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The US national debt just crossed 100% GDP for only the second time ever outside of a world war. Three days ago, Jamie Dimon, CEO of JPMorgan Chase, the largest bank in America, sat down at an investment conference in Oslo and told a room full of institutional investors that a bond crisis is coming.
In January, Ken Griffin, the CEO of Citadel, stood at Davos and warned that if Americans' fiscal house is not in order, bond vigilantes can come out and re- re-check their price. Two of the most powerful people in global finance, the same message three months apart, and most people your age have no idea what they're actually talking about or why it matters to them personally.
So, welcome back everyone. I'm Michael and this is The Cool Analyst. Today, I want to walk you through exactly what this number means, where it came from, what history says happens next, and what you actually do about it. So, let's go ahead and get into it. What is debt-to-GDP and why does it matter more than the headline $36 trillion figure?
GDP is the total economic output of an entire country in a single year. Every salary paid, every product manufactured, every service sold, everything. When your national debt equals your GDP, you owe one full year of your entire economic output to creditors. Right now. Debt held by the public, the number economists actually watch, not the gross number that includes what the government owes itself, hit $30.3 trillion at the end of fiscal year 2025, exactly 100% of GDP.
And every single CBO projection shows it's climbing from here without reversal. It's set to reach 107% by 2029, 136% by 2045, and 150% 56% after. That's not a fringe prediction from a doom blog. That is the Congressional Budget Office, the non-partisan official scorekeeper of the federal government.
And their baseline projection, without a recession, without new war, without another pandemic, just current law on autopilot. And there's a number inside that projection that people almost never talk about. Rising debt under current law will reduce average American income growth by 16% between now and 2055.
Reducing income in that year by nearly 6% compared to a world where we stabilize the debt today. That is your career arc. Your peak earning years, the salary your kids start with. This didn't happen overnight, and it didn't happen by accident. After World War II, US debt hit 106% of GDP in 1946. Then something remarkable happened.
Over the next 35 years, it worked all the way back down to 34%. How? It's pretty simple. Growth just outpaced borrowing. The post-war economic boom was real. Defense spending fell dramatically once the war ended. Political will existed to run smaller deficits. That combination works. History proved it conclusively.
And then we got to the 1980s, which tax cuts came. So deficits started climbing. 2001, two wars put on the national credit card with no new taxes to fund them. And then you had 2008, the financial crisis, which we had an emergency stimulus. 2017, more tax cuts and a jobs act. Then COVID, roughly $5 trillion in emergency spending over 18 months.
Each decision had a justification. Some were clearly the right call. You do not let the financial system collapse over a balance sheet concern. You do not let people starve during a pandemic pandemic over a deficit worry. But here's what nobody says clearly enough. The federal government currently spends $1.33 for every dollar of revenue it collects.
The 2025 deficit was $1.8 trillion, 5.9% of GDP. The 50-year historical average deficit is 3.8% of GDP. We are running deficits more than 50% above the historical average. And now recession year with relatively low unemployment. This is not emergency spending anymore. It's structural. It's just how we operate now.
About bankruptcy, it happens two ways, slowly then all at once. The interest payment data is where you can see the slowly part already in motion. So, the federal government spent $1 trillion on interest payments in the fiscal year 2025. $1 trillion just interest, not paying down principal, not reducing the debt, just keeping current and old borrowing.
Net interest is now the second largest government expenditure behind only Social Security. We spend more on interest than we do on Medicare, national defense, Medicaid, veteran benefits, food assistance, transportation, and science combined. So, just read that again. More than defense, more than Medicare, just interest.
And the bad thing too is it's accelerating. CBO projects net interest payments with a total of $16.2 trillion over the next decade, rising from $1 trillion 2026 to $2.1 trillion by 2036. Debt services cost double from under 500 billion in 2022 to $1 trillion today. In 3 years. And the projection says it doubles again over the next 10.
Think about what that does structurally. The money going to interest payments, is it going to infrastructure? is it going to defense, is it going to healthcare research, is it going to anything with a return. It's just gone. Every year the interest piles, it just grows and the pile available for everything else shrinks.
That's not political, it's just simple math. Here's the piece that I think is generally underappreciated and it's the most urgent near-term risk in this whole story. The government needs to sell bonds constantly to fund the annual deficit, to roll over maturing old debt. All of that requires buyers, investors willing to purchase these US Treasury bonds.
And the buyer base is changing in a way that matters enormously. A Wharton finance professor said it just this year. The most important thing about debt is you need someone to buy it. We used to count on China, Japanese investors, and the Federal Reserve. All those players are slowly going away and are actually now selling.
China, Japan, the Fed, the three biggest historical buyers of US government debt, pulling back, are actually selling right now. At the same moment we need to issue more debt than at any point in peacetime history. Basic supply and demand, more supply, less demand, prices fall, yields rise. And higher Treasury yields pull interest rates up across the entire economy.
Mortgages, car loans, student loans, corporate borrowing, credit cards, you name it. Ken Griffen pointed at Japan specifically as a cautionary tale at Davos in January. Japan's bond market sold off, yields hit all-time highs, and Griffin's point was direct that that is what happens when bond vigilantes decide a country's fiscal house is not in order.
They come out and react their price and it usually happens pretty fast. The UK lived this in 2022. Prime Minister Liz Truss announced unfunded tax cuts. The 30-year gilt yield is spiked 200 basis points in a month. Pension funds faced margin calls they couldn't meet. The Bank of England said a number of pension funds were days from collapse.
The central bank had to intervene as emergency buyer. Truss resigned 45 days into her tenure. 45 days. That's how fast it moves when the market decides it doesn't want your debt. So, here's what history says when this happens, and I have three historical cases with three different outcomes. So, the first one is the United States post World War II, which I mentioned earlier in this video.
Debt was at 106% and the outcome, 35 years of declining debt as growth outpaced borrowing. Growth rate averaged nearly 4% annually. Defense spending fell, political will existed. The optimistic case. It requires all three conditions at the same time. Right now, we have none of them clearly. The second case, Japan.
1990s onward. Debt declined after crisis and never came back down. Now, over 260% of GDP. Two lost decades. A stock market that took 34 years to recover its peak. A central bank buying stocks directly just to keep the system running. Interest rates at zero so long entire generation never experienced a normal rate environment.
The slow de- slow deterioration case, right? And then the third case, Greece. This was 2010. Debt was at 130%. Lost access to bond markets and required an IMF bailout. Unemployment hit 27% and that's the crisis case. So, right now, the US has structural advantages Greece never had. Reserve currency, the deepest capital markets in history, the most productive economy ever built.
Those advantages buy real runway. They don't repeal the math math. The question isn't whether the trajectory is sustainable. It certainly isn't. The question is how much runway we have before the slow is slowly becomes all at once. So, what can you do about this? I can think of four things, practical, not doom.
So, own assets, not cash. Governments carrying unsustainable debt historically resolve it through some combination of growth, inflation, and financial repression. Two of those three outcomes punish cash savers and benefit asset owners. So, equities, real estate, inflation protected instruments, that's historically a correct positioning.
The debt trajectory makes this more urgent. Max your Roth IRA now. The most likely long-run policy response to this debt level is eventually higher taxes. Not this year, maybe not this decade, but the math forces it. Paying taxes at today's rates, locking in a Roth contribution right now, is a direct hedge against whatever Congress decides to do in 2035 or 2040.
They can change future tax rates. They cannot retroactively touch a Roth already funded. Understand your rate environment. The structural pressure from this debt trajectory keeps rates higher for longer than most people expect. If you're planning to buy a house, finance anything, start a business, price your decisions accordingly.
Assumptions that rates normalize to pre-2022 levels anytime soon may be exactly wrong. Don't catastrophize, but don't ignore it. The US has real advantages that buy runway. Even Dalio, who calls this debt death spiral, says we'll get through it. So, the question is the cost of getting there and the most people who will feel that So the last thing I want to say is the US has a real advantage that buys runway.
Even Dalio who calls this a debt death spiral says we'll get through it. The question is the cost of getting there and the people who will feel that most directly are young people in their working years when these projections materialize. That's us and knowing it exists is the entire advantage. Things up, I just want to say again debt held by the public hit 100% of GDP at the end of fiscal year 2025.
Only the second time in history outside of a world war. Interest payments crossed $1 trillion and exceed what we spend on defense, Medicare and Medicaid individually. CBO projects that we're going to hit 150% by 2055. The buyer base for US Treasuries is shrinking at the exact moment supply is rising and two of the most powerful financial executives in the world are saying publicly that a bond market reckoning is coming.
The paper markets are mostly calm right now. The politicians are mostly quiet but the people actually managing trillions of real capital are saying something very different. One of those groups is right and in every other period of financial history it has always been the people closest to the money who saw it coming first.
If you want me to go deeper on what an actual US bond market crisis looks like, the warning signals, the domino sequence, what it means for stocks and mortgages specifically, drop it in the comments. New video every week. Like and subscribe and I'll see you in the next one.
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