The United States economy is growing faster than expected, but British economists are sounding the alarm over a debt bubble that could pop at any moment. Sources in London and Washington confirm that the US national debt has hit a record $35 trillion, roughly 120% of GDP. The debt-to-GDP ratio is now higher than at any point since World War II.
Dr. Alistair Thornton, a senior fellow at the Institute for Fiscal Studies, told me: "The US is living on borrowed time and borrowed money. The government is spending like there's no tomorrow, and eventually, the bill will come due. We've seen this movie before: Greece, Japan, and now America."
Despite the warnings, the US economy added 275,000 jobs in March, blowing past forecasts. The unemployment rate held steady at 3.8%, and consumer spending remains robust. But beneath the surface, cracks are forming. Corporate debt has ballooned to $11 trillion, and the yield curve has inverted three times in the past year, a reliable predictor of recession.
"The Fed is walking a tightrope without a net," said Sarah Chen, a former Treasury official who now runs a hedge fund in New York. "They have to keep rates high enough to tame inflation but low enough to service the debt. It's an impossible balancing act."
The Bank of England has warned that US debt levels pose a risk to global financial stability. In its latest Financial Stability Report, the Bank noted that a US default would trigger a cascading crisis across international markets. "The US dollar is the world's reserve currency, but that status is not a God-given right," said the report, obtained by this newspaper. "Excessive debt erodes confidence."
Meanwhile, the Biden administration is pushing ahead with a $5 trillion infrastructure package, funded by borrowing. "We don't have a choice," a White House official said on condition of anonymity. "If we don't invest now, we'll pay the price later."
But the price might already be too high. Interest payments on the debt now exceed $1 trillion a year, more than the entire defence budget. By 2026, debt service will be the single largest federal expenditure.
I asked Dr. Thornton how this ends. He paused, then said: "It ends badly. Either with a debt crisis, a default, or a period of financial repression where savers are wiped out. There is no painless way out of a $35 trillion hole."
The irony: the US economy is booming now, but it's built on a foundation of sand. The question is not if, but when, the tide goes out.
