US debt crisis: Most likely fix is severe austerity triggered by a fiscal calamity

Public debt already amounts to 99% of GDP, and is on track to reach 107% by 2029, breaking the record set after the end of World War II. Debt service alone amounts to more than $11 billion per week, or 15% of federal spending in the current fiscal year.

In a Project Syndicate In an op-ed last week, Frankel listed a list of potential solutions to debt: faster economic growth, lower interest rates, defaults, inflation, financial repression, and fiscal austerity.

He said that while faster growth is the most attractive option, it is not coming to the rescue due to a shrinking workforce. AI will boost productivity, but not to the extent needed to rein in US debt.

Frankel also said that the previous era of low interest rates was a historical anomaly that would not return, and that a default was not plausible given already growing doubts about Treasuries as a safe asset, especially after President Donald Trump’s shock tariffs on “Emancipation Day.”

He explained that relying on inflation to reduce the real value of US debt would be as bad as a default, and financial repression would require the federal government to essentially force banks to buy bonds with artificially low yields.

“There is only one possibility left: severe fiscal austerity,” Frankel added.

How dangerous is it? He estimated that a sustainable US debt path would require eliminating almost all defense spending or almost all non-defense discretionary spending.

For the foreseeable future, Democrats are unlikely to cut major programs, while Republicans are likely to use any fiscal breathing room to push for more tax cuts, Frankel said.

“Ultimately, in United NationsHe added: “For the foreseeable future, austerity may be the most likely of the six possible outcomes. But unfortunately this will likely only come after a severe financial crisis. The longer it takes for this reckoning to come, the more radical the need for adjustment will become.”

The austerity outlook echoes an earlier note from Oxford Economics, which said the expected insolvency of Social Security and Medicare trust funds by 2034 would serve as a catalyst for fiscal reform.

In Oxford’s view, lawmakers will seek to prevent a financial crisis in the form of a sharp decline in demand for Treasuries, leading to higher interest rates.

But that’s only after lawmakers try to take the more politically expedient path by allowing Social Security and Medicare to tap into general revenues that fund other parts of the federal government.

“However, unfavorable financial news of this kind could trigger a negative reaction in the US bond market, which may view this as a surrender of one of the last major political opportunities for reforms,” wrote Bernard Yaros, chief US economist at Oxford Economics. “A sharp upward repricing of the long-term bond premium could force congress to return to a reform mindset.”