U.S. debt to GDP is almost as high now as just after the Second World War. And now Trump's tax cuts, foreign policy adventures and proposal to double the US defense budget are projected to push it way higher. So is the US heading towards a debt crisis? You'd think so. But there's one big problem. People have been warning about US debt for literally decades now. The national debt. It is a massive storm that is clouding America's future. Yes, that was a US TV spot from 1992, but also in 2006, Barack Obama warned us. Paul Ryan again did the same in 2011 and before coming into office, Trump Treasury Secretary Scott Bassett openly stated that current US debt is fundamentally unsustainable and that taming it is why he took the job. But coming into office, Bassett is currently overseeing such a massive big spending increase that the US Congressional Budget Office now predicts US debt to GDP will go even higher than. After fighting a literal world war. So when can we expect something will break? When will the US enter the dreaded debt death spiral that hit Greece in 2012 at 172% debt to GDP? Venezuela in 2017 at 160%, debt DB and Sri Lanka in 2022 at 114% to GDP. Well, this graph probably will not tell us. You see, there's a big problem with how we typically look at government debt. That is we do not know how much is too much. There isn't even a clear pattern. You see, for Russia in 1998, 75% of GDP was its breaking point for Argentina. In 2001, it was about 65% of GDP and 40%. Today, 250% of GDP seems just fine. So what does it tell us about this alarming trajectory of you as debt? When will it genuinely be too high?

To answer that question, we have to go beyond what you usually hear in the media and find out when do governments actually go bust? If we look at the five most high profile government defaults of the last decade, we can see that they all had two things in common, but it was not high debt to GDP. That is, while Greece, Venezuela and Sri Lankan depths were absolutely considered very high by today's standards, Russian and Argentinean debts right before their collapse would be considered fairly low, fairly responsible. Instead, what all these cases had in common was that they had very, very high real interest rates just before they collapsed. That is here, you see interest rates minus inflation. That is real interest rates just before the collapse. And while they vary quite a bit, I think it's fair to say that any interest rate above 20% would be considered really, really high. And remember that is interest rates corrected for inflation, which is very important because if there is a lot of inflation, tax revenue tends to go up quickly along with rising prices, which could make repaying debt easy. So in practice, interest rates would often have been way higher than inflation. These are indeed interest rates minus inflation. And while inflation is often associated with too much government spending, as you can see here, inflation in Venezuela and Sri Lanka was indeed extremely high just before they collapsed. But in Russia it was actually still at a manageable 6%. And Argentina had deflation at -1.7% and Greece at 1.5%. In this cases, inflation would not have predicted a crash. So just to be clear, Russia, Argentina, Greece, Venezuela and Sri Lanka defaulted on their debts not because they could not borrow anymore, but rather because they could only borrow at such high ever increasing interest rates that they'd have to borrow more and more just to keep paying these ever increasing interest rates. So at that point, they rather chose not to borrow anymore at all. And this is not just me cherry picking five examples that fit this narrative. Economic research also does not find evidence that there exists a certain debt to GDP ratio, after which governments and their economies collapse, perhaps even stranger. Even a bad economy does not predict a government debt default. On the other hand, what does predict whether a government will soon default on their debt is interest rates that are rising faster than government revenue, which forces governments in what you could call a self-fulfilling debt death spiral. And in such a spiral, higher interest rates, spending increases government debt. And then investors see government debt getting higher and higher and therefore ask, of course, a higher interest rate, which in turn increases government debt and so forth. And as you can see here for Greece, that self-fulfilling doom loop can actually explode really quickly after a period in which everything looked quite fine. Once a country enters this state, it will be extremely difficult to get out of because most governments cannot raise taxes fast enough without destroying the economy.

And this brings us to the only real way that economists track debt sustainability. They simply compare. Interest rates corrected for inflation are to how fast the economy is growing, corrected for inflation. Gee. And interestingly, if real interest rates are lower than how fast the economy is growing, the government can even reduce the debt over time quite quickly, simply by running a balanced budget, excluding interest rates. But once interest rates are bigger than growth, they start rising faster than Texas can keep up. Then the government will really have to cut spending very quickly to avoid ending up in a death spiral. So can the US avoid such a dreaded debt death spiral? And how much longer can it keep spending like this? And this is currently even more difficult to assess than normal, because the US is in a massive AI spending boom right now, of which we still have to see the productivity effects in macroeconomic data. But there certainly have been a lot of super interesting tools coming out, such as that of our advertising sponsor Letaido by Ahrefs, a major SEO and marketing platform. Whether you run a business blog or have any other online presence, you know marketing is a lot of work. Tracking what's working, finding content ideas, keeping tabs on competitors, writing reports. Whereas regular AI models can do a lot in theory, in practice it's incredibly difficult and tedious to feed them all the right data and the perfect prompt. This is where Letaido comes in, which has unrestricted access to all Ahrefs data and, unlike standard agents, has been specifically trained to be a marketing rockstar. Letaido is a platform where AI agents actually do the work for you 24/7, not a chat bot that just answers questions. Agents that connect to your tools, understand your data, and ship finished results. For example, since my website was already connected to Ahrefs, I could simply ask Letaido to do an analysis on who links to my website, and Letaido immediately gave me a fully up to date backlink profile report explaining what's working well, what can be improved, and what I should do next. Finally, it gave follow up recommendations for analysis to do next, such as optimizing my organic keywords or discovering content gaps. So if you want to turbocharge your marketing, why not give Letaido a try and use the link in the description and top comment below to put an AI agent to work on your marketing. But first, let's get back to our core question. How can we know if us that is entering death spiral territory? It's actually not that difficult. We have to figure out first if interest rates correct it for inflation, are keeping up with economic growth corrected for inflation.

So where is the US right now when it comes to real interest rates? If we look at the average interest rate the US government is currently paying there just around 3.8% on average on the debt they already have. And because inflation is around 3.5% pretty high, that means that real average interest rates that they are currently paying is really only about 0.3%. Okay, so what about economic growth corrected for inflation. Well, if we look at some of the latest projections then this is estimated to be between 1.5 to 2.5%. So real interest rates paid today are much lower than economic growth. Okay. We can breathe easy talking about US debt doom with current real interest rates around 0% looks almost like a joke. However, that's only looking at interest rates right before the collapse. But that's not how it doom loop works. Remember what happened to Greek government debt up to 2010? Everything was looking quite fine. Interest rates were just slowly going up. But of course, beneath the surface things were not fine. And then suddenly interest rates exploded. In the US, we're starting to see a similar trend. Sure, interest rates were going down and down and down, but ever since 2020, they have slowly been going up. The positive trend has reversed. But something else more worrying is going on now. Remember, US debt is now pretty high and therefore interest rate payments as a share of the economy have really exploded are now back up to the highs that they were in the 1990s. When that worrying clip was made that I showed you previously. In fact, the US government is now spending more on interest rate payments every year than it is spending on its massive military. 14% of spending. That's more than it spends on education, infrastructure and scientific research and administration combined. So debt to GDP matters. After all, it just does not matter on its own. It matters if you take it together with rising interest rates for yes. Now you may say, But what about Japan? Well, unlike the US, Japan has a lot of financial assets and these will help it keep its interest rate bill manageable. And while the US net debt, the gray bar, is lower than 100% of GDP, this does not change our analysis in this case because we have seen that what really matters is interest rate payments needed to service that debt. And there, the Committee for a Responsible Federal Budget has calculated that either with current or with higher future interest rates, the interest rate cost trajectory is about to swallow more and more of the US budget. Even overtaking Medicare by 2029. And this is why outgoing Fed Chair Jerome Powell said that the level of our debt relative to the economy is not unsustainable. The path is unsustainable. And worryingly, investors seem to agree. Remember that if I compare current real interest rates to growth, everything looks fine. But if you look at ten year so-called Treasury inflation protected securities, we can deduce that investors believe that future interest rates corrected for inflation will likely be about 2.15%. Meanwhile, as you remember, most professional forecasters believe the US economy is likely to grow around 2% in the same period. So US debt is currently fine. But if we plug expected future rates into the main economic indicators for debt sustainability, we can see that there now strong signs that the US is heading towards a debt death spiral if it continues its current spending plans. So in conclusion, is the US heading towards a debt crisis? Yes. If it continues on its current spending path, then interest rate payments will start getting so high that the US government will either have to take drastic actions or face a debt spiral. But when will that debt spiral come? We cannot know for sure. In that way, it's really a bit like a bubble like Bitcoin in 2017 or the Chinese housing bubble in the 20 tens. In both cases, most economists agreed that this was unsustainable, that it was a bubble. However, they were unable to predict exactly when the bubble would pop. Similarly, today, if the massive AI spending is justified and the US economy will soon grow by even more, then the US may continue spending like this. And actually, debt to GDP will be fine. On the other hand, if it is a bubble and it pops, then US government spending will look even more unsustainable than it already looks today. Making a debt crisis come sooner.

But okay, let's address the elephant in the room. What will the debt crisis actually look like? Here I do think the Venezuela, Argentina, Russia, Greece comparisons are a bit misleading. You see, these are relatively simple economies that have historically either borrowed a lot in foreign currencies or had locked in their currency, like Greece, to the euro or Argentina to the dollar, or depended heavily on a single commodity for their income, like Russia in 1998 or Venezuela in 2017. Meanwhile, the US has a fairly well diversified economy with many companies that genuinely dominate the rest of the world. And of course, crucially, because the US issues the world's reserve currency, it's unlike Greece, Venezuela and Lanka has essentially just borrowed in its own currency. Therefore, I think if the US finds itself in this debt death spiral, it will more likely adjust similarly to how Britain did after the Second World War by forcing financial institutions to keep interest rates low, while fairly high inflation, but nothing like hyperinflation, erodes the debt. Notably, this meant that Britons did suffer, but due to its geopolitical heft. Britain had this thing called the sterling zone, and it essentially, for some allies and former colonies to share the pain. So if the US has to adjust, I think it's more likely not to be a spectacular Venezuela style blowup, but rather a painful period of much higher inflation, but not hyperinflation that will slowly erode much of US debt, making both US citizens and in this case, the world, who heavily uses the dollar as a reserve and investment Guernsey significantly poorer. But yeah, that's my take. What do you think? Let me know in the comments below. And finally, if you are heading a marketing team and if you are interested in putting an agent to work on your marketing, consider checking out our sponsor Lotito via the link below. It really helps out the channel if you use our link.