A recent Bloomberg Opinion piece warned that U.S. policymakers are pulling the country toward a fiscal black hole. The report behind that warning—a new Brookings Institution chartbook—gives the bears plenty to work with.

Debt held by the public is already around 101% of GDP. The World War II peak was 106% in 1946. Under Brookings’ current-policy baseline, debt reaches 137% of GDP by 2036. 

Those numbers have investors worried about reaching a breaking point. And the only potential options are default or a surge of inflation. 

Right now, the federal government is in an ugly situation. The deficit is expected to remain large and the federal budget is giving policymakers less room to maneuver.

However, ugly does not automatically mean unmanageable.

The real pressure point investors should be looking at instead is debt service.

The federal government brought in roughly $5.2 trillion in receipts last year. Brookings projects receipts will reach $5.5 trillion in 2026.

That is the largest tax base in the world. It also is not enough to cover Washington’s spending path right now.

The U.S. is expected to spend $7.5 trillion this year or a deficit of about $2 trillion.  That’s right in the middle of where it’s been the past few years, going as low as $779 billion in 2018 and as high as $3.1 trillion in 2020. 

The Brookings Institute report warns that, if current federal policy stayed in place for the next decade, the annual deficit is on track to surpass $4 trillion by 2036.

That sounds scary, but a borrower does not get into trouble simply because the loan balance crosses a round number.

The trouble starts when the borrower can no longer service the debt.

That makes interest expense the number investors should watch first. Brookings estimates net interest costs were $970 billion last year. 

That’s less than one-fifth of federal receipts. And the good news is, even if the government has to borrow more, it can do so for cheap. 

Washington is still borrowing at 3.4% in 2026. The inflation-adjusted rate is about 0.5%.

At today’s 3.4% average cost, every $1 trillion of new debt adds about $34 billion of annual interest expense. In a roughly $30 trillion economy, that is not an immediate breaking point.

Economic growth changes the equation.

Debt-to-GDP has two pieces. The debt matters, and that’s what investors mostly pay attention to. But GDP matters, too.

Straight-line projections make the debt story look like a doomsday counter. But economies do not move in a straight line. 

The truth is, there’s no way of knowing what will happen to the U.S. over the next decade. However, if the deficit does reach $4 trillion, that’s not an issue if the economy grows to match it. 

Brookings’ chartbook shows tax receipts staying near normal historical levels as a share of GDP in this same scenario. In other words, it expects that new borrowed money will help grow the economy enough to pay off the higher interest load. 

As long as that’s the case, a higher debt number won’t cause major problems. However, this doesn’t mean Washington shouldn’t take the responsible path—a move toward a smaller deficit.

That said, investors have to separate fiscal discomfort from an investable signal. The U.S. has used debt through wars, recessions, infrastructure build-outs, research programs, energy systems, and crisis response.

Borrowing to grow leaves the economy with greater productive capacity. And as long as the U.S. keeps servicing its debt and the economy keeps expanding, markets can still reward productive companies with strong cash flows and real earnings growth.

The debt clock may be flashing, but it is not, on its own, a sell signal.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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