Top experts are sounding the alarm about a potential debt crisis, Goldman Sachs said.
The bank interviewed three economy pros about their outlook for the US fiscal situation.
The top insights from Ray Dalio, Ken Rogoff, and Niall Ferguson are detailed below.
Investor concerns over a swelling government debt load were soothed last week. But some experts say the US isn’t out of the woods yet.
Goldman Sachs spoke to three top economic experts — Ray Dalio, Ken Rogoff, and Niall Ferguson — about rising debt levels in the US. All three said they were worried about an impending debt crisis, particularly when considering the effects of President Donald Trump’s GOP tax and spending bill, which has been estimated to add trillions to the budget deficit over the next decade.
That reflects a slightly more pessimistic view than the market. After a scare last month, demand for long-dated government bonds was strong this week. It was a sign that investors are feeling more comfortable about the fiscal situation in the US, after showing nerves last month after Moody’s downgraded US debt and Trump’s tax bill began making its way through Congress.
Here are the top points each of the experts had to make:
Ray DalioJemal Countess/Getty Images for TIME
The billionaire hedge fund manager said he sees three factors determining the outlook for the US debt.
How much the government pays on debt interest relative to its revenue. If interest payments keep rising, it can “unacceptably” prevent the government from spending money on other things.
How much debt the government needs to sell relative to demand. If the government needs to sell more Treasurys than people are willing to buy, interest rates will have to rise. That provides a more attractive yield to investors to hold onto the US debt, but high rates also hurt markets and the economy.
How much money the central bank needs to print in other to purchase the remaining debt. If demand for US Treasurys is especially weak, the Fed can step in to purchase bonds to keep the government funded. If it has to print more money to do so, that can raise inflation and ding the value of the US dollar.
“One can easily measure these signs of deterioration and see movement toward an impending debt crisis,” Dalio, who has long warned of troubling debt dynamics in the US, said. “Such a crisis occurs when the constriction of debt-financed spending happens, like a debt-induced economic heart attack.”
To prevent a crisis, Dalio said he believed the government should reduce the budget deficit to 3% of GDP. Reducing the debt could cause interest rates to decline around 150 basis points, he estimated, reducing interest payments on the national debt and stimulating the economy.
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Kenneth RogoffFaruk Pinjo/World Economic Forum
Given Trump’s current agenda, Rogoff thinks the US will likely enter a debt crisis within the next four to five years. That’s faster than the five- to seven-year timeline he predicted prior to Trump’s reelection.
“The notion that debt is a free lunch that had been pushed by many economy-watchers is absurd,” Rogoff said. “Today’s larger deficit on top of already-high debt levels is setting up for a crisis that will necessitate a significant adjustment.”
Rogoff thinks a debt crisis could play out in two ways:
Inflation spikes and results in an economic shock. “Exactly what that shock will look like is difficult to say, but it will likely be more painful than the Covid inflation shock that precipitated only relatively minor adjustments in bond markets,” Rogoff said.
The government could manage the debt by keeping interest rates artificially low and restricting capital flows. But those measures will hurt economic growth and essentially serve as a tax on savers in the economy, he said.
Investors have long been concerned about the US debt, but the outlook is especially worrying now because long-term interest rates are going through a “normalization” from low levels that stretched over the past decade, Rogoff said.
“People need to recognize that higher interest rates are here to stay and that a return to the low-rate era of the past might well prove wishful thinking,” he added.
Niall FergusonDavid Levenson/Getty Images
Ferguson thinks a crisis could be triggered by a military challenge that results in the US losing its position as a global power, as it goes deeper into debt.
The British-American financial historian said his favorite gauge to determine how unsustainable national debt was is when a country spends more on interest payments for its debt than on defense.
That rule, which he calls “Ferguson’s Law,” now applies to the US, which spent $1.1 trillion on interest payments on the national debt over the 2024 fiscal year, according to the Treasury Department. It was more than the $883.7 billion approved that year for total defense spending.
Nearly every nation that has violated Ferguson’s Law has lost its status as ” great power” in financial markets, he said.
“Any great power that pursues a reckless fiscal policy by allowing the cost of its debt to exceed the cost of its armed services is opening itself up to challenge,” Ferguson said. “The US is just the latest great power to find itself in this fiscal jam.”
The US has been able to borrow as much as it has through now with no issues, in part because the US dollar remains the world’s reserve currency and investors still see Treasurys as “risk-free,” Ferguson said, meaning they have faith in the US’s ability to make good on its interest payments.
But that already appears to be shifting, he said, pointing to investors around the world shedding their exposure to US Treasurys and moving away from dollar assets.
“I’ve warned the US is on an unsustainable fiscal path for 20 years now, and so at times have felt like the boy who cried ‘wolf,'” Ferguson added.
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