America's debt debate is back in the headlines...
A recent Bloomberg Opinion piece warned that U.S. politics 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.
This year, debt held by the public is about 101% of GDP. The all-time high was 106% in 1946. Under Brookings' current policy baseline, public debt will reach 137% of GDP by 2036.
To put that in dollar terms: today's public debt is roughly $31 trillion. Brookings expects it to climb toward $56 trillion by 2036.
Those numbers have folks worried that we're reaching a breaking point... and that the only potential solutions are a default or an inflation surge.
Right now, the federal government has backed itself into a corner. The deficit doesn't seem to be shrinking anytime soon. And the federal budget is giving policymakers less room to maneuver.
But that doesn't automatically mean it's unmanageable.
The real pressure point is debt service...
The federal government brought in roughly $5.2 trillion in tax revenue last year. Brookings projects that number will reach $5.5 trillion this year.
That figure makes the U.S. the largest tax base in the world. But that's still not enough to cover Washington's current spending path.
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 has been for the past few years. The deficit was as low as $779 billion in 2018 and as high as $3.1 trillion in 2020.
And the Brookings report warns that if current federal policy remains the same for the next decade, the annual deficit will surpass $4 trillion by 2036.
That sounds scary... but just because the deficit crosses a round number doesn't mean the borrower is automatically in trouble.
The trouble starts when the borrower can no longer service the debt...
That's why it's so important to keep an eye on interest expense.
Brookings estimates net interest costs were $970 billion last year. That's less than one-fifth of tax revenue. So the U.S. has plenty of cash to cover the interest on our mountain of debt.
And the good news is, even if the government has to borrow more... it can do so for cheap.
Washington is still borrowing at an average rate of 3.4%. The inflation-adjusted rate is about 0.5%. Based on that average rate, every $1 trillion of new debt adds about $34 billion of annual interest expense.
In a roughly $30 trillion economy, that's not an immediate breaking point.
That brings us to the piece of the debt equation people forget about...
We're talking about GDP.
The debt-to-GDP ratio has two pieces. Everyone tracks the debt as it climbs. But GDP matters just as much.
A growing economy generates more tax revenue and reduces the ratio... even without paying down a single dollar of principal. In other words, you don't have to shrink the debt if you can grow GDP fast enough.
Straight-line projections make the debt story look like a doomsday counter. But economies don't move in a straight line.
The truth is, we don't know what will happen to the U.S. over the next decade. But if the deficit does reach $4 trillion, that's not an issue if the economy grows to match it.
Brookings' chartbook shows tax revenue staying near 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.
Sure, the responsible path is to move toward a smaller deficit...
But investors have to learn when to ignore their fiscal discomfort. The U.S. has used debt through wars, recessions, infrastructure build-outs, research programs, energy systems, crisis responses, and more.
Borrowing to grow leaves the economy with greater productive capacity.
As long as the U.S. keeps servicing its debt and the economy keeps expanding, markets can still function as they should.
The debt clock is flashing. But at the moment, it's still not a sell signal.
Regards,
Joel Litman
May 11, 2026
