Is the US on a Slippery Slope to Default?
- 6 days ago
- 5 min read
Updated: 5 days ago
My only claim to professional expertise is knowing how countries go bankrupt and
understanding the workout process that has evolved for restoring their access to
international capital markets.
This expertise was acquired over the 18 years I was employed by the US Treasury
Department and then 7 years with the Institute of International Finance (the global association for the international finance industry). I capitalized on this expertise by writing a book on the workout process that was published by the Brookings Institution Press in 2003: Restructuring Sovereign Debt: The Case for Ad Hoc Machinery.
At no point during those years did I imagine that the United States might be on the
slippery slope to default in my lifetime. I recently concluded that it is.
There is one simple reason for arriving at this conclusion. The share of the Federal
budget devoted to paying interest on its outstanding debt is close to an historic high and
is projected to rise rapidly to an unsustainable level. The trend is shown graphically in
this chart¹:
¹ From “Spending, Taxes, and Deficits: A Book of Charts” by Jessica Riedl, The Brookings Institution, April 2026 at https://www.brookings.edu/wp-content/uploads/2026/04/BudgetChartBook-2026.pdf
I have not been able to find an analysis of the link between default and the share of a
government’s budget devoted to interest payments on its outstanding debt. What is
clear, however, is that growing interest payments squeeze out budget spending that
produces tangible benefits to households. At some point this interest burden becomes
politically unsustainable. Consequently, the government is forced to renege on its
commitment to meet its contractual debt service obligations. It is possible that no
country since 1900 has been able to avoid default when the share of its government
budget devoted to interest payments interest passes 20 percent and nothing has been
done to stop it from rising to 30 percent.²
² A recent Congressional Budget report showed that net interest payments on USG debt in Fiscal Year 2026 are projected at 3.3 percent of GDP compared with the average of 2.1 percent in 1975-2025, and rising to 4.6 percent of GDP in 2035, when interest payments will be almost twice the GDP share of Defense spending and bigger than the share of Medicare spending. https://www.cbo.gov/publication/62105
An important distinction exists between a formal default and a technical default. In the
case of a formal default, the government stops paying interest and redeeming maturing
debt and begins accumulating arrears that are eventually eliminated in a negotiated
workout with its creditors.
In the case of a technical default, to avert a formal default, the government preemptively
announces or negotiates various forms of restructuring of its debt service obligations.
One simple form is to unilaterally extend the date of its maturing debt. For example,
instead of getting the full value from a maturing bond this year, the bondholders will get
it five years later (while still getting their contractual interest payments). Another form is
to carry out a voluntary or negotiated exchange of outstanding bonds with new bonds
that have a lower value either due to having a later maturity date or having a lower
interest rate or both. Since 1990, an impressive number of other forms of “haircut” have
been adopted including some that are quite complicated.
There is no secret in how the United States arrived at this perilous moment: Federal
spending has been bigger than Federal revenue in every Fiscal Year since 1970 except
in the 1998-2001 period.
There is no secret in how to avoid default: reduce spending and increase revenue.
There is no secret in why this hasn’t been done: lack of political will in both the
Congress and the Executive Branch. But the blame ultimately rests with the voters who
elected the members of Congress and the President over the past 55 years. In short,
Americans are spending too much and saving too little. You could call it an addiction.
There have been plenty of warnings. The Peter G. Peterson Foundation has been
issuing them for years. ³ In the first week of May, the New York Times magazine included
a comprehensive account of the risks.⁴ The reporter, Tony Romm, wrote that the size of
the US government’s debt had just exceeded the country’s total economic output
(annual rate of GDP) for the first time since World War II, except briefly during the
Covid-19 pandemic. He concluded “If its debt continues to grow faster than the
economy, . . . it will only become more expensive for the government to borrow money,
as investors demand higher yields on bonds to finance that debt.” He described this as
a “debt spiral”. I’m calling it the slippery slope.
Three other warnings are worth mentioning. In 2011, the Standard & Poor bond rating
agency for the first time reduced its rating on USG debt from the top AAA rating to AA+.
In the same year, the Fitch and Moodys rating agencies changed their outlook on this
debt to negative.⁵ In May 2025, Moodys dropped its rating on USG debt from the top
rate of Aaa to Aa1.⁶
A second warning is the one mentioned by Romm: the higher yield investors demand
for the money they lend to the USG (e.g., to buy its bonds and other forms of debt). This
yield has been trending up since coming out of the Covid-19 pandemic at the end of
2021. At the beginning of May 2026, the 10-year Treasury bond was yielding 4.40
percent, pushing it above the long-term average of 4.25 percent.⁷
A third warning came in a report issued on 6 May 2026 by the Institute of International
Finance. A Reuters story about this report includes this quote from one of its authors
“While there [is] ‘no immediate risk’ in the $30 trillion U.S. Treasury market, long-term
projections [suggest] U.S. government debt increasingly [looks] to be on an "unsustainable path".⁸
If the necessary political will materializes, a technical default can be avoided by slashing
US Government spending, not just on the “discretionary” parts of the budget but on the
“entitlements” including social security, Medicare, and pensions. These cuts will tip the
US economy into a recession that could quickly become a Depression. In this context,
increasing taxes will be a political nonstarter—with the possible exception of taxes
targeting high net worth individuals and large inherited wealth. However, given how
deep a hole the US government has dug, it is more likely that these cuts will be joined
by, or quickly followed by, a technical default.
Let’s be clear about what will happen globally when paying the full amount of interest
due on US bonds becomes politically unbearable. To begin with, foreigners hold around
31 percent of federal debt according to a recent Library of Congress report.⁹ A US
default will inevitably tip the global economy into a depression of a magnitude greater
than any experienced in the past. One reason for this is that US Treasury securities
function as the foundation for the entire international financial system. This is due to the
role of the dollar as the world’s principal trade and reserve currency and because the
debt of other countries is usually priced with reference to the “risk free” yield of Treasury
securities.¹⁰
¹⁰ Another symptom of the default risk in US Treasury securities is that recently a few corporate bonds have been issued at lower yields than comparable Treasury securities. This might be due to exceptional demand for these particular securities more than to a perceived risk of lower default. Over the past 50 years, the spread between corporate and Treasury bonds has been pretty constant. The spread may not.
In short, there will be a direct impact of a USG default as the role of the US dollar in
global trade and finance forces other countries to shift to other currencies. The indirect
impact could be much larger as the depression in the US economy ripples across the
world in the form of rising unemployment and lower household incomes.
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