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Menu America’s Coming Crash Will Washington’s Debt Addiction Spark the Next Global Crisis? Kenneth S. Rogoff September/October 2025 Published on August 19, 2025
Daniel Downey KENNETH S. ROGOFF is Professor of Economics at Harvard University and a Senior Fellow at the Council on Foreign Relations. He was Chief Economist at the International Monetary Fund from 2001 to 2003 and is the author of Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead.
More by Kenneth S. Rogoff Listen Share & Download Print Save For much of the past quarter century, the rest of the world has looked in wonder at the United States’ ability to borrow its way out of trouble. Again and again, under both Democratic and Republican administrations, the government has used debt more vigorously than almost any other country to fight wars, global recessions, pandemics, and financial crises. Even as U.S. public debt rapidly climbed from one plateau to the next—net debt is now nearing 100 percent of national income—creditors at home and abroad showed no signs of debt fatigue. For years after the 2008–9 global financial crisis, interest rates on Treasury debt were ultralow, and a great many economists came to believe that they would remain so into the distant future. Thus, running government deficits—fresh borrowing—seemed a veritable free lunch. Even though debt-to-income levels jumped radically after each crisis, there was no apparent need to save up for the next one. Given the dollar’s reputation as the world’s premier safe and liquid asset, global bond market investors would always be happy to digest another huge pile of dollar debt, especially in a crisis situation in which uncertainty was high and safe assets were in short supply.
The past few years have cast serious doubt on those assumptions. For starters, bond markets have become far less submissive, and long-term interest rates have risen sharply on ten- and 30-year U.S. Treasury bonds. For a big debtor like the United States—the gross U.S. debt is now nearly $37 trillion, roughly as large as that of all the other major advanced economies combined—these higher rates can really hurt. When the average rate paid rises by one percent, that translates to $370 billion more in annual interest payments the government must make. In fiscal year 2024, the United States spent $850 billion on defense—more than any other country—but it spent an even larger sum, $880 billion, on interest payments. As of May 2025, all the major credit-rating agencies had downgraded U.S. debt, and there is a growing perception among banks and foreign governments that hold trillions of dollars in U.S. debt that the country’s fiscal policy may be going off the rails. The increasing unlikelihood that the ultralow borrowing rates of the 2010s will come back any time soon has made the situation all the more dangerous.
There is no magic fix. U.S. President Donald Trump’s efforts to place the blame for high rates on the Federal Reserve Board are deeply misleading. The Federal Reserve controls the overnight borrowing rate, but longer-term rates are set by vast global markets. If the Fed sets the overnight rate too low and markets expect inflation to rise, long-term rates will also rise. After all, unexpectedly high inflation is effectively a form of partial default, since investors get repaid in dollars whose purchasing power has been debased; if they come to expect high inflation, they will naturally require a higher return to compensate. One of the main reasons governments have an independent central bank is precisely to reassure investors that inflation will remain tame and thereby keep long-term interest rates low. If the Trump administration (or any other administration) moves to undermine the Fed’s independence, that would ultimately raise government borrowing costs, not lower them.
Skepticism about the safety of holding Treasury debt has led to related doubts about the U.S. dollar. For decades, the dollar’s status as the global reserve currency has conferred lower interest rates on U.S. borrowing, reducing them by perhaps one-half to one percent. But with the United States taking on such extraordinary levels of debt, the dollar no longer looks unassailable, particularly amid other uncertainty about U.S. policy. In the near term, global central banks and foreign investors may decide to limit their total holdings of U.S. dollars. Over the medium and longer term, the dollar could lose market share to the Chinese yuan, the euro, and even cryptocurrency. Either way, foreign demand for U.S. debt will shrink, putting further upward pressure on U.S. interest rates and making the math of digging out of the debt hole still more daunting.
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Already, the Trump administration has hinted at more drastic actions to deal with mounting debt payments, should gaining control of the Fed not be enough. The so-called Mar-a-Lago Accord, a strategy put forward in November 2024 by Stephen Miran, now head of Trump’s Council of Economic Advisers, suggests that the United States could selectively default on its payments to the foreign central banks and treasuries that hold trillions of U.S. dollars. Whether or not the proposal was ever taken seriously, its very existence has rattled global investors, and it is not likely to be forgotten. A clause proposed for the huge tax and spending bill that was passed by the U.S. Congress in July would have given the president discretion to impose a 20 percent tax on select foreign investors. Although that provision was removed from the final bill, it stands as a warning of what might come if the U.S. government finds itself under budget duress.
With long-term interest rates up sharply, public debt nearing its post–World War II peak, foreign investors becoming more skittish, and politicians showing little appetite for reining in fresh borrowing, the possibility of a once-in-a-century U.S. debt crisis no longer seems far-fetched. Debt and financial crisis tend to occur precisely when a country’s fiscal situation is already precarious, its interest rates are high, its political situation is paralyzed, and a shock catches policymakers on the back foot. The United States already checks the first three boxes; all that is missing is the shock. Even if the country avoids an outright debt crisis, a sharp erosion of confidence in its creditworthiness would have profound consequences. It is urgent for policymakers to recognize how and why these scenarios could unfold and what tools the government has to respond to them. In the long term, a severe debt or, more likely, an inflationary spiral could send the economy into a lost decade, drastically weakening the dollar’s position as the dominant global currency and undermining American power.
THEIR MONEY, OUR GAIN It is crucial to understand that the Trump administration’s economic policies are an accelerant, rather than the fundamental cause, of the United States’ debt problem. The story really begins with President Ronald Reagan in the 1980s, an era of deficit spending in which the U.S. debt-to-GDP ratio was about a third of what it is today. As Vice President Dick Cheney said during the first George W. Bush administration, “Reagan proved deficits don’t matter.” It is an assumption that both parties appear to have taken to heart in the twenty-first century, despite far more worrying debt burdens. In fiscal year 2024, for example, the Biden administration ran a budget deficit of $1.8 trillion, or 6.4 percent of GDP. Except for the global financial crisis and the first year of the pandemic, that was a peacetime record, slightly exceeding the 6.1 percent of the previous year. President Joe Biden’s deficits would have been larger still but for determined resistance from two centrist Democratic senators who bid down some of the administration’s most expansive spending bills.
During his 2024 presidential campaign, Trump pilloried Biden for his administration’s massive deficit spending. Yet in his second term in office, Trump has embraced similarly large deficits—six to seven percent of GDP for the rest of the decade, according to independent forecasts produced by the Congressional Budget Office and the Committee for a Responsible Federal Budget. The latter has projected that, by 2054, the U.S. debt-to-GDP ratio will reach 172 percent—or an even higher 190 percent if the bill’s provisions become permanent. Trump and his economic advisers claim that such forecasts are overly pessimistic—that the projections for growth are far too low and those for interest rates far too high. Higher growth will bring in larger future tax receipts; lower interest rates mean the debt will be less costly to service. If Team Trump is right, both factors will actually lower deficits and tilt the trajectory of debt to income downward. Whereas in January 2025, the CBO projected an annual growth rate of 1.8 percent over the next decade, the administration has put the figure at 2.8 percent. The difference is significant: if the U.S. economy is growing at 1.8 percent annually, it will double in size (and presumably tax revenues) every 39 years. At 2.8 percent, it would double every 25 years. For Trump, assuming that kind of rapid growth has made it easier to finance a lot of budget giveaways.
There is a substantive basis for the Trump administration’s growth projections, although it has little to do with the claimed benefits of the “big, beautiful bill” passed in July. Many prominent technology experts firmly believe that as long as the government stays out of the way, artificial intelligence companies will achieve Artifi
