By Kenneth Rogoff, Professor of Economics and Maurits C. Boas Chair of International Economics at Harvard University, former Chief Economist at the International Monetary Fund, and Member of SAGE's Academic Committee
Aug 19, 2025 — Foreign Affairs (Opinion)
For much of the past quarter century, the rest of the world has looked in wonder at the United States’ ability to borrow its way out of trouble. Again and again, under both Democratic and Republican administrations, the government has used debt more vigorously than almost any other country to fight wars, global recessions, pandemics, and financial crises. Even as U.S. public debt rapidly climbed from one plateau to the next—net debt is now nearing 100 percent of national income—creditors at home and abroad showed no signs of debt fatigue. For years after the 2008–9 global financial crisis, interest rates on Treasury debt were ultralow, and a great many economists came to believe that they would remain so into the distant future. Thus, running government deficits—fresh borrowing—seemed a veritable free lunch. Even though debt-to-income levels jumped radically after each crisis, there was no apparent need to save up for the next one. Given the dollar’s reputation as the world’s premier safe and liquid asset, global bond market investors would always be happy to digest another huge pile of dollar debt, especially in a crisis situation in which uncertainty was high and safe assets were in short supply.
The past few years have cast serious doubt on those assumptions. For starters, bond markets have become far less submissive, and long-term interest rates have risen sharply on ten- and 30-year U.S. Treasury bonds. For a big debtor like the United States—the gross U.S. debt is now nearly $37 trillion, roughly as large as that of all the other major advanced economies combined—these higher rates can really hurt. When the average rate paid rises by one percent, that translates to $370 billion more in annual interest payments the government must make. In fiscal year 2024, the United States spent $850 billion on defense—more than any other country—but it spent an even larger sum, $880 billion, on interest payments. As of May 2025, all the major credit-rating agencies had downgraded U.S. debt, and there is a growing perception among banks and foreign governments that hold trillions of dollars in U.S. debt that the country’s fiscal policy may be going off the rails. The increasing unlikelihood that the ultralow borrowing rates of the 2010s will come back any time soon has made the situation all the more dangerous.
There is no magic fix. U.S. President Donald Trump’s efforts to place the blame for high rates on the Federal Reserve Board are deeply misleading. The Federal Reserve controls the overnight borrowing rate, but longer-term rates are set by vast global markets. If the Fed sets the overnight rate too low and markets expect inflation to rise, long-term rates will also rise. After all, unexpectedly high inflation is effectively a form of partial default, since investors get repaid in dollars whose purchasing power has been debased; if they come to expect high inflation, they will naturally require a higher return to compensate. One of the main reasons governments have an independent central bank is precisely to reassure investors that inflation will remain tame and thereby keep long-term interest rates low. If the Trump administration (or any other administration) moves to undermine the Fed’s independence, that would ultimately raise government borrowing costs, not lower them.
Read More: https://www.foreignaffairs.com/united-states/americas-coming-crash-rogoff