The US Debt Crisis May Have Already Begun. It Could Unfold in Slow Motion

When we talked to Robin Wigglesworth on The Long View podcast, he made the history of the bond market come to life. The Financial Times journalist and author of A Fabulous Debt talked with me and co-host Ben Johnson about how bonds accelerate economic growth but have also contributed to some of history’s most significant financial crises. Even James Bond came up in the conversation.

You can listen to the full episode above or check out an excerpt from our conversation with Robin that highlights rising debt levels.

How Much Debt Can the US Carry?

Amy Arnott: Robin, there are so many parts of the book that we didn’t have time to talk about, but before we wrap things up, maybe we can just talk briefly about the end of the book where you discuss rising global debt levels. How concerned are you about that issue and the sustainability of sovereign debt levels today?

Robin Wigglesworth: Yes, it’s the, what, $150 trillion question now, I’d say. I’d say I’m more concerned than I was, but probably less concerned than most people in the world, if that makes sense. And I feel we have been fretting about this for a very long time, I mean, for 30, 40 years. And these things can change quite quickly. The national debt clock in New York was built in the late ’70s, early ’80s, I think, and people worried about America’s debt then. But literally by the ’90s, the Treasury stopped auctioning 30-year bonds because there were such big budget surpluses. People genuinely thought America would basically be debt-free, and why should they issue 30-year Treasuries and lock in that high borrowing cost for American taxpayers when the US was paying down all its debts? Things can change quite quickly.

Broadly speaking, we don’t mean the clichés, or we don’t lend money to margins. We’re lending money to each other essentially. And there are fragilities sometimes involved with that. The Trump administration going around being mean to foreigners that still buy trillions of dollars worth of Treasuries can kind of inject extra fragility, perhaps. But I actually think, especially for big developed countries and above all for the United States, there is a far greater capacity to carry debt than people think. Japan is a great example. There are nuances there in that its net debt levels are not as horrific as its nominal debt/GDP ratio might imply.

But what I worry about, and the reason why I say I’m not worried, I’m more worried now than I used to be, is that for me, the solutions, usually multiple ones, have always been letting inflation run a little bit hot for a bit longer. I mean, 2022, when inflation went up—look, I understand this seems almost heartless to say, and inflation can hurt obviously poorer households far more than the richer ones. It’s inherently sort of very unequal impact—but the biggest reduction in global debt ever in history was 2022, because nominal GDP was growing so quickly with high inflation.

And I thought the best thing would’ve been to let that run hot for a few years, and actually then a lot of things would look a lot less stretched. And that’s not painless. Definitely there are no easy choices here, but compared with some of the alternatives, I think that would’ve been possibly a better thing. What I radically underestimated was our inability to tolerate faster inflation. We were talking about ’60s or ’70s or ’80s level inflation. We were talking high single digits in most developed countries. And that’s no fun. I hated it as well, but I thought it would’ve been better. Now, given that that seems politically unpalatable, I do worry about what are other ways around it.

My assumption has been for a few years now that when we think debt crises, we think, like, Argentina or Greece: you default, restructure, you move on. I don’t think that happens in a country like the United States that can literally print dollars. We always kind of have this visceral sense of an acute debt crisis, runaway bond yields, Treasury selling off as foreigners flee or people panic, and so on. And that forces a change. I don’t think it’s going to happen.

I think the US is maybe in the early stages of what I’d call a chronic debt crisis. It’s just very slow, very gradual. Basically, it starts snowballing that the US has to borrow so much. Its debt stock is so big. As a refinance, all those Treasuries issued at 1%, 2%, 3%, at 3%, 4%, 5%, 6%. Even if the budget was balanced, the US would be locking in higher and higher, basically, cost interest payments. And of course, sadly, the budget is far from balanced today. But then you can start seeing things snowball: The cost of just simply servicing the debt is growing and growing and growing.

Countries have to start running just to stay on top of it. You’ve seen this, actually; one of the best examples is Canada. Canada went on a bit of a debt spree in the, I think, ’60s and ’70s, but into the ’80s. And they didn’t really get on top of inflation as much as other countries. So, they had to start jacking up interest rates. Interest rates went higher. The provinces had borrowed too much money. Ottawa had borrowed too much money. Interest rates started going up, and the debt-servicing costs—just how much it cost the economy as a whole to service government debts—went from 2%-3% of GDP to 5% and then really started to snowball and hit almost 10% at the peak in the mid-90s. And then they had to go full austerity and said, “This is ridiculous. So much of our budget is getting eaten up by servicing debts. This cannot continue.”

For me, if you eyeball it, you can see it. Around 5% interest payments/GDP seems to be one of those areas where countries normally turn around and fix things, like the UK in the ’80s; all things start snowballing in a sort of dramatic way. And the US is still far from that. The US is, I think is around this year, kind of a 3.6% of GDP. I think it’s 3.5%, 3.6% of GDP is going to debt-servicing costs. And that is not great. And it is definitely going higher, but it still is another decade before it hits kind of 5%-ish.

I just think the real chronic debt crisis in America, and, frankly, look, I don’t want to—I mean, you asked about the globe, and I worry about that, but we can have debt crises in France and Zambia and places like that, and it can be painful, but they’re not of global consequence. But everything that happens in the US just matters to everybody else to a far greater degree.

This debt crisis doesn’t play out in hyperinflation, doesn’t play out in runaway bond yields. It plays out as debt eroding America’s financial health and being able to spend less on other stuff it wants to spend money on. Whether that’s defense, there’s lots of focus on the fact that interest payments now consume more of the federal budget than defense does, but infrastructure, healthcare, education, all sorts of other things that the US maybe would like to spend money on, it is less able to as that kind of interest bill swells and swells and swells. It’s a chronic crisis rather than an acute one.

Maybe it’ll become an acute one. I just think that kind of classic acute debt crisis that people envisage might never occur in the US since it’s so unique and certainly won’t play out any time soon. I think we are now just—this was a very long answer to just a question that obviously we think a lot about now—but my view is that this is a chronic debt crisis that will be far slower to play out than most people appreciate, but it can still end up being quite painful nonetheless.