In Greek mythology, the Trojan princess Cassandra stood as an infamous figure whose prophetic powers were both a blessing and a curse. Gifted by Apollo with the ability to foresee future events, she warned her fellow Trojans that the wooden horse left outside their city’s gates by the Greeks was not a mere offering, but a trap filled with soldiers. Her warnings, tragically, went unheeded. The Trojans brought the horse inside the city walls, setting the stage for their ultimate downfall. This ancient tale continues to echo through time, especially when one considers modern-day fiscal policy.
Today, Cassandra’s warning finds a modern parallel in the escalating concerns over the federal government’s mounting debt. For years, a chorus of economists and financial experts—modern-day Cassandras—has been warning that the unchecked growth of the federal debt will inevitably lead to disaster. Yet, as in the Trojan story, their concerns are routinely ignored. Washington continues to pass budgets that add to the debt, and no matter which party is in power, the warnings seem to fall on deaf ears. The nation is careening toward a fiscal cliff, and few in Congress appear to care.
The numbers paint a stark picture. In the just-ended fiscal year, the U.S. federal government spent $1.83 trillion more than it took in, bringing the national debt to an eye-watering $35 trillion. These numbers raise serious questions about the long-term sustainability of the nation’s fiscal policies. If the country’s gross domestic product (GDP) were in the ballpark of $75 trillion or even $50 trillion, the Debt Cassandras might not be quite so alarmed. A robust economy generating that kind of revenue would theoretically bring in enough tax dollars to cover the interest payments on the debt and even chip away at the principal.
However, the reality is far different. The U.S. economy is nowhere near that size, and the nation’s debt-to-GDP ratio is sounding alarms. Many experts argue that a ratio above 60% raises red flags, while others put the danger level at 77%. Uncle Sam, however, currently has a debt-to-GDP ratio north of 130%. Even if one excludes debt that the government owes to itself, the ratio of debt held by the public is hovering around 100%.
If this trajectory continues, the problem will only worsen. Debt held by the public is projected to climb to 125% of GDP by 2034 under current law. The nonpartisan Committee for a Responsible Federal Budget forecasts that, depending on the outcome of the 2024 presidential election, the situation could become even more dire. If Kamala Harris is elected, the debt-to-GDP ratio could rise to 133% by 2034. If Donald Trump wins, it could soar to 142%. Despite these grim predictions, both candidates are offering policy platforms that include tax cuts and increased spending, both of which will serve as rocket fuel for the nation’s mounting debt.
For years, the Debt Cassandras have been predicting fiscal doom. Yet, catastrophe has not come to pass. The debt-to-GDP ratio has surged beyond what was once considered dangerous, but the U.S. Treasury continues to issue bonds, and investors still buy them. Could it be that the Cassandras are wrong? Is it possible that the real danger lies at a much higher debt-to-GDP ratio than experts have anticipated?
This line of thinking has lulled many policymakers into a sense of complacency. As years pass without a full-blown crisis, the urgency to address the debt diminishes. Just as the Trojans ignored Cassandra’s warnings and grew complacent as years passed without any visible consequences, Washington seems content to keep borrowing, secure in the knowledge that the government can still make its interest payments.
However, that complacency comes with a significant cost. Interest payments on the debt are already consuming an ever-larger share of the federal budget. In fact, they now exceed the amount spent on national defense, a worrying sign of the debt’s growing burden. Looking ahead, those interest payments are on track to surpass Social Security as the largest single item in the federal budget. When that happens, the consequences for the nation’s fiscal health will be profound.
The problem isn’t just that interest payments are crowding out other critical areas of federal spending. As the debt continues to grow, it becomes increasingly likely that investors in government bonds and notes will begin to question whether they will ever get their principal repaid. When that happens, demand for U.S. Treasury securities will plummet. To attract buyers, the government will be forced to offer significantly higher interest rates, exacerbating the debt problem even further.
Higher interest rates will also weigh heavily on the broader economy. In the past, Congress has often turned to tax cuts and deficit spending to revive the economy during downturns. But in a scenario where the government is struggling to service its own debt, those options may no longer be available. Instead, Congress would likely be forced to raise taxes and cut spending, actions that could further depress the economy. In such a nightmare scenario, even politically sensitive programs like Social Security and Medicare might not be spared from cuts.
One of the most perplexing questions in this debate is how much debt is too much. No one knows for sure the exact debt-to-GDP ratio that would cause investors to panic and trigger a crisis. Optimists often point to Japan, which has a debt-to-GDP ratio of around 250%, far higher than the U.S. ratio. If Japan can sustain such a high level of debt without catastrophic consequences, some argue, why can’t the U.S. do the same?
However, this comparison is misleading. An analysis by the Federal Reserve Bank of St. Louis found that Japan’s debt situation is fundamentally different from that of the U.S. When factors such as intra-governmental transfers and reserve funds are taken into account, the net liability of both countries is actually similar, at around 119% of GDP. Additionally, Japan’s high national savings rate and the fact that a significant portion of its debt is held domestically make its situation unique. The U.S., by contrast, relies more heavily on foreign investors to finance its debt, which makes it more vulnerable to shifts in global financial markets.
A small but vocal minority of economists subscribes to the ideas of modern monetary theory (MMT), which posits that governments that borrow in their own currency, such as the U.S., need not worry about accumulating debt. According to this theory, the government can simply print more money to repay its debts. While this may be true in a technical sense, the real-world consequences of such a strategy would likely be disastrous. Printing money to pay off debt would almost certainly lead to runaway inflation, eroding the value of the dollar and causing widespread economic hardship.
As the federal debt continues to grow, the question is not whether the U.S. can continue borrowing indefinitely, but how long it can do so before investors lose confidence. The longer that Washington delays addressing the debt problem, the greater the risk that the eventual reckoning will be far more painful than it needs to be. Just as the Trojans grew complacent over time, believing that Cassandra’s prophecies would never come true, so too has Washington lulled itself into a false sense of security.
The danger is real, and the Debt Cassandras may yet be proven right. The nation’s fiscal trajectory is unsustainable, and the consequences of inaction could be catastrophic. We can only hope that the optimists are correct, for the nation is now firmly hitched to their wagon. But there is a terrible risk that, like Cassandra of Troy, the warnings of the Debt Cassandras will go unheeded until it is too late. And by then, the damage may be irreparable.
