TIPPING POINT
If there is one chart that exemplifies how fiscal folly has made the U.S. economy and government less resilient, it is the share of government revenues spent on servicing the country’s debt.
Currently, the Treasury is spending roughly one-fifth of its revenue on interest expense alone. This is a much larger share than in Japan, Britain or Germany.
It’s also more than the government can afford. Mandatory spending on Social Security, Medicare, Medicaid, and other entitlement programmes swallowed up $4.2 trillion in 2025, about 80% of America’s $5.2 trillion in total revenue. That means – barring any major changes to the budget moving forward – the U.S. will now have to borrow just to pay its existing debt.
This could be a dangerous tipping point, putting the U.S. at risk of falling into a debt spiral of ever-higher interest costs and even more borrowing.
To be fair, the U.S. is not alone in its fiscal problems. Other developed countries, most notably Japan, are also raising investor concerns about unsustainable fiscal dynamics.
U.S. yields are also not that high compared to pre-2008 averages, and the term premium on the 10-year has not moved much in the past year, suggesting investors are not yet panicking about U.S. finances.
Still, U.S. Treasury Secretary Scott Bessent was alarmed enough to announce a plan last month to potentially increase bond buybacks to push down long-term yields.
Washington, which has the privilege of issuing the world’s reserve currency, may be able to get away with deficit spending far longer than any other nation without running into trouble. But that only makes the U.S. the cleanest dirty shirt.
U.S. public sector finances are becoming increasingly fragile, with few politicians willing to confront voters with the tough choices needed to increase resilience, namely raising taxes or cutting entitlements. If democratically elected politicians fail to act, the bond market might do it for them.
The result may be severe economic pain that could undermine Americans’ already low trust in government. We’ve seen this occur in the past, most notably in 1930s Germany. The rise of an authoritarian leader in Russia after its external default in 1998 and the chaos of the late 1990s is another example. More recently, democratic backsliding occurred in Hungary and Poland after the financial crisis of 2008 and the European debt crisis of 2011, propelling populist politicians into government who enacted authoritarian-leaning policies.
If a recession or cost-of-living crisis becomes too intense and citizens feel politicians are failing them, they might start to question the benefits of democracy itself, especially if extremists on either the right or left emerge who offer supposedly painless solutions to these problems. At that point, democracy itself could be at risk.
(The views expressed here are those of Joachim Klement, an investment strategist for Panmure Liberum.)
TLT•
