Introduction to the US Debt Crisis
The United States is facing a potential public debt crisis, a situation that was once considered unthinkable. This crisis has been triggered by the country’s behavior, similar to that of an emerging market, since the introduction of tariffs by President Donald Trump. The question on everyone’s mind is: what does this mean, and how do debt crises typically occur in emerging markets?
Understanding Emerging Markets
An emerging market can be defined as a market from which you cannot emerge in an emergency. However, a more accurate definition is related to how these markets react to fiscal expansions, such as tax cuts or increases in government spending. In developed markets, fiscal expansions typically lead to an increase in the value of the local currency. In contrast, emerging markets like Argentina or Turkey usually experience a devaluation of their currency due to concerns about debt sustainability.
The US: An Emerging Market?
The recent enactment of the One Big Beautiful Bill Act in the US is a prime example of a fiscal expansion, which is expected to increase the public debt by $3.3 trillion by 2034. This has led to a decline in the value of the US dollar, a trend that began in mid-January 2025. The situation in the US resembles that of an emerging market, where doubts about debt sustainability drive the exchange rate.
The Consequences of Debt Crises
Emerging market debt crises have taught us that these episodes evolve gradually, then suddenly. The process begins with nasty debt dynamics, where the cost of servicing the debt increases, leading to higher interest rates, larger deficits, and even more debt. The US is already experiencing this, with interest payments on the federal debt expected to reach $1 trillion in 2025.
The Shortening of Debt Maturities
Another step towards a debt crisis is the shortening of debt maturities. The US government has been borrowing short, rather than long, which means that an increasingly large share of outstanding bonds must be rolled over every month. This increases the risk of a debt crisis, where the government may struggle to find buyers for its bonds.
The Doom Loop
The final step towards a debt crisis is the so-called doom loop, where fears about the debt lead to a drop in bond prices, reducing the ability of debt holders to purchase new debt. This creates a vicious cycle, where the problem exacerbates itself. The US is not yet in this situation, but the recent downgrading of its debt by ratings agencies and the firing of the Bureau of Labor Statistics commissioner suggest that the country is moving in that direction.
Will the US Experience a Debt Crisis?
The standard answer to this question is that a run on government debt cannot happen because US debt is denominated in dollars, and the Fed can always print more dollars to bail out panicking debtholders. However, this relies on the Fed’s commitment not to inflate away the value of the debt, a promise that President Trump is eroding.
Financial Repression: A Possible Way Out
One possible way out of this situation is financial repression, where the government forces bondholders to buy debt at an interest rate lower than they would voluntarily accept. This is a polite form of default and has been a common practice in emerging markets.
Conclusion
The US is facing a potential public debt crisis, triggered by its behavior as an emerging market. The country’s debt dynamics are becoming increasingly unsustainable, and the shortening of debt maturities and the doom loop are real risks. While the US has the ability to print its own currency, the Fed’s commitment not to inflate away the value of the debt is essential to preventing a crisis. Financial repression is a possible way out, but it is a risky and unattractive option. The US must take steps to address its debt crisis, or risk facing the consequences of its actions.
