When economists discuss the national debt exceeding $40 trillion or annual deficits hovering around $2 trillion, the figures can seem threatening. But do they portend some form of a debt spiral resulting in an economic crisis?
America’s debt problem isn’t some distant threat. It’s already costing families money through slower income growth, higher borrowing costs, and a weaker economic outlook. But the real danger isn’t simply how much debt we have today. It’s the fact that the debt is growing faster and faster, driven by structural imbalances that Washington continues to ignore. What matters most is not the debt level itself, but the trajectory: how quickly it is rising, what’s causing it to rise, and whether policymakers act before the debt spiral becomes much harder to stop.
A debt spiral is a self-reinforcing loop where rising debt forces the government to spend more on interest, enlarging the deficit and necessitating further borrowing. Left unchecked, this cycle threatens economic stability, elevates borrowing costs, and restricts policy options. Experts from across the political spectrum and fields of economics have warned about the risks of allowing this trajectory to take hold. This blog explores this critical issue supported by the insights of leading fiscal experts who have appeared recently on the Concord Coalition’s podcast Facing the Future.
How Are Interest Rates on Government Debt Set?
To understand how a debt spiral develops, it helps to look at how government borrowing works. When the U.S. government spends more than its revenue, it must raise additional cash by selling Treasury securities—such as bills, notes, and bonds—to investors, banks, foreign governments and others. Interest rates on this debt differ depending on the term of the debt: the rates on short-term debt are heavily influenced by the federal funds rate set by the Federal Reserve to manage inflation and employment, whereas the rates on long-term debt are set by supply and demand at Treasury auctions.
What Triggers Rising Borrowing Costs?
Several catalysts can drive borrowing costs upward. Lower demand or higher perceived risk forces the government to offer higher yields to attract buyers. If investors lose confidence in long-term fiscal planning, they require a higher risk premium to hold government debt.
Reduced purchasing by key foreign or institutional investors has shifted the burden to more price sensitive investors who may be looking for higher yields. Another factor in today’s bond market is AI companies issuing debt that will exceed $1 trillion and competing alongside the Treasury for the same pool of investment capital which drives up interest rates. Inflation expectations also prompt buyers to demand higher yields upfront to preserve purchasing power.
The Debt Spiral Mechanism
When investors lose confidence that Congress will do what must be done to rein in the debt, or in the Fed’s ability to control inflation, the debt spiral progresses through distinct phases.
- Spiking yields raise borrowing costs for new and refinanced debt.
- Higher interest costs dampen economic activity, lowering revenues and threatening a recession
- Net interest payments take up a growing share of federal revenue, squeezing out funding for productive investments in defense, infrastructure, and public programs.
- Expanding interest expenses widen annual deficits even without new spending legislation, requiring the Treasury to issue even more bonds.
- Increased borrowing puts upward pressure on interest rates and the spiral repeats
A debt spiral accelerates when the interest rate (R) on government debt exceeds the economy’s growth rate (G). As the government borrows more just to pay interest, the debt climbs faster than the economy expands. In this scenario, even if revenues and expenditures excluding interest are balanced (known as primary balance), debt will continue to grow as a share of the economy. For the last two decades interest rates have been less than the economy’s growth rate. However, the Committee for a Responsible Federal Budget estimates that average interest rates could exceed economic growth by 2029.
Economic Implications for Everyday Households
This dynamic directly impacts everyday households. Treasury yields serve as a benchmark across the economy, driving up mortgage rates, auto loans, credit cards, and business borrowing costs. Higher public debt also absorbs savings from capital markets, reducing private investment in innovation and expansion. Furthermore, mounting interest obligations pressure Congress to cut spending or reduce support for public services and safety net programs, slowing broader economic and wage growth.
Ultimately, as high borrowing costs curb consumer spending and corporate investment, the broader economy faces a heightened risk of recession. A downturn triggered by a debt spiral is particularly difficult to manage, as reduced tax revenues and higher social spending further enlarge the deficit. For households and businesses, this can translate into widespread job losses, stagnating wages, and restricted access to credit, compounding the economic strain across all sectors.
Douglas Holtz-Eakin, former Director of the Congressional Budget Office, describes the mechanics: “You get an interest rate spike. The world starts charging you a lot more interest because you’re a less reliable debtor… that spike starts a recession. And the recession exacerbates the revenue problem and the spike becomes even bigger.”
Dennis Lockhart, former President of the Federal Reserve Bank of Atlanta, paints a similar picture: “You would have turmoil in the auctions that occur periodically to refinance the debt… the only way to get the offering of debt that’s being refinanced is to raise the interest rates. So, interest rates would rise, particularly higher long-term rates… Then if it’s serious enough, the psychology would spread to other sectors in the economy… that would lead to a recession.”
The Ultimate Risk: Fiscal Dominance
The most critical risk of a prolonged debt spiral is fiscal dominance, a point where debt is so massive that the central bank can no longer raise interest rates to fight inflation without risking government insolvency or financial instability. Under fiscal dominance, monetary policy becomes trapped. Raising rates expands the deficit, while lowering rates or purchasing government debt directly leads to debt monetization and sustained inflation. Preventing this outcome requires proactive, gradual fiscal adjustments to keep national debt on a sustainable path relative to the broader economy.
As Dennis Lockhart explains, “Fiscal dominance is when the tools of the central bank are overpowered by the bad fiscal situation and no longer seem to have their efficacy…You may not find that even raising interest rates is all that powerful in dealing with inflation. Central to this is really the power of inflation expectations and what the public believes to be the inflationary future. And that’s sensitive to all kinds of circumstances that the Fed cannot really control or even address. So, I think the longer-term trajectory does raise issues of whether inflationary pressures would be harder and harder for the Federal Reserve to responsibly deal with.”
What Could Be Done?
Experts suggest that addressing the debt challenge will require difficult but necessary fiscal reforms. Mitch Daniels, former Governor of Indiana and Director of the Office of Management and Budget, highlights the need for proactive planning: “People right now should be writing the game plan for the very drastic things… somebody right now should figure all the things in the federal budget that will have to go… what major changes in the entitlement programs can be made that try to protect the most vulnerable people… what tax or revenue increases are thinkable, that won’t be counterproductive.”
Douglas Elmendorf, former Director of the Congressional Budget Office, stresses the importance of early action: “The right thing to do, the prudent thing to do, of course, is to take action first. You don’t wait until you’re sure you’re on the edge of the cliff to step back. And we should be stepping back. Yesterday would be better than today, and today would be better than tomorrow.”
Conclusion
The concept of a debt spiral is not just an abstract economic theory, it represents a very real and pressing risk to the financial stability of the United States. Rising debt and interest costs threaten to create a self-perpetuating cycle that could lead to higher borrowing costs, recession, and social upheaval. While the timing of such a crisis is uncertain, the consensus among experts is clear: delaying action only invites a crisis and worsens the outcome.
The path forward demands difficult choices: careful balancing of spending cuts, tax reforms, and protecting vulnerable populations. It is a challenge that requires political will and public understanding before the situation reaches a breaking point. As the experts have noted, the time to act is now, before the debt spiral tightens its grip.
