Worrying about debt is, in a very real way, worrying about power. Ancient Rome was weakened by its debts, as was the Soviet Union. In the case of the United States, concerns about the $35 trillion national debt — now proportionately higher than at any time in history, including a huge World War II spike — tends to lead to anxiety that the U.S.’s global influence will wane as it has a harder and harder time convincing bondholders (the hedge funds, banks, pensions, and foreign nations who buy our Treasuries) that it is the most financially sound country in the world. The day the debt becomes unmanageable is the day the bond markets enact a kind of financial revenge — and various grim scenarios ensue.
But the national debt has, for decades, been the big political problem that wasn’t. To the economic left, it is something of a bullshit issue — a bogeyman when the U.S. has the largest economy and prints the most sought-after currency. Even on the right, until fairly recently, it had been fading as a concern. Former vice-president Dick Cheney famously quipped that annual deficits, which expand the debt, “don’t matter.” Donald Trump ballooned the debt during his one term almost as much as Obama did during his eight years in the White House. But now, some of Wall Street’s most experienced investors and economists are concerned that this time — really and truly — is different. If things spin out of control, the economic consequences are unpredictable, increasing the likelihood of higher interest payments on homes, cars, and credit cards, and spiking unemployment for years. And — ironically, given that debt alarmism has historically skewed Republican as a political issue — if Trump is again elected as president, the doomsday debt scenario could come even faster than anyone thought.
What is different now, says Mark Zandi, chief economist at Moody’s Analytics, is that the financial situation in Washington, D.C. — which has long eschewed any fiscal discipline — is now on the verge of spiraling out politically, too. “It’s the fact that we’re willing to play roulette with a debt limit,” he said. “That we’re willing to shut the government down on a regular basis. That we can’t come to terms on anything. Take a look at this presidential election. It’s about as close as it could possibly be. And these are two very different visions of the world and the economy and everything — that just says it all. It’s about our politics and our governance. We just can’t get our act together.”
There’s a reason voters don’t care about the national debt: It’s basically been good for us. Debt pays for our government services without relying on taxes, and, through subsidies, helps keep market prices lower than they otherwise would be. What the Druckenmillers and Joneses are worrying about is a kind of point of no return — a moment when the debt becomes so unwieldy that the economy more or less capsizes. All of a sudden, interest rates would rise sharply, since the bondholders will have lost trust in the U.S.’s ability to maintain its consumer economy. Taxes would likely have to increase substantially, and the economy could fall into recession. Bondholders would demand more in interest than they’re currently getting, exacerbating an already downward spiral in the good economic fortunes of the country.
Nobody knows what this point of no return may be. The potentially poisonous combination of higher interest rates and high deficits post-COVID resulted in interest payments on the federal debt topping $1 trillion this year, a record sum by a large margin. (This approaching milestone led investors like Druckenmiller to accuse Janet Yellen, the Treasury secretary, of making the “biggest blunder” in the country’s fiscal history last year.) Interest on the debt is now more expensive than the entire U.S. defense budget, and now is topped only by Social Security and health-care costs. Pessimists argue that there is danger to the federal debt outpacing the size of the U.S. economy that supports it — a phenomenon known as a debt spiral — where the economy depresses and it gets increasingly expensive to pay down the money owed.
Zandi pointed out that, should Republicans win the White House and both chambers of Congress, the tax cuts and higher spending would likely make lawmakers confront the debt problem years or decades down the line, since they would be more motivated to pass Trump’s agenda. Should Harris win with a divided Congress — his base case — Republicans are likely to hold the debt ceiling hostage again to try to force down government spending. “We’ve got to do something, otherwise we’re going to be living in a world of high interest rates,” Zandi said. “Ownership is going to collapse and you’re not going to be able to afford a car and your credit-card payments.”
The U.S. is already in a period of uncharted indebtedness, in large part because of the COVID pandemic and the trillions of dollars in stimulus bills from both the Trump and Biden administrations. The years of high inflation — partly spurred on from spending, but also an effect of snarled supply chains and two major global wars — gave bondholders license to demand higher interest payments, deeming the U.S. debt riskier than it had been since the financial crisis. “We’re spending more on interest than on our own defense, and that’s never happened historically,” Zandi said. “I don’t think that makes sense to anybody.”
