America’s Fiscal Drift and the Quiet Threat to Dollar Supremacy

What emerges from the long sweep of data is not episodic excess but structural imbalance. The United States has moved from borrowing in response to crisis to borrowing as a baseline condition.

The first chart tells the essential story. Federal debt has risen from below $400 billion in the late 1960s to nearly $38 trillion in 2025. The slope steepens noticeably after 2008, and again after 2020. The pandemic response explains the vertical surge in 2020 and 2021, yet what follows is more troubling. The line does not stabilise. It continues climbing at speed.

This is not simply the accumulation of past crises. It is the embedding of permanent deficits into the fiscal structure. Debt is no longer reacting to downturns. It is expanding during expansions.

Nominal GDP has grown impressively over the same period. From roughly $800 billion in the late 1960s, it now approaches $30 trillion. The United States remains the world’s largest economy, dynamic and innovative. Yet the GDP curve, while upward sloping, lacks the convex acceleration seen in the debt series.

Growth has not collapsed. It has simply failed to keep pace with borrowing.

Indexed to 1966, the divergence becomes starker. Public debt has risen more than 11,000 percent. GDP has increased roughly 3,800 percent. The gap is not a rounding error. It reflects decades in which fiscal expansion outstripped economic expansion.

For long stretches, markets tolerated this imbalance because interest rates remained subdued and nominal growth occasionally exceeded borrowing costs. That cushion has thinned. With Treasury yields materially higher than in the 2010s, the compounding arithmetic has turned less forgiving.

Debt sustainability is governed by a simple equation. When the effective interest rate exceeds nominal growth and primary deficits persist, the debt ratio rises mechanically. The United States is increasingly flirting with that condition.

The ratio now stands at approximately 121% of GDP. For most of the postwar period, federal debt hovered between 30 and 60% of output. Even during the Cold War build up and early 1990s deficits, it remained contained.

The post 2008 era broke that pattern. The pandemic pushed the ratio sharply above 100 percent. What is unusual is not the spike. It is the failure to retreat. Debt above 120 percent of GDP is historically associated with war mobilisation or severe recession. Today it coexists with low unemployment and moderate growth.

The shaded band marking the commonly cited sustainable range of 60 to 70 percent underscores the distance travelled. The United States has not merely crossed that threshold. It has doubled it.

Persistent Deficits in Good Times

The fiscal imbalance is no longer cyclical. It is structural.

From 2020 onward, Washington has recorded multi trillion dollar deficits for five consecutive years. The 2020 and 2021 shortfalls of $3.1 trillion and $2.8 trillion reflected emergency pandemic spending. Few objected to that response.

What is harder to defend are the deficits that followed. $1.4 trillion in 2022. $1.7 trillion in 2023. $1.8 trillion in 2024. The deficit to GDP ratio now stands at 6.3 percent. Such a figure is typically associated with crisis management, not economic expansion.

Structural pressures dominate the composition of spending. Entitlement programmes expand automatically as demographics age. Discretionary spending remains politically difficult to compress. Most importantly, net interest payments are rising rapidly. As debt grows and refinancing occurs at higher rates, interest becomes one of the largest line items in the federal budget.

The deficit chart illustrates the long arc of fiscal deterioration. The late 1990s surplus now appears as a historical anomaly. Since the early 2000s, deficits have been persistent, interrupted only briefly by partial consolidation.

The pandemic collapse is visually dramatic. Yet the more concerning feature is what follows. The fiscal balance does not normalise. It settles into a structurally negative position.

In economic theory, persistent primary deficits during expansion imply a political economy constraint rather than a cyclical one. Tax reform remains contentious. Spending reform even more so. The result is inertia.

The decade comparison reinforces the shift. Average annual debt growth in the 1960s was 3.8 percent. In the 1970s it rose to 8.7 percent. The 1980s saw 13.4 percent. The 1990s moderated to 7 percent. The 2000s returned to 8 percent. The 2010s averaged 6.6 percent. The 2020s so far stand at 8.5 percent.

The current pace is not extraordinary compared with the 1980s, but the context is different. In the 1980s, debt to GDP began from a far lower base. Today’s borrowing compounds atop an already elevated ratio.

High growth rates on a small base are manageable. High growth rates on a massive base become destabilising.

The Dollar’s Privilege and Its Limits

For decades, the United States benefited from what Valéry Giscard d’Estaing once termed the exorbitant privilege. The dollar dominates global reserves, trade invoicing and financial settlement. US Treasuries serve as the world’s benchmark safe asset. This architecture allows Washington to borrow at scale in its own currency with limited immediate penalty.

Reserve currency status confers flexibility. It does not repeal arithmetic.

Foreign central banks, sovereign wealth funds and global investors hold Treasuries because they trust the depth of American markets and the credibility of its institutions. Confidence is cumulative but not immutable. If debt continues rising relative to GDP while political consensus on adjustment remains elusive, investors may demand higher compensation.

The adjustment need not be dramatic. It can manifest gradually through a rising term premium, incremental reserve diversification toward gold or alternative currencies, and reduced appetite for absorbing issuance without higher yields.

When applied to a debt stock approaching $38 trillion, even modest increases in average borrowing costs materially raise interest expenditure. Rising interest crowds out discretionary fiscal space. It tightens financial conditions domestically. It constrains future crisis response.

Dollar dominance is unlikely to evaporate overnight. The euro area faces fragmentation risks. China’s renminbi remains constrained by capital controls and governance opacity. There is no immediate substitute with equivalent liquidity and rule of law.

But erosion does not require replacement. It requires marginal reallocation. A few percentage points shift in global reserve composition, sustained over years, can alter funding dynamics.

The Slow Burn Risk

The most plausible risk is not sudden collapse but gradual constraint.

A structurally high deficit above 6 percent of GDP during expansion implies that any recession will push borrowing significantly higher. If debt is already above 120 percent of GDP at the peak of the cycle, downturn dynamics become more precarious.

Markets tolerate large debts when fiscal authorities demonstrate credible pathways to stabilisation. Absent that, they impose discipline indirectly through higher yields.

The United States retains profound economic strengths: innovation, energy capacity, demographic resilience relative to peers. Yet fiscal complacency can erode even dominant positions.

Reserve currency status has allowed Washington to postpone difficult adjustments. It cannot postpone them indefinitely.

The trajectory depicted across these six charts is not a snapshot anomaly. It is a pattern. Debt is growing faster than output. Deficits persist in good times. Interest costs are rising. The ratio remains far above historically comfortable ranges.

Sovereign creditworthiness ultimately rests on growth, taxation capacity and political will. America possesses the first two in abundance. The third remains uncertain.

If adjustment comes by choice, it will be orderly. If it comes by market compulsion, it will be less so.

The arithmetic is already visible. The question is whether policy will respond before confidence begins to recede.

Sources & References

PE150. (2025). Fiscal Dominance: Structural Debt Expansion, Monetary Growth, and Rising Risk Premiums. https://www.pe150.com/p/fiscal-dominance-structural-debt-expansion-monetary-growth-and-rising-risk-premiums 

U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, February 20, 2026.

U.S. Department of the Treasury. Fiscal Service, Federal Debt: Total Public Debt [GFDEBTN], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GFDEBTN, February 20, 2026.

U.S. Office of Management and Budget and Federal Reserve Bank of St. Louis, Federal Surplus or Deficit [-] as Percent of Gross Domestic Product [FYFSGDA188S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FYFSGDA188S, February 20, 2026.

U.S. Office of Management and Budget, Federal Surplus or Deficit [-] [FYFSD], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FYFSD, February 20, 2026.