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Will there be a U.S. debt crisis?

Chart of the week
Americas

7/4/2025

A look at the risks that the U.S. debt trajectory could become dynamically unstable

paper currency blowing out of open window
Will there be a U.S. debt crisis?

How much is too much? When it comes to the time of debating U.S. , 24 hours appears to be a cut-off point. Towards the end of the marathon session that eventually saw that chamber at the narrowest possible margin pass Donald Trump’s “”, Senator John Fetterman, Democrat from Pennsylvania declared: “Oh my God, I just want to go home. I’ve already missed our entire trip to the beach.”[1]

At the time of writing, the prospects of Donald Trump’s domestic policy agenda, making most of his first term tax cuts permanent, in the remain unclear. But the fact that 50 Senate Republicans supported the Senate Bill underlines just how unconcerned Washington remains about sustainability of Federal finances.

One useful tool is suggested by Penn Wharton Budget Model from Senator Fetterman’s home state.[2] For any such analysis, a key starting point is that once interest rates exceed economic growth, Federal debt grows faster than the economy unless offset by sustained primary . As our Chart of the Week shows, average nominal on public debt are already approaching nominal growth. 

“This underlines the risks that the U.S. debt trajectory could become dynamically unstable.,” argues Christian Scherrmann, U.S. Economist for DWS. The Wharton analysis identifies a critical debt-to-GDP threshold of approximately 200% and suggests that under recent policy and macroeconomic conditions, the United States has an estimated 20-year window to implement corrective measures, if market conditions remain generally favorable.

Not a recipe for long-run solvency and macroeconomic stability

 

%

Combination chart with 3 data series.

The chart has 1 X axis displaying
. Data ranges from 1984-12-31 00:00:00 to 2024-12-31 00:00:00.
The chart has 1 Y axis displaying values. Data ranges from -4.63 to 15.01.
End of interactive chart.

Sources: U.S. Bureau of Economic Analysis, U.S. Treasury, Haver, DWS Investment GmbH as of 7/2/25

* 10-Year Treasury Note Yield at Constant Maturity (% p.a.)
**Gross Domestic Product year on year growth rate
*** Federal Receipts, Outlays, Surplus/Deficit & Debt as % of GDP

The catch is stability could evaporate far more quickly if there was a crisis in between which would require a sudden increase in , or a sudden loss of market confidence. While the U.S. retains a window for adjustment, the margin for error is narrowing. Delayed action increases the risk of a non-linear fiscal crisis, where market confidence deteriorates rapidly. Policymakers must consider both the magnitude and timing of interventions to ensure long-run solvency and macroeconomic stability.

1

The Philadelphia Inquirer, July 1st, 2025, “Fetterman says ‘I just want to go home’ as Senate votes on ‘Big Beautiful Bill’”

2

Jagadeesh Gokhale and Kent Smetters. Mariko Paulson, October 6, 2023, “When Does Federal Debt Reach Unsustainable Levels?”

This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Alternative investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients. 

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