The exorbitant privilege, tested
The United States enjoys what no other sovereign does: the ability to borrow without limit in the currency the world must hold. That privilege is not a myth and it is not gone. But it is being tested by arithmetic. The federal deficit is running near 6 to 7 percent of GDP - extraordinary for an economy at full employment with no recession to fight - gross debt exceeds 120 percent of GDP, and net interest has become one of the largest and fastest-growing lines in the budget as the stock of debt reprices to a 4-plus percent world. The question is not solvency. It is the price of abundance.
Why the trajectory is the risk
The US will not default; it issues the reserve asset and controls the printing press. The risk is different and subtler: that the relentless growth of supply, combined with a structurally higher interest rate and a term premium that has rebuilt, steadily raises the yield the world demands to hold Treasuries. That is dilution, not default - a slow erosion of the scarcity and safety premium that kept US borrowing costs artificially low for a generation. Each year of 6-percent deficits adds to the supply the market must absorb without the Fed's balance sheet behind it, and the tariff revenue the administration touts does not close a gap of this size.
The American fiscal problem is not a crisis with a date; it is a tax with no ceiling. Every year the deficit runs at full employment, the term premium has one more reason to sit higher, and the world's risk-free rate - the number off which every asset on earth is priced - drifts up. That is the channel through which US fiscal policy quietly taxes global valuations.
The political economy of no consolidation
There is no political constituency for consolidation. Tariffs are framed as a revenue answer but raise a fraction of what is needed and carry their own growth and inflation costs. Neither party proposes the entitlement and tax changes that would actually stabilise the ratio, and a closely divided polity makes grand bargains impossible. The base case is therefore continuity: deficits near 6 percent, debt grinding higher, and the market - not Washington - imposing whatever discipline arrives, through the term premium and the shape of the curve. The bond market is the only fiscal authority with a vote, and it votes in basis points.
| Metric | Reading | Direction |
|---|---|---|
| Deficit / GDP | ~6-7% | Stable-high |
| Debt / GDP | >120% | Rising |
| Net interest | Top budget line | Rising fast |
| Consolidation plan | None credible | Frozen |
| Rating | AA+ / top-tier | Stable |
| Term premium | Rebuilt | Elevated |
Scenarios and what to own
Our base case is managed dilution: no crisis, but a structurally higher risk-free rate and a steeper curve as the supply wave and term premium do the work that fiscal policy will not. The bull case is a growth-led stabilisation in which AI-driven productivity lifts the denominator faster than the debt grows. The bear case is a disorderly term-premium repricing - a buyers' strike at a bad auction, a downgrade, a confidence wobble - that forces yields sharply higher and tightens financial conditions abruptly. For allocators the implication is to favour the front end and real assets over long nominal Treasuries, and to treat the long bond as a source of risk rather than the risk-free anchor it once was.