Recently, three events related to the U.S. Treasury bond markets have drawn public attention. For one, Japan sold some of its U.S. Treasury holdings to support the yen, and Treasury Secretary Scott Bessent intervened in the currency/debt markets to negate some of the resulting market pressures. Second, U.S. bond yields, especially at the long end, have risen alongside dollar weakness under the weight of an increased supply of dollar debt and weakening demand for it. And third, Secretary Bessent announced that the Treasury will purchase U.S. bonds, though its capacity to do so is limited. While most people are inclined to view these as passing events, they are symptoms of a serious debt problem that appears to be progressing into a more advanced stage.
In my book How Countries Go Broke: The Big Cycle, I laid out a template for understanding what happens when a country continuously spends more than it takes in, accumulating debt and debt service payments that rise relative to incomes. My perspective is that of an experienced global macro investor, and my understanding of this dynamic, which I will now explain, was what led me to anticipate the 2008 Great Financial Crisis and the European debt crisis that followed.
Because I am now at a stage in life in which I want to pass along what I have learned, I wrote the book and am sharing this article in the hope that it will help people and policymakers deal with this issue well.
How the mechanics work
The debt dynamics of governments are analogous to those of individuals and companies with two important differences. First, when the demand for debt falls short of the supply, governments can create money through their central banks and hand it out to make it easier to pay debt (which also lowers the value of their money). Second, governments can get money from others through taxes.
Throughout history, governments have tended to accumulate more and more debt until one or both of the following classic big debt cycle dynamics occur, leading to bad returns of debt assets and financial market crises.
First, debt service payments grow relative to incomes until they crowd out spending. Think of credit as being like blood in the economy's circulatory system. When credit circulates well and is used productively, it generates income that can service the debt that created it, which is healthy. But when debt service grows faster than the income needed to pay for it, debt-service costs accumulate like plaque in arteries, gradually crowding out other spending until eventually there is a financial heart attack. That is now happening in the U.S., but the U.S. isn’t alone. The United Kingdom, the European Union, China, and Japan all face too much debt relative to income and fiscal imbalances their governments haven’t solved.
Second, the supply of debt to be sold becomes much greater than the demand for it. As a country’s debt-service burdens grow, those who already hold a lot of the debt become less willing to buy the large amounts of new debt being offered and/or to roll over their maturing debt. Some holders even become more inclined to sell their debt holdings. At the same time, in cases when there are big capital and trade wars resulting from big geopolitical conflicts, history shows that fears of financial sanctions can hurt demand. When demand falls while supply is rapidly increasing, that causes interest rates to rise and credit growth to be curtailed. Credit and economic problems also typically occur, and there is often the "printing " of money and credit, which devalues it. In either case, that is bad for bonds. All these things are now occurring for the U.S., which adversely affects its government supply-demand balance.
The Big Debt Cycle degenerative process that follows these dynamics can easily be seen and understood by studying historic cases across many countries and is as predictable as demographic changes. Anyone who has studied monetary history should know that all monetary orders have eventually broken down, and it was this dynamic that led to the declines of previous reserve currencies and the empires behind them, most recently the British and, before that, the Dutch. Yet the process is not well understood and typically ignored until it is too late because, like unhealthy practices such as smoking and eating fatty foods, it takes place over a long time—typically over about a lifetime of around 80 years. The exact timing of the financial/economic heart attack is not easy to predict until the final symptoms appear. In my 2025 book, I estimated that it would take place in 2027, give or take two years. So far, the progression has been consistent with my estimates. It is certainly time to understand and pay attention to these dynamics.
Just like the progression of symptoms with a disease, this degenerative process is observable and measurable. Rising debt burdens, weakening debt demand, increasing monetization, and deteriorating central-bank balance sheets can all be used as indicators of where in the cycle the process is and what is likely to happen.
More specifically, the key red-flag indicators to watch out for are:
Government debt-service costs rising relative to government revenue to unacceptably squeeze out spending.
The supply of government debt becoming too large relative to demand for it, causing long-term interest rates to rise faster than short-term rates.
The government treasury shortening the maturity of its debt sales to reduce the supply of bond sales.
The currency weakening, particularly relative to hard asset storeholds of wealth such as gold.
With a further lag, higher interest rates hurting the prices of other investment assets like stocks and real estate, and, after another lag, hurting the economy and creating credit problems.
Central banks "printing" money and credit, purchasing bonds, and guaranteeing debt.
Central Banks incurring large losses and monetizing their own debt.
Late in the cycle, governments adopting more extraordinary measures to manage the growing mismatch between their debt offering and debt service obligations and their available financing. These measures can take the form of: shutting down banks or forcing bank mergers because the banks' losses and lack of liquid funds make fully paying their depositors' withdrawals impossible; unusual financial supports for systemically important companies; the establishment of capital controls to prevent money from leaving the country; and the outlawing of hard asset monies such as gold.
The process reaches a breaking point when debt service crowds out essential spending, bond supply overwhelms demand and pushes interest rates higher, or central-bank money creation becomes excessive and undermines the value of the currency.
In all these scenarios, bondholders do poorly until debt and currency values are devalued enough to restore demand or the debt is restructured. Quite often these cycles end with a return to hard currencies and hard monetary policies to reestablish confidence in debt as an attractive, real-returning asset.
That is the typical Big Debt Cycle.
The U.S. situation in a nutshell
To understand the U.S. position today, imagine that you are running a big business called the U.S. government.
This year, revenue will be roughly $5.5 trillion, while expenditures will be approximately $7.5 trillion, resulting in an anticipated deficit of nearly $2 trillion. Spending therefore exceeds income by roughly 40%. At the same time, federal debt held by the public is approximately $32 trillion, or about six times annual revenue and $240,000 per American household. Interest expenses alone are approaching $1 trillion per year, roughly 20% of revenue and about half the annual deficit.
In addition to interest payments, roughly $10 trillion of maturing principal must be refinanced. As a result, total debt-service requirements today amount to roughly $11 trillion, or about twice annual revenue.
That’s the current situation.
Looking forward, it appears most likely that things will get worse, and I estimate that projected deficits will cause the federal debt to rise to roughly $55 to $60 trillion over the next decade, requiring an additional $25-$30 trillion of debt sales. If that occurs, debt-service burdens will continue rising while increasing pressure is placed on investors to absorb ever-larger supplies of government debt assets. In addition, similarly large increases in debt and equity in supply in the U.S. private sector and in other countries that have to fund their increasing military and other expenditures will greatly add to the overall supply of debt and other financial assets.
My 3% three-part solution
The proposed solution that I laid out in my book was to stabilize the government's debt and debt ratio to roughly 3% of GDP through a balanced combination of spending restraint, increased tax revenue, and lowered real interest rates (which would happen naturally with improved debt fundamentals). All three changes are necessary because relying excessively on any one of them would create severe and unnecessary economic pain because the adjustment would be too great. Based on my analysis, spending reductions and revenue increases of roughly 5% relative to current plans, combined with interest rates approximately 1% to 1.5% points lower than otherwise expected, would substantially reduce future debt-service costs from current projections. Lower financing costs, stronger asset prices, and improved economic activity would also support government revenues.
History shows that this kind of solution is possible. The most comparable U.S. example occurred between 1991 and 1998, when the budget deficit was reduced by roughly 5% of GDP while economic outcomes remained favorable. But because of the lack of dealing with this debt issue earlier and the resulting current level of indebtedness, plus the increased needs for capital to fund AI and military expenses, we may be past the point of no return.
What this means for investors
For investors, the lesson is not to try to predict the exact timing of the next debt crisis. Timing such events is a challenge for even the most experienced investors. Instead, what’s important is to recognize the long-term implications of excessive indebtedness and to diversify broadly across countries and asset classes, favoring balance-sheet strength, and be cautious about concentrating heavily in long-duration debt assets. Assets that are not government liabilities, such as gold, can provide useful diversification when governments are monetizing debts and depreciating their currencies.
Even though these debt dynamics have occurred repeatedly throughout history and are logical, they still surprise people. The key is recognizing them early enough to act before they become unmanageable. The warning signs are measurable, and the necessary adjustments are obvious based on the lessons of history. The question is whether political leaders and policymakers will understand this and act while they still can—and whether you and others will protect yourselves if they don't act.
