Red Alert: Debt Crisis Ahead!
America is 249 years old today. We may not make 250 without a debt crisis that radically transforms our republic in ways hard to fathom.
Since 1776 America has overcome many existential crises. We now face an imminent danger as treacherous as the Revolutionary War, Civil War, Great Depression, World War II and Cold War. America likely will survive the coming debt crisis but only at a terrible cost that rends its social fabric. It will take at least ten years of hardship to deleverage our economy and to purge all the excess debt.
A lot has happened recently and there is much more clarity about both the timing of the crisis and the government’s initial response. We also know the results of DOGE, the Trump tariffs and the misnamed Big Beautiful Bill.
Present State of the Debt Crisis
The crisis began several months ago but has not reached critical mass. All it will take to go nuclear is a triggering event, i.e. the Minsky Moment.1 We know the crisis has begun because it is impacting our economy in many ways including:
There is weak demand for Treasury debt - especially longer-term bonds. The Fed has been forced to buy significant tranches to stabilize the market.
Moody’s joined S&P and Fitch in downgrading US government debt.
The point-of-no-return debt to GDP ratio has been breached.
Interest rates are higher than they otherwise would be.
We are unable to spend what is needed for defense.
Dire warnings have come from top economists and bankers.
Prominent Americans Sounding Alarm
Until recently, I and a few others have been lone voices in the wilderness warning of a certain and imminent debt crisis. Just since the beginning of 2025 the voices have turned into a cacophony. Following are some of the urgent warnings.
The richest man in the world and one of the smartest, Elon Musk, has called the debt crisis a “financial emergency” and predicted dire consequences such as inflation spikes, job losses, systemic collapse and debt slavery. His motivation for heading DOGE was to try and save America from certain ruin.
The DOGE wunderkinds believed a crisis could be averted only by taking a chainsaw to federal spending. That is the only reason they were willing to volunteer without pay, work insane hours, endure constant criticism and be separated from their families for long periods of time.
Ray Dalio2, who along with Warren Buffet is the most successful investor of the past half century, has warned the US faces a debt crisis within 3 years. He has said we are approaching a critical inflection point and describes the situation as an “economic heart attack” and a “debt death spiral”.
Jamie Dimon, CEO of JPMorgan Chase, is acknowledged to be the top US banker. Dimon warned “You are going to see a crack in the bond market; it’s going to happen”. Dimon went on to say “It could happen in 6 months or 6 years”.
Jeff Gundlach of DoubleLine Capital said the debt and interest have become untenable and US bonds no longer are legitimate risk-free investments. He likened the US today to just before the 2006 Great Financial Crisis.
Peter Orszag, CEO of Lazard and former US budget director, said he’s worried because “The (US debt crisis) wolf is lurking much closer to our door”.
Hedge-Fund manager Paul Tudor Jones said “Those who know the numbers are unsustainable are happy to suspend disbelief while the show continues”.
Others warning of a debt crisis include Nobel Laureates, BlackRock CEO Larry Fink and former Treasury Secretary Lawrence Summers.
When Will Debt Crisis Hit the Tipping Point?
The crisis could attain critical mass as early as tomorrow, or at any time during the next few years. I consider Ray Dalio’s timeline the most likely, i.e. within 3 years. Be cautioned however by the alarm issued by Kenneth Rogoff, former IMF Chief Economist and an authority on debt crises, who warned:
“Debt crises are never a matter of arithmetic. Almost every country default - either through outright default or high inflation - occurs long before debt calculus forces it to.”
There is more clarity about timing than there was six months ago. When Trump took office there was a faint hope DOGE could change the trajectory of spending as they aimed to cut $1 trillion of spending. Trump said his tariffs would bring in another $1 trillion a year and presto - the $2 trillion annual deficit would disappear.
Instead, DOGE cut only $175 billion and tariffs are bringing in less than $200 billion. Moreover, many of DOGE’s cuts are not codified and may never happen. Similarly, much or all of the tariffs may disappear once trade deals are negotiated. The so-called Big Beautiful Bill adds $300 billion per year to the already existing deficit and negates virtually all the potential deficit reduction from DOGE and tariffs.
Recent Treasury bond auctions have seen tepid demand. Foreigners have curtailed buying. Longer-dated bonds are not selling and buyers are demanding higher interest rates. The Fed has been forced to step in and buy large tranches of the bonds.
The political backdrop is an unmitigated disaster. Republicans claim to be deficit hawks, but act like chickens. Democrats are beyond the pale, refusing to cut the most blatant waste, fraud, abuse and corruption, while demonizing every proposed cut as leading to death and suffering. Musk fought the swamp and the swamp won. Never again will there be such an opportunity; Trump and DOGE were America’s last best hope. Now it is clear politicians will not act until there is a crisis majure.
What Happens After the Minsky Moment
Thanks to Ray Dalio’s work as revealed in his book, we have more clarity about what will happen once the debt crisis hits full force. It is virtually certain the Fed will monetize the debt, i.e. print money. This, of course, will lead to high inflation and possibly hyperinflation. This expedient will work only for a short time.
Moderate inflating will not solve the problem; it is only a short-term fix to prevent chaos. What happens next is terra incognita hic sunt dracones, or in English, unknown land - here be dragons. The government response must effectively deleverage the economy by purging all excess government debt.
There are several ways deleveraging can occur: (1) hyperinflation; (2) extending maturities; (3) seizing private pensions, IRAs and 401(k)s; (4) restructuring; (5) pausing or accruing interest payments; (6) repudiation; (7) huge tax increases along with adding VAT and/or carbon taxes; (8) drastic cuts to spending; (9) default; and most likely (10) some combination of the above.
Higher taxes are self defeating as that slows the economy and thereby reduces tax collections. America does not have a revenue problem; it has a spending problem; hence, the heavy lifting must come from spending cuts. To deleverage the economy, cuts of the magnitude of 20% to 30% will be required, specifically including Social Security, Medicare and Medicaid and other health programs. Further, the reduced spending must be sustained for many years.
How and When the Crisis Ends
The crisis will not end until the economy is deleveraged and all excess debt is purged from the system. This is likely to take about ten years.
The coming debt crisis is unlike all the other existential crises America has faced. The Revolutionary War, Civil War, World War II and the Cold War were necessary to save America. The Great Depression could not (except in hindsight) be averted. In sharp contrast, the debt crisis has been foreseeable for years and easily could have been averted. It is not hyperbole to assert the debt crisis is a voluntary crisis.
Both individually and as a nation, we are the sum total of the choices we make. We have consciously chosen to bankrupt the most prosperous nation in the history of mankind. We mortgaged the future and stole from our children and grandchildren. We did this not to save our nation from conquest, natural disaster or economic ruin, but to finance a 25-year Bacchanalia of spending, debt and deficits. That is why the coming crisis is not an economic crisis. It is a moral crisis.
The Minsky Moment is an event resulting in a sudden collapse of asset prices and economic stability and triggering a wave of defaults, deleveraging and panic selling.
Dalio’s recent book “How Countries Go Broke” details why the US is going broke. He compares America’s present situation to debtor nations during the past 500 years.