The United States national debt that now stands at $38.4 trillion will very soon be growing faster than the economy itself.
Indeed, it has reached a precarious milestone, hitting 100% of Gross Domestic Product (GDP) and placing the nation on a trajectory that could trigger six distinct types of fiscal crises, according to an ominous new warning issued Thursday by the Committee for a Responsible Federal Budget (CRFB).
With the national debt now effectively equal to the size of the entire US economy, the non-partisan watchdog’s latest report, “What Would a Fiscal Crisis Look Like?” outlined a dangerous future ahead.
“If the national debt continues to grow faster than the economy”, the report said, “the country could ultimately experience a financial crisis, an inflation crisis, an austerity crisis, a currency crisis, a default crisis, a gradual crisis, or some combination of crises. Any of these would cause massive disruption and substantially reduce living standards for Americans and people across the world”.
The report warned that unless policymakers enact a “thoughtful pro-growth deficit reduction package”, disaster likely lies ahead.
”The United States is deeply indebted, and its finances are on an unsustainable long-term trajectory”, the report concluded. While it’s “impossible” to know when disaster will strike, “some form of crisis is almost inevitable” without a course correction, the CRFB said.
Among the most alarming scenarios detailed is the “Austerity Crisis”. In this potential future, a loss of market confidence would force lawmakers to enact abrupt, massive spending cuts or tax hikes to quell panic. While deficit reduction is necessary, the CRFB warned that rapid implementation of such austerity measures during a weak economy could trigger the worst economic contraction in nearly a century.
As an example of such an austerity crisis, the CRFB pointed to Greece in the 2010s during the Great Recession, when economic weakness led to an “untenable spike” in borrowing and bond yields, prompting a painful set of austerity measures that decimated the economy and pushed the unemployment rate to record levels. Portugal and Spain had similar, less severe crises during this period.
Beyond forced austerity, the watchdog identified five other crisis scenarios:
1. Financial Crisis: If investors lose confidence in the US Treasury market, interest rates could spike uncontrollably. This would devalue existing bonds, potentially triggering cascading failures at banks and financial institutions.
The report cited the 2023 collapse of Silicon Valley Bank as a “small-scale” preview of how rapid rate increases can destabilize the banking sector. More broadly, though, it pointed to 2007 as a famous example of a financial crisis, driven by collapsing valuations of subprime mortgage-backed securities, leading to a Global Financial Crisis where hundreds of financial institutions closed, housing values declined by one-quarter, output shrank 4%, unemployment rose to 10%, and the economy took years to recover.
2. Inflation Crisis: To avoid default or bank failures, the Federal Reserve might be pressured to “monetize” the debt – printing money to buy Treasury bonds. This could spark spiraling inflation, eroding savings and purchasing power, similar to historical crises in Argentina or the Weimar Republic (Germany during the 1919–1933 period).
3. Currency Crisis: Reckless fiscal policy could lead to a sudden depreciation of the US Dollar, undermining its status as the world’s dominant reserve currency. A weakened dollar would erode American geopolitical power and make imports significantly more expensive.
4. Default Crisis: Although considered “very unlikely”, a failure to pay interest or principal on the approximately $31 trillion in debt held by the public would be “catastrophic”. A default would freeze global credit markets, crash stock markets, and likely plunge the world into a deep recession.
5. Gradual Crisis: Perhaps the most insidious scenario is a slow decline where no acute event occurs. Instead, high debt crowds out investment, slowing growth over decades. Congressional Budget Office (CBO) models suggest this trajectory could leave real income per person 8% lower by 2050 than it would be otherwise.
Japan is the classic example of a gradual crisis, with the CRFB noting that it has sustained extremely high levels of debt for several decades, avoiding an acute crisis but with real GDP only growing 10% (0.5% per year) over the past two decades.
The report noted that a crisis does not require a single “tipping point” but can be sparked by various catalysts, including a recession, a “poor” Treasury auction in which demand for US debt falters, or a breach of the debt limit.
The warning comes as the fiscal situation deteriorates. Interest costs on the debt surged to roughly $1 trillion last year, consuming a near-record 18% of federal revenue – an amount comparable to the entire Medicare budget. “With debt at 100% of GDP”, the report argued, “the US has less fiscal space than any time in history in case of another war, pandemic, or recession”.
