In recent months, rising US debt and widening fiscal deficits have frequently dominated financial headlines. For example, CNBC recently reported that the US federal deficit is rapidly expanding due to a combination of tax cuts, expansionary fiscal stimulus, and entitlement spending. Institutions such as Yale University, Wharton School of Business, and the Congressional Budget Office have warned that this trend has pushed interest costs to record highs, even exceeding the defense budget, leading to market concerns about the US's solvency. Prominent figures such as Larry Summers and Ray Dalio have also voiced concerns that without drastic measures, the US could face a new round of financial crisis.

The problem, however, is that these warnings are nothing new. Investment gurus like Ray Dalio have been predicting debt crises almost year after year for decades. We can directly see his long-term performance at Bridgewater Associates, but his track record of predicting debt crises is far less accurate than one might imagine. Looking back at the timeline of his crisis predictions, you'll notice a pattern:

• March 2015 - Thinks the Fed could repeat the Great Depression of 1937

• January 2016 – Claims the 75-year debt supercycle is coming to an end

• September 2018 - Says the current economic situation is similar to that of 1937 and will fall into recession within two years

• January 2019 – Warning of a significant risk of a US recession

• October 2022 – Predicts a “perfect storm” for the economy (stock market lows at the time)

• September 2023 - Assertions that the United States will fall into a debt crisis

Even more than ten years ago, he admitted that predicting debt crises was one of the areas where he made repeated mistakes in his investment career.

debt crisis

One of the biggest risks for investors isn't a recession itself, but misjudging trends and missing out. Ten years ago, if someone had completely exited the market in response to Ray Dalio's warnings of an impending depression, they likely would have missed out on one of the strongest bull markets in U.S. history.

Over the past 40 years, the U.S. national debt has expanded exponentially, yet the catastrophic consequences repeatedly predicted have never materialized. Despite significant interest rate volatility, chronic political deadlock, and spiraling fiscal deficits, the U.S. economy has continued to operate, grow, and attract global capital. The root cause lies in what economists call the "exorbitant privilege" enjoyed by the United States as the issuer of the world's reserve currency.

The US dollar is at the core of the global trade, investment, and reserve systems, while US Treasury bonds constitute the world's deepest and most liquid capital markets. This advantage enables the US to sustain large deficits for extended periods without triggering significant market turmoil. As long as global confidence in US institutions and the rule of law remains intact, demand for US debt will remain stable, providing a solid buffer for US finances against genuine financing pressures.

Furthermore, the US government has long been accustomed to using deficit spending as the backbone of its economic operations. Core expenditures such as Social Security, Medicare, and national defense are politically untouchable, and various fiscal transfers (such as tax credits and subsidies) have become a vital component of household consumption and business operations. US economic growth, consumption, and investment are largely dependent on sustained and stable government spending, all of which is comprised of deficits.

Therefore, despite the high levels of US debt and deficit, the likelihood of a fiscal crisis in the short term is low. However, this does not mean that the risk has disappeared. The potential impact of debt expansion on long-term economic vitality and sustainable growth still deserves investors' continued attention.

Investment Risks

Many people are concerned about the continued rise in US debt, which is fundamentally caused by the long-term decline in economic growth. A fundamental fact that is often overlooked is that the US economy can hardly achieve growth without further debt expansion.

The reason is simple: government debt ultimately flows into the balance sheets of businesses and households in the form of loans, credit, or direct transfers, becoming the "fuel" that fuels the economy. Looking at the metric "the amount of debt required to generate $1 of economic growth," we find that since 1980, debt expansion has completely outpaced economic growth. Worse still, this expansion has diverted fiscal resources from productive investment to debt servicing and social welfare spending.

From another perspective, if debt is excluded, the United States has hardly seen any real "organic" economic growth since 2015. This means that to maintain the current economic growth rate, debt and fiscal deficits must continue to expand.

A historical comparison is even more instructive. Between 1952 and 1982, the US economy, fueled by surpluses, averaged nearly 8% growth. Today, however, high debt levels have become a drag on growth, forcing the Federal Reserve to adjust its growth structure—interest rates must remain low for an extended period, and debt growth must outpace economic growth to prevent economic stagnation.

Furthermore, a significant portion of the new debt being issued today is also considered "unproductive" because it currently does not generate a sustainable return on investment. This is key to understanding the current issuance of US debt and its long-term impact on the economy. We will discuss this in detail.

Unproductive debt

It’s important to understand that not all debt is equal. This is a crucial distinction between productive and unproductive debt , and a core premise for assessing the risks and benefits of government borrowing.

Productive debt refers to investments that generate long-term economic returns, such as infrastructure, education, research, or business capital expenditures. These investments can boost future GDP and productivity, ultimately covering their costs through increased tax revenue.

Unproductive debt is used to finance consumption or transfer payments, such as social welfare benefits or debt interest, which do not generate measurable economic returns. In the United States, entitlement payments such as Social Security and Medicare, as well as interest payments on the national debt, account for approximately 73% of the federal budget and are therefore unavoidable and mandatory.

While these expenditures are essential for social security, they increase the fiscal burden without boosting economic potential. Today, the U.S. economy is increasingly reliant on unproductive debt to sustain growth, which erodes fiscal sustainability in the long term. The risk lies not in the debt itself but rather in the fact that borrowed funds fail to create future value, ultimately burdening taxpayers with a burdensome debt without a corresponding return.

In his book American Gridlock, economist Dr. Woody Block clearly explains this difference using the examples of Country A and Country B:

• Country A : Revenue is $3 trillion, expenditure is $4 trillion, of which $1 trillion of deficit is made up by issuing government bonds, but these funds are used for pure consumption and do not generate returns, so the deficit must be repaid by future taxes.

• Country B : The same fiscal gap, but the deficit funds are invested in projects such as infrastructure that can generate positive returns. The future returns are sufficient to cover the expenditures, so there is no real deficit.

The United States is currently more like Country A, with new debt largely used for welfare and debt repayment, resulting in a negative return on investment. The larger the debt balance, the more pronounced the economy's "reverse leverage" effect, which diverts more funds from productive sectors and diverts them to low- or even no-return spending.

the multiplier effect also confirms this. Research from the Mercatus Center at George Mason University shows that the economic multiplier of excessive debt is often close to zero or even negative:

• If the multiplier is > 1, it means that government spending can stimulate more private investment and consumption;

• If the multiplier is < 1, government spending will "crowd out" the private sector and instead suppress private investment and consumption.

Real-world data shows that government spending can expand the size of the public sector while shrinking the private sector's share, thereby hindering long-term growth. Research by Robert Barro and Charles Redlick further indicates that once future taxes required to pay for these expenditures are taken into account, the multiplier often becomes negative.

Stuart Sparks of Deutsche Bank further noted:

This means that if deficits are cut hastily amidst a high debt burden, the economy could suffer a shock similar to the depths of the Great Depression. In other words, spending must be precisely targeted at areas that can boost productivity and potential growth. Otherwise, debt will not only fail to contribute to growth but could also become a long-term economic burden .

Conclusion

This is one of the core reasons why the US economy has been in a state of long-term low growth. Because the public is highly dependent on these non-productive spending items , cutting them is almost impossible in reality, and hasty adjustments are tantamount to "economic suicide."

However, there are still opportunities for improvement. The development of new infrastructure, such as AI-powered data factories, can create jobs, drive the development of related industries, and inject new growth momentum into the economy through AI-driven productivity gains. Even a slight increase in the average annual GDP growth rate could stabilize the current debt-to-GDP ratio. For example, increasing the growth rate to 2.3% to 3% would significantly improve fiscal sustainability. Even a simple 1 percentage point interest rate cut could save approximately $500 billion in interest payments annually, thereby alleviating deficit pressure.

Therefore, while debt is a crisis, it is not America's true problem, nor is it an imminent one. As federal borrowing increasingly flows into consumer spending, this money will not generate future economic returns. This trend, which began over 50 years ago, continues to drag down economic potential (r*), crowd out private investment, and weaken long-term growth momentum.

History and data demonstrate that if debt is used to invest in productive assets such as infrastructure, innovation, and education, it not only supports economic growth but also pays for itself over time. Conversely, debt used for welfare and debt repayment fails to generate this positive cycle. Unfortunately, political and demographic constraints make it extremely difficult to reverse this situation without triggering an economic shock.

Unless policymakers redirect fiscal focus toward areas that boost productivity, the U.S. economy risks falling into a vicious cycle of low growth, rising debt, and diminishing returns. Artificial intelligence may be a game-changer—if combined with targeted investments and prudent policies, it has the potential to boost productivity, restore growth, and ease fiscal pressures.

The road ahead is narrow, but not impossible. A crisis is not imminent; the real test lies in whether sufficient political will can be mustered to drive this transformation forward.