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Kenneth Rogoff highlights the dangers of the Trump administration's bet that the US can outgrow its fiscal problems

Bonds / opinion
Kenneth Rogoff highlights the dangers of the Trump administration's bet that the US can outgrow its fiscal problems
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By Kenneth Rogoff*

America’s fiscal position is increasingly looking like a train hurtling along a twisting mountain track. No one seems willing to slow down for fear of falling behind schedule and losing their job. Even if the train doesn’t crash, it is worth asking: Why keep pushing it? Despite solid growth, the federal deficit is about 6% of GDP. Yet the option of slowing down does not appear to be in President Donald Trump’s playbook.

The start of a public-debt crisis is usually pretty straightforward. The end is much harder to predict. A crisis can erupt when a country’s debt is historically high but has remained manageable thanks to low interest rates. Then, for whatever reason, rates begin to rise. It might be because of global forces, a change of government, or simply because memories of previous financial crises have faded.

This is roughly where the United States finds itself today. Rising borrowing costs would be less of a problem if the government had locked in cheap long-term financing, but it didn’t. Most homeowners, by contrast, did. They are still enjoying low monthly payments even though rates on new mortgages have soared above 7%.

As a result, US interest payments have gone from being something of a nuisance to the second-largest item in the federal budget in just six years, and they are bound to become the largest before long. As high interest rates add to the deficit, the government has three choices. It can raise taxes, cut spending, or borrow more. For the most part, the US government has chosen borrowing.

If the US is lucky, the market will remain reasonably forgiving and assume the government will eventually get its debt problem under control. Unfortunately, bond investors are growing wary of the global debt glut. It is a fair bet that, at some point, the government will respond with modest deficit reductions and hope that buys it time. That strategy often works, but after many years of this, the market may need to see more.

So far, the Trump administration has preferred to remind everyone how great the economy is, or at least how great the stock market thinks the economy is. Treasury Secretary Scott Bessent has leaned heavily on faster growth as the answer to America’s fiscal problems. Trump, for his part, seems to have little interest in dealing with the deficit, judging by his promise to give every American a $5,000 “dividend” if Republicans maintain control of Congress in the upcoming midterm elections.

Bessent might be right that US growth will exceed expectations. But as I have argued before, there are good reasons to think that even if growth remains robust, the extra tax revenues from AI will be disappointing.

The US is nowhere near a debt crisis, but what would it take to trigger one? For starters, interest rates would have to keep rising. That is not hard to imagine. If the Iran war drags on, and political dysfunction worsens, the ten-year Treasury could rise by another percentage point, pushing the federal deficit higher. And if the government still fails to respond, things could start to snowball. Eventually, its choices could narrow to some combination of high inflation, financial repression, default, or austerity. Even a serious scare would limit how aggressively policymakers could respond to future recessions and financial crises. High debt could also weigh on growth, as it has in other advanced economies.

How bad things get will depend above all on whether the administration can regain bondholders’ confidence without paying an enormous political price. The trouble is that debt crises tend to erupt precisely when governments are already stretched thin, both economically and politically.

The US has the resources to deal with its fiscal issues. What it lacks is the political appetite to make the necessary painful choices. And that may not change until a debt crisis forces voters to rethink their priorities. On its current trajectory, however, the country has no room for anything to go wrong, whether it’s a war, an environmental catastrophe, or a large-scale cyberattack requiring a massive increase in government spending.

Most advanced economies face some version of the same debt problem, without the benefit of issuing the world’s reserve currency. The United Kingdom is particularly exposed. Unlike debt-challenged France, it cannot fall back on economically stronger Germany. Canada is in much better shape, which is good, because who knows what the Trump administration might ask for in return if Canada sought financial help. As for the US, it has no one to turn to, except perhaps the International Monetary Fund—and even then, mostly for moral support.


*Kenneth Rogoff, a former chief economist of the International Monetary Fund, is Professor of Economics and Public Policy at Harvard University and the recipient of the 2011 Deutsche Bank Prize in Financial Economics. He is the co-author (with Carmen M. Reinhart) of This Time is Different: Eight Centuries of Financial Folly (Princeton University Press, 2011) and the author of Our Dollar, Your Problem (Yale University Press, 2025). Copyright: Project Syndicate, 2026. www.project-syndicate.org

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4 Comments

No consideration that economies may have reached their zenith.

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Has Rogoff Found the Fiscal Trap - But Not the Escape Route?

His warning about the US fiscal trajectory is difficult to argue against. Debt is compounding, interest costs are exploding, refinancing is becoming progressively more expensive, and the extraordinary assumption underlying Washington’s strategy appears to be that economic growth, increasingly turbocharged by AI, will somehow outrun the arithmetic.

But there is one paragraph in Rogoff’s argument that really jumped off the page at me.

He says the US has the resources to deal with its fiscal problems, but lacks the political appetite to make the necessary painful choices. He then warns that America now has virtually no room for anything to go wrong - a war, environmental catastrophe, cyberattack, or some other event requiring another massive increase in government expenditure.

There is just one rather awkward problem - things are already going wrong.

The US is already running enormous fiscal deficits during supposedly reasonable (headline) economic conditions. Interest expenditure has already crossed $1 trillion annually. Debt is already being refinanced into a dramatically more expensive interest-rate environment. America is already involved in enormously expensive geopolitical commitments.

And sitting on top of all this is possibly the largest concentrated capital wager in modern American economic history - AI. I would not claim that we can know with certainty who ultimately "wins" the AI race. But the economic asymmetry should be deeply uncomfortable.

America is throwing staggering quantities of capital at data centres, chips, electricity generation and transmission infrastructure on the assumption that the resulting productivity gains will justify the investment.

Yet China is simultaneously developing competing AI capability inside an economy with cheaper energy, cheaper physical infrastructure, enormous manufacturing depth and a financial system capable of directing credit strategically toward productive national priorities.

So perhaps the important AI race isn't simply who builds the biggest model - maybe it is who produces the greatest productive return from each dollar of capital and each kilowatt-hour of energy consumed?

That brings us directly back to PGDP - and to what I have called my Holy Grail Three Pillar approach.

#1 My first pillar is productive credit creation - create credit primarily for productive enterprise, infrastructure, energy, manufacturing and SMEs rather than continually feeding property speculation, financial engineering and asset inflation.

#2 The second is public-utility banking - recover for society a meaningful proportion of the enormous income presently generated through the privilege of money and credit creation (AKA unearned economic rent), while directing that credit toward expanding the productive economy.

#3 And the third is fundamental tax reform, including a broad low-rate financial transaction tax, shifting the burden away from productive labour and enterprise and toward the enormous transactional flows generated throughout the financial economy.

Rogoff's prescription remains largely trapped inside the conventional framework. Eventually taxes must rise, spending must fall, growth must accelerate, or some painful combination of all three must occur.

But why accept the monetary architecture producing the problem in the first place?

Put those three pillars together and something rather important changes - instead of continually creating additional debt claims against tomorrow's productive economy and then demanding ever more "painful choices" from taxpayers to service them, you begin rebuilding the productive economy that ultimately gives money, debt and government finances their value in the first place.

Clearly Rogoff is right about something extremely important - America really does possess extraordinary resources. It possesses energy, agriculture, technology, universities, entrepreneurs, capital, labour and one of the world's great productive inheritances - the problem isn't fundamentally a shortage of resources.

It is an extraordinarily inefficient monetary architecture for mobilising them, and perhaps that is the most curious omission in the article.

If your financial system repeatedly produces escalating private debt, escalating public debt, asset inflation, financial rent extraction by private monopolies and trillion-dollar interest bills, eventually we should stop asking taxpayers how much more pain they are prepared to endure.

Perhaps we should start asking whether we have designed the monetary system properly in the first place.

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As Warren Buffet says, never bet against the USA economy. 

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Economist on idiot mode. 

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