Where’s the Leverage?

“You cannot escape the responsibility of tomorrow by evading it today.” – Abraham Lincoln?

In 1937, eight years into the Great Depression, John Maynard Keynes stated, “The boom, not the slump, is the right time for austerity at the Treasury.” Fast forward to 2024, and the U.S. Gross Domestic Product (GDP) is growing at a brisk 3.0% year-over-year. However, the federal budget deficit is running at 6.3% of GDP, the largest seen four years into an economic expansion – a stark contrast to Keynesian principles.?

Federal government debt has ballooned to $30.4 trillion, with a staggering $12 trillion added over the past five years alone—an annualized growth rate of 8.4% of GDP. Yet, the increase in borrowings is largely confined to the government sector. As the chart shows, nonfinancial corporate debt has risen by $3.3 trillion over the same period, growing at an annualized rate of 2.2% of GDP—aligned with historical averages.?

The chart highlights two major surges in government debt in recent decades—both triggered by crises, the first spike following the 2008/09 Global Financial Crisis, and the second during the 2020 Pandemic. In both instances, the government borrowed heavily to weather the crises, while private sector borrowing either slowed or continued on its pre-crisis trajectory.?

The divergence between government and private sector borrowing could materially impact fixed-income markets. From a supply-demand perspective, the private sector could benefit from constrained net supply. In The Low Expected Net Supply of Credit is a Potential Tailwind for 2024 , we noted that low net credit issuance could support credit markets, especially in the face of large U.S. Treasury issuances. So far, broad-based credit spread tightening has occurred this year.?

However, while credit market dynamics remain favorable, risks tied to federal debt sustainability are growing. With debt-to-GDP projected to climb to 125% within the next decade under current policies, neither presidential candidate has offered clear solutions. Both appear likely to increase deficit spending based on campaign proposals. Rising interest rates on government debt or a recession could push the U.S. closer to fiscal reckoning. For further details, see Debt Spiral Watch: A Scenario Survey as Washington Drifts Toward a Reckoning .?

The growing contrast between government and private sector borrowing has significant implications for both the economy and fixed-income markets. While constrained private sector credit supply may support credit markets, escalating federal debt poses substantial risks. Policymakers face a delicate balancing act. Rising interest rates or an economic downturn could exacerbate already fragile debt sustainability.?

The source of the next crisis could very well arise from the solutions used to solve previous ones—government debt itself.