The National Debt Crisis

Recently, I wrote a column titled The Truth About Tariffs that explained what they are, how they work, and why aggressive use of tariffs does not benefit the U.S., or anywhere else for that matter. It was NOT a political perspective, as purely economic as I could make it, but in the highly charged and partisan environment we live in these days, I approach such subjects with caution.

So I was pleasantly surprised to receive a number of responses from readers – all positive – that said in various ways, “Thank you for setting the record straight.”

A couple of the people who wrote in said they would like to see a similar column about the national debt. That made sense to me. While tariffs have unquestionably been the top financial story of 2025, the exploding national debt has been a growing story for the past two decades and is only getting bigger. But, the concern and coverage of the issue has not been even remotely commensurate with the gravity of the debt catastrophe that looms over the country.

I’m not so full of myself to think that one little column by Ed Coburn is going to change that situation. But we have to start somewhere. And as a service to Cabot readers, who may need to be increasingly cognizant of the debt’s impact on the current and future investing environment, I think this is an important subject to have clearly on your radar.

The U.S. national debt, exceeding $36.2 trillion as of May 2025, represents the greatest and most pressing economic challenge of our time. While deficits can stimulate growth during crises, unchecked debt poses severe risks to economic stability, government functionality, and global financial systems.

Not unlike personal debt, government debt isn’t all bad. Just like borrowing money to start a business, government debt can provide an economic stimulus by funding critical initiatives during recessions, such as the 2008 financial crisis bailouts ($700 billion) and COVID-19 relief ($5 trillion). These measures stabilize demand, prevent collapse, and spur recovery.

In addition, like a mortgage to buy a house, deficits enable infrastructure, education, and R&D spending. You could wait until you had saved enough to buy the house for cash, but in the intervening years, you’re paying a lot more in rent and missing out on the benefits of home ownership.

For example, the 2021 Infrastructure Investment and Jobs Act allocated $1.2 trillion to modernize roads, broadband, and energy grids. Such infrastructure can provide a foundation for economic benefits for decades, and it may be reasonable to have the future beneficiaries of that investment incur the cost for that.

The growing government debt is, of course, not free. Debt servicing consumed $881 billion of federal revenue in 2024, rivaling defense spending. By 2035, interest costs could hit $1.8 trillion annually, crowding out other priorities.

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In addition to crowding other priorities, extensive government borrowing competes with private sector loans, raising borrowing costs for corporations. The Congressional Budget Office (CBO) estimates that each 1% rise in debt-to-GDP reduces private investment by 0.33%.

And persistent deficits may force tax hikes or money printing, fueling inflation. The 2022–2024 inflation surge (peaking at 9.1%) was largely attributed to pandemic-era stimulus. High debt limits the government’s ability to respond to crises (e.g., recessions, pandemics, even major catastrophes). During the 2023 debt ceiling standoff, the U.S. credit rating was downgraded, spiking Treasury yields to 5.84%.

As I mentioned, asking future generations to cover some of the cost for infrastructure investments isn’t unreasonable. That’s very different from asking future generations to fund the cost of the government providing routine services now. Not only is that unfair on its face it means a combination of higher taxes and reduced services to pay down the debt. The CBO projects debt-to-GDP will reach 156% by 2055, far above the 2025 level of 100%.

The U.S. national debt is a double-edged sword: essential for crisis response but increasingly unsustainable. In our personal lives, we know that taking on debt makes sense for infrastructure (house, car for transportation, education) and in case of an emergency (the roof blows off your house, your septic system fails). It is not a good idea as a way to fund things that don’t have an economic impact (parties, vacations, expensive clothes, expensive cars beyond reasonably meeting your transportation needs). And it is a really bad idea to fund operating expenses from a loan, such as paying your electric bill, buying food, paying rent, etc.

Otherwise, people should think about funding their lifestyle on a pay-as-you-go basis. This means adjusting income and expenses until the former meets or exceeds the latter.

While deficit spending can drive growth, unchecked borrowing risks inflation, market instability, and generational inequity. Addressing the debt requires bipartisan fiscal reforms, investment in productivity, and reevaluating spending priorities to ensure long-term stability. US deficit spending started to become a more frequent occurrence in the 1980s.

Perhaps in response to this development, in 1986, Grover Norquist, who founded the Americans for Tax Reform advocacy group, began to push the Taxpayer Protection Pledge in which legislators and candidates agreed to oppose all tax increases. Politicians who crossed this pledge found themselves in the spotlight and often facing a well-funded challenger who learned the importance of adhering to the pledge. Unfortunately, the pledge didn’t say anything about balancing the budget so, not surprisingly, we didn’t do that.

As noted above, a deficit is a function of failing to match revenues and expenses. If your refuse to change your income but keep spending more you’re going to have a deficit, and that accumulates each year into the growing debt we have seen over the last 20 years. Norquist is a hero to many, but by so effectively taking discussion of new revenue off the table, he almost single-handedly planted the seeds for our current debt crisis.

Impact on Markets and the Economy

Rising debt increases Treasury supply, pushing yields upward. The 10-year Treasury yield rose from 1.9% in 2021 to 4.5% in 2024 as debt surged. In turn, these higher rates raise mortgage, car loan, and business borrowing costs, slowing economic activity.

In the short term, deficit spending can boost corporate profits. We saw this in action in 2020 and 2021 with the government stimulus checks, which enabled a big increase in consumer spending. But in the longer term, such a stimulus drives inflation and rate hikes that are likely to trigger a market correction. This is exactly what we saw in 2022 when the S&P fell 25% in response to the Fed raising rates to combat inflation.

Because of the dollar’s unique status as the global reserve currency (60% of global reserves are in U.S. dollars), U.S. debt instability risks worldwide financial crises.

As the debt grows, concerns about risk grow too. For this, and other reasons, the bond rating agencies have now all downgraded their credit rating for the U.S. This is likely to undermine the status of the dollar as the global reserve currency, reducing demand for and the value of the dollar. A weaker dollar makes imports more expensive, driving inflation in the U.S. Higher interest rates, over time, reduce corporate profits, lower the equity value of companies, and slow overall economic growth.

I hope it goes without saying that simply printing more money to pay down the debt should be off the table. This has been tried many times throughout history, and it drove hyperinflation, often with truly catastrophic consequences (Germany between the World Wars, Brazil through the 1980s and early 90s).

Impact on Government Operations

Interest costs this year have just edged out defense spending as a percent of government spending. Spending funds to fund the debt means reduced funds for infrastructure improvements, healthcare, education, climate initiatives and other government services.

Sources: USAFacts, US Treasury Fiscal Data, Congressional Budget Office

Because Congress has created the concept of a debt ceiling, separate from the idea of spending, it has created a situation where we have seen one party try to use that as leverage, resulting in standoffs (e.g., 2011, 2023) that have shut down or threatened to shut down the government. The resulting disruption to government operations creates additional expense and delays in delivering services, delayed payments, and harm public and global trust that can persist long after the standoff is resolved.

And, a government that has an enormous debt and is already running a deficit will have less flexibility in the face of a severe market event. The impact of an inadequate response could significantly extend the duration and severity of a crash.

Impact on Individuals

The rising debt means the government must pay higher interest to attract buyers for additional bond issues. New bonds offer higher yields, but existing bonds lose value. For retirees relying on bond ladders or bond funds, this can mean capital losses. Those “safe” investments can start to look less safe.

In addition, equity markets often react negatively to credit downgrades or debt ceiling crises, as seen after the S&P downgrade in 2011 and again with the recent Moody’s downgrade in 2025. This can cause the value of your 401(k), IRA, or other retirement accounts to drop—sometimes sharply and suddenly.

As mentioned earlier, the rate charged for consumer loans affects the cost of housing, cars, education, and credit cards to name the most notable categories. This, in turn, drives inflation, which reduces the purchasing power of retirement savings by making everything from food, to energy, to healthcare more expensive. That reduces consumption, reducing demand and slowing economic activity. It’s not a good cycle.

At the same time, the impact on the government is continued pressure to reduce or eliminate provision of services. “Stealth” tax increases like raising the eligibility age for social security, trimming Medicare coverage, making certain benefits taxable as income further erode buying power.

What Can We Do?

The national debt is $36.2 TRILLION! And it and grew by $1.7 trillion last year, even in a historically strong economy, and one in which the stock market saw a gain of more than 24%.

The UPenn Wharton School projects the U.S. has two decades before our national debt becomes irreversibly unsustainable. If investors lose confidence, or if interest rates spike for other reasons, that timeline will only be accelerated.

What, if anything, do we do now? We’ve dug ourselves an awfully big hole. How do we pay off our debt?

Even if we stopped deficit spending immediately, the debt would continue to grow because of the effect of compounding interest.

At the highest level, it’s pretty simple. We need to adjust government revenue and government spending so that the former exceeds the latter.

That’s much easier said than done.

Let’s look at expenses. More than 70% of federal spending goes to mandatory programs (Social Security, Medicare, and Medicaid) and interest. That leaves less than 30% for everything else – and defense makes up almost half of that at 13% of overall expenses.

According to the Congressional Budget Office, we need a combined 2.2% of GDP (which is about $600 billion in 2025) in the form of savings or increased taxes just to stabilize our budget. For perspective, $600bn is a bit under 10% of the Federal budget. Remember that less than 30% of the budget is discretionary, so we would need to cut a third of that. And that just gets us stable.

So, there is no practical way to address this crisis without including mandatory programs as part of the discussion of potential spending cuts. One political party has made this a red line, but we have to get past that.

To begin to pay down the debt would mean even further cuts making it even more unattainable without reductions to mandatory spending and defense. The bottom line is it is virtually impossible, and politically sensitive, to do what needs to be done with spending cuts alone.

Now let’s look at the revenue side. This is the side that has been taken off the table by the other political party for the past four decades, triggering what has become our debt crisis.

U.S. tax rates are the lowest they have been this century. For the top 1%, tax rates are the lowest they’ve been since 1960. The following chart shows current day tax rates from other peer countries around the world. To help you out, I’ve highlighted in green the lowest tax rate in each category. See if you can detect a pattern.

Since other developed countries generally fund healthcare through taxes, we’ve added a line for the US that includes taxes and healthcare. Since healthcare costs are effectively a regressive tax, lower income level taxpayers are hit harder, putting their tax burden near the top among our peers, while the higher income levels feel it much less and their tax burden is the lowest among their international peers.

To help you out, I’ve highlighted in green the lowest tax rate in each category and in red the highest effective tax rate in each category.

Average Tax Rates by Country and Income Group (2025)

Sources:
1. https://taxfoundation.org/data/all/federal/latest-federal-income-tax-data-2025/
2. https://wealthmanagementcanada.com/blog/list-of-countries-by-tax-rate/
3. https://ifs.org.uk/taxlab/taxlab-key-questions/how-do-uk-tax-revenues-compare-internationally
4. https://taxfoundation.org/data/all/eu/top-personal-income-tax-rates-europe/
5. https://worldpopulationreview.com/country-rankings/highest-taxed-countries

To calculate the effective tax rates for the US with Healthcare line, we have used:

• Average per capita healthcare cost (2023): $13,432
• Average private health insurance premium (2025): $7,452
• Median US household income (2024): ~$75,000
• Top 50% income (est.): $120,000
• Top 10% income (est.): $350,000
• Top 1% income (est.): $1,200,000

If you infer US tax rates on are too low you’re getting the picture. And further, if you infer that US tax rates become relatively even lower in comparision with our peer nations as you move up the income levels, you’d be right again.

Note: For the average American, the tax rate is 13.6% while the effective rate including healthcare is 31.5%. We believe that to be a fairer, apples-to-apples comparison. That means healthcare accounts for 17.9% of the average American’s income. That is more than the TOTAL tax burden for the average Brit, Canada, and South Korean, where healthcare is free and higher education is either free or greatly subsidized. The issue of healthcare costs being so high in the US is worthy of consideration but is beyond the scope of this article.

I’m not going to wade into politics. Cabot is an investment research firm, not an advocacy organization. Our promise is to help you make money by being a more successful investor, whatever the market conditions.

If you said the US has the lowest tax rates in each category, you are correct. Congratulations. You win your share of $36.2tn in debt.

If you infer that US tax rates are too low you’re getting the picture. And further, if you infer that US tax rates become relatively even lower in comparision with our peer nations as you move up the income levels, you’d be right again.

I told myself I’m not going to wade into politics. Cabot is an investment research firm, not an advocacy organization. Our promise is to help you make money by being a more successful investor, whatever the market conditions.

But this is a crisis of unprecedented importance.

A leading university has said it’s on a 2o-year timeline (at most) before it crashes and explodes. That may seem like plenty of time but in government terms, and looking at the scale of the crisis, it’s not. Solving this issue in that timeframe is going to take concerted effort and serious willpower instead of increased spending and tax cuts.

There is no time to lose.

Share this article with your friends and family so they understand why this is such a crisis. Get your children involved (like climate change, this mess is going to disproportionately affect them – and, by the way, a failed and insolvent government has no resources to expand research and action on climate change, so this really is a two-fer.)

Let your elected leaders know you want them to stop wasting time. While one party unilaterally takes new taxes off the table and the other does the same to spending cuts, we will never solve this, and we will all sink together.

The solution, and we MUST find one, involves getting away from political grandstanding and reaching real compromise – the kind where everyone gives up some of their previous positions in the interest of solving an enormous national crisis.

I wish I were ending this on a happier note, but this is not a test.

For your investing success,

Ed Coburn
President, Cabot Wealth Network

What do you think? Did you find this column useful? How concerned are you about the national debt? Please share your thoughts with me. Email support@cabotwealth.com.

Updated: This article has been updated to reflect the effective tax rate including healthcare, which is paid for by taxes in most other developed countries.

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