Paul Tudor Jones recently voiced concerns that rising U.S. deficits and debt and increasing interest rates could lead to a fiscal crisis. His perspective reflects the long-standing fear that sustained borrowing will trigger inflation, raise interest rates, and eventually overwhelm the government’s ability to manage its debt obligations. In short, his thesis is that interest rates will rise as the Government goes broke.
Lance Roberts maintains in his article today, however, that the above not withstanding, “a closer look at historical precedent and current fiscal dynamics suggests that Jones’ thesis is not well supported by longer-term data and that his concerns are overstated.
Paul Tudor Jones argues that higher debt will increase interest rates and create unsustainable borrowing costs and that the U.S. will eventually go bankrupt. His concerns, however, overlook several critical economic realities:
- the U.S. is a sovereign issuer of the world’s reserve currency and, as such, the U.S. government cannot run out of money in a manner that a business or individual can. Debt rollovers, global demand for Treasuries, and flexible monetary policy all work to prevent a fiscal collapse.
- rising government debt has not correlated with higher interest rates over the past few decades. In fact, despite increasing debt, the slower economic growth and lower interest rates that occurred during those years reflect the diversion of productive capital into non-productive debt service. In other words, debt is “deflationary” as it retards economic prosperity.
- investor demand for government bonds often outweighs concerns about debt levels, particularly when governments offer stability. The U.S. Treasury market is the most significant and liquid globally. That means there will likely continue to be a high demand for U.S. debt, even with increased debts and deficits. As countries seek high levels of safety and liquidity to store their fiscal reserves, the U.S. Treasury will remain the asset of choice.
Jones’s concern about inflation resulting from high deficits overlooks the complex interplay of fiscal and monetary policy and structural economic factors. Inflation can indeed rise if government spending outpaces the economy’s productive capacity. However, recent inflationary pressures in the U.S. were driven largely by supply chain disruptions, energy shocks, and pandemic-related spending rather than chronic deficits.
The fallacy in Jones’s argument should be evident. Interest rate increases, without a subsequent rise in economic growth and wages to support higher borrowing costs, slows economic activity. Slowing economic growth leads to increased unemployment, thereby reducing inflation and interest rates.
Contrary to Jones’ assertion that debt will become unmanageable, debt rollovers are a standard practice for governments with large borrowing needs. The U.S. Treasury regularly issues new debt to refinance maturing obligations, spreading repayment costs over time. Historical data shows that even when debt levels rise temporarily, they can stabilize through economic growth, moderate inflation, and fiscal adjustments.
Indeed, a research paper by Paul Goldsmith-Pinkham suggests that higher debt levels do not inherently raise fiscal costs. As long as real interest rates remain below the economy’s growth rate, governments can roll over debt without increasing the debt burden. This scenario has played out in the U.S. in recent years, with strong post-pandemic growth helping to offset the cost of higher borrowing.
Conclusion: The U.S. Is Unlikely to Face a Fiscal Crisis Anytime Soon
Jones’ prediction that rising debt will lead the U.S. toward financial ruin underestimates the resilience of the American economy and the tools available to policymakers. The U.S. enjoys several structural advantages—such as the global demand for Treasuries, the dollar’s reserve currency status, and the Federal Reserve’s ability to manage liquidity—that make a debt crisis highly unlikely. While rising deficits and interest rates present challenges, the U.S. has ample capacity to manage its debt sustainably, especially if economic growth remains near long-term trends.
However, given the impact of rising debt, increasing deficits, and demographic headwinds (the 3-D’s), which retards economic prosperity over time, Central Banks will continue to suppress interest rates to keep borrowing costs down.
Historical evidence suggests that interest rates will be lower, not higher, unless the Government embarks on a massive infrastructure development program. Such would potentially revitalize the American economy and lead to higher rates, more substantial wages, and a prosperous society. However, outside of that, the path of interest rates in the future remains lower.”
