The Coming Crisis

The Credit Strategist April 2025

“A fire broke out backstage in a theatre. The clown came out to warn the public: they thought it was a joke and applauded. He repeated it; the acclaim was even greater. I think that’s just how the world will come to an end: to general applause from wits who believe it’s a joke.”

Soren Kierkegaard, Either/Or, Part I

Treasury Secretary Scott Bessent seems like the kind of man familiar with the work of Soren Kierkegaard. He certainly understands the serious nature of the United States’ deteriorating fiscal posture and the lack of serious policy proposals to address it. Mr. Bessent recently told NBC’s Meet the Press that the Trump Administration is trying to avert a financial crisis: “What I could guarantee is we would have had a financial crisis. I’ve studied it, I’ve taught it, and if we had kept up these spending levels that – everything was unsustainable. We are resetting, and we are putting things on a sustainable path.” Our Treasury Secretary could not be more correct – the United States is absolutely facing another financial crisis if it doesn’t address the current growth of its debt and deficits. The crisis will most likely take the form of buyers of U.S. government debt demanding higher yields on that debt forcing the deficit to unsupportable levels. The current growth of the deficit and the annual cost of servicing it renders a crisis virtually impossible to avoid with the only question being “when” not “if” it occurs. That is why the Trump Administration is seeking to lower government spending through DOGE and raise revenues with tariffs and higher income and corporate tax payments stimulated by lower tax rates.

As Carmen Reinhart warns, “If there is a common theme to the vast range of the world’s financial crises, it is that excessive debt accumulation, whether by the government, banks, corporations, or consumers, often poses greater risks than it seems during a boom.” Today, every part of the global economy carries too much debt – much more than before the 2008-9 Great Financial Crisis. Much of this debt was created as a means of “solving” that crisis but only delayed a true day of reckoning (note I didn’t write “the final day of reckoning” because no doubt the next crisis will again be “solved” with even more debt creation). It is impossible to objectively look at the growing quantum of global public and private sector debt and conclude anything other than (a) all of it can never be repaid, (b) it is a handicap to economic growth, (c) it is the result of poor economic management and political cowardice, and (d) if sustained, will lead to crisis, catastrophe, and immense suffering. There are ways to mitigate these consequences but none of them will come without significant sacrifice on the part of everyone.

The Trump Administration recognizes this threat and is proposing policies designed to soften the blow. But the intensity of opposition to this effort cannot be overstated. Both Congress and voters are unwilling and unprepared to pay the necessary price to set the federal budget on a more sustainable path. Solutions that constitute the bare minimum to address the problem are treated by the mainstream media and political opponents of the administration as the work of Satan while even the administration’s allies whisper opposition behind closed doors.

The budget plan that squeaked through Congress and narrowly avoided a government shutdown is deeply flawed due to special interests and divided government. To start, it is projected to significantly increase the deficit above current projected increases of ~$2 trillion per year (by at least $2 trillion over the next decade). Most opposition to the plan comes from legislators who want to spend more, not less, money (only a few members of Congress want to cut spending in an absolute sense and they tend to be far out of the mainstream politically). Proponents of the proposed budget argue that (i) revenues will increase from higher tax collections because lower income and corporate tax rates will unleash higher economic growth; (ii) tariffs will generate hundreds of billions of dollars of revenues; and (iii) DOGE and regulatory relief will cut spending by ~$1 trillion. In order to do that, however, each of the components to the strategy will have to be more radical than what is contained in the current budget proposal.

Nobody wants to cut any government spending that directly affects them regardless of its merit. There is already a great deal of opposition in Congress to the cuts in the recently passed budget deal that threatens Medicare but still adds trillions to the deficit. And the opposition comes from both sides of the aisle. Behind closed doors (and even out in the open), Republican lawmakers resist cutting spending that affects their constituents, leaving anyone trying to prevent the coming crisis in an untenable position. At least Republicans are putting forth some kind of plan; Democrats have no plan and no ideas (or if they have ideas, they are generally bad ones). With weak Congressional support, the Trump Administration is indeed fighting to stave off a financial crisis but faces long odds to accomplish its goals.

On our current course, however, America’s economic strength will continue to wane. This concern was recently expressed by Moody’s who warned that America’s “fiscal strength is on course for a continued multiyear decline” after “deteriorate[ing] further” since the ratings agency assigned a negative outlook to the country’s triple-A rating in November 2023. While recognizing America’s “extraordinary” economic resilience and the role of the dollar and Treasury market as backbones of the global financial system, Moody’s warned that “[t]he potential negative credit impact of sustained high tariffs, unfunded tax cuts and significant tail risks to the economy have diminished prospects that these formidable strengths will continue to offset widening fiscal deficits and declining debt affordability. In fact, fiscal weakening will likely persist even in very favorable economic and financial scenarios.” Moody’s warning appears to be based on a traditional, static view of Trump Administration economic policies that doesn’t account for changes in behavior in reaction to changes in policy. The phrase “unfunded tax cuts” doesn’t reflect the growth that could result from lower tax rates or alternatively the slowdown that could result if taxes were raised (by allowing the 2017 Trump tax cuts to expire). The point of tax cuts is to free up money for use in the economy, not to stick it in a drawer to lay fallow. Tariffs are unlikely to be as inflationary or recessionary as forecast by many economists because they affect a small percentage of goods. The real problem remains the dead weight of unproductive debt that the government and Wall Street keep dumping on the American economy with no end in sight. Moody’s should sharpen its pencil on the debt ratings it issues to corporations borrowing until they go bust if it wants to provide truly useful information to investors.

Only radical rather than cosmetic fiscal surgery will stop the coming crisis. Severe reductions in defense and entitlement spending coupled with higher revenues are required to reduce the deficit or, for that matter, to even stabilize it before it poses an imminent existential threat (it already poses a long-term existential threat). By sharp reductions I mean absolute cuts in spending, not lower rates of increases in spending that politicians and government statisticians treat as cuts. The magnitude of necessary spending cuts and revenue increases will cause an economic slowdown and a lot of pain on voters focused on their immediate needs rather the long-term benefits of solving a problem that could literally destroy their lives if not brought under control. But the political backlash (led by politicians not voters) in a deeply divided electorate with little spirit of shared sacrifice or threshold for pain renders such a solution virtually impossible. The media and politicians speak about recessions – even minor ones – as Armageddon, yet a serious recession is the only way to purge the economy of the enormous amounts of worthless debt and wasteful spending weighing it down. Wiping this detritus off the books would give the economy a chance to grow and allow the natural cycle of capitalism to function. But the stubborn refusal to face our economic situation makes the long-term outlook even worse while deluding people into thinking conditions are better than they really are.

The debt crisis is hardly limited to the United States, however; it is global. The OECD reported in March that outstanding government and corporate bonds exceeded $100 trillion in 2024. Between 2021 and 2024, interest costs as a percentage of output rose from the lowest to the highest percentage in the last twenty years, reaching 3.3% of GDP in member countries and higher than defense spending. This may seem like a small percentage but it’s not. With higher borrowing costs and debt levels, these numbers will likely worsen in the future as governments face greater spending demands on defense, climate, and aging populations. Nearly half of government debt of OECD and emerging market countries and one-third of corporate debt will mature by 2027. The OECD also observes that since 2008, corporate investments has declined while borrowing for non-productive financial purposes like refinancing existing debt or payouts to shareholders has increased. And if you think things are bad in the West, I discuss the ongoing collapse of Chinese real estate markets below. The U.S. may not be the first country to hit the debt wall face first.