development. This very scenario played out in the 1980s, when high interest rates under Fed Chairman Paul Volcker curtailed business expansion, leading to a painful recession.

Figure 3 - Monthly Federal Funds effective rate, unemployment rate and inflation rate in the U.S. during Paul Volcker's terms as Federal Reserve Chairperson from 1979 to 1987

When businesses scale back investments, the entire economy suffers. Less innovation and growth lead to slower economic expansion, reduced tax revenues, and an even larger deficit. The vicious cycle of borrowing, rising yields, and economic stagnation then continues.

Market Instability and the Debt Spiral

This debt spiral doesn’t just hamper economic growth—it can also destabilize financial markets. As Treasury yields rise, investors shift their money from stocks and high-yield bonds to government debt, making riskier assets less attractive. This capital flight can increase volatility in the stock market, create liquidity shortages, and even lead to broader financial crises.

The real danger is how quickly these factors can feed into each other. Deficits lead to more borrowing, which pushes up yields and increases the cost of servicing the debt. We are already seeing the early stages of this cycle, and with each turn, it becomes harder to break free.

Black Swan Events: When It All Unravels

Perhaps the most unpredictable—and dangerous—aspect of this crisis is the risk posed by black swan events. These are rare, unexpected occurrences that can wreak havoc on financial systems. We’ve already witnessed the devastating impact of such events during the 2008 financial crisis and the COVID-19 pandemic. Both exposed deep vulnerabilities in the global economy, accelerating downturns in ways that no one could have predicted.

For a country burdened with massive debt, these shocks can be catastrophic. Take Greece’s debt crisis in the early 2010s. Sparked by the global financial meltdown of 2008, Greece’s heavy public debt left little room to maneuver, leading to severe austerity measures and a decade-long economic recession.

In the U.S., a black swan event could trigger a flight to safety, with investors flocking to U.S. Treasuries. However, in a worst-case scenario, even Treasuries might lose their safe-haven status if confidence in the government’s ability to manage its debt collapses. Panic selling could follow, creating a market crash and a downward spiral that would be difficult to contain. Excessive debt doesn’t just make black swan events more dangerous—it amplifies their consequences.

Economic Consequences of Inaction: A Crisis for Future Generations

If we remain on this path, the consequences for future generations are dire. We may face a deep recession—or worse, a depression. Higher Treasury yields, combined with declining confidence in the government’s ability to manage its debt, could lead to a massive sell-off in risk assets. The result would be a sharp decline in the value of stocks, bonds, and retirement savings, leaving millions of Americans worse off.

The broader economy would suffer as well. Businesses would cut spending, hiring would slow, and consumers—already struggling with inflation and higher borrowing costs—would reduce their spending. The result would be an economic slowdown reminiscent of the Great Depression, when unemployment soared and economic activity ground to a halt. While this scenario might seem extreme, remember how close we came to a similar situation during the 2008 financial crisis, before unprecedented government intervention stabilized the system. This government intervention was only possible because the government was able to borrow money to inject liquidity into the banking system. If the government was no longer able to cheaply and reliably borrow funds for an emergency rescue package, the fallout would potentially be catastrophic.?

Political Inaction: A Bipartisan Failure

Both political parties share the blame for this looming crisis. Over the years, Democrats have pushed for expansive social programs, such as healthcare and education, without securing corresponding revenue increases. Programs like the Affordable Care Act, while necessary, have added trillions to the national debt. Meanwhile, Republicans have focused on tax cuts—particularly the 2017 Tax Cuts and Jobs Act—which reduced government revenue without addressing the need for spending cuts. This imbalance has only widened the deficit.

Neither party is innocent, and during election cycles, both are more focused on making promises than on dealing with the nation's fiscal reality.

The Path Forward: A Call for Fiscal Responsibility

What can be done to prevent this crisis from worsening? First, we need a serious discussion about entitlement reform. Programs like Social Security, Medicare, and Medicaid are critical, but they’re also the largest contributors to the national debt. Reforming these programs could involve raising the retirement age, modifying income caps, adjusting benefits, or introducing means testing. These solutions are politically difficult but necessary for long-term fiscal sustainability.

In addition to entitlement reform, the government must adopt a more disciplined approach to spending. We need smarter taxation policies, spending cuts, and—most importantly—bipartisan compromise. There are specific policy proposals that have been floated by experts and economists that could serve as starting points, including reducing waste in defense spending, simplifying the tax code, and targeting tax loopholes that allow corporations and the wealthy to avoid paying their fair share.

The alternative—continuing to kick the can down the road—is no longer an option. Failure to act will leave future generations facing a bleak combination of higher taxes, fewer public services, and an economy weighed down by debt. The path forward will require hard choices, but those choices are necessary if we are to ensure we provide our children and grandchildren with real economic opportunity.