A debt crisis may not be imminent in the United States, but one of the world’s most prominent economists believes the country is becoming dangerously less prepared for the next major shock. In an interview with Die Zeit, Harvard economist Kenneth Rogoff warned that rising real interest rates, enormous public debt and political unwillingness to raise taxes or cut spending are steadily reducing America’s financial room for manoeuvre.
“We see signs of a certain panic in the Trump administration,” Rogoff said, describing the response in Washington to rising borrowing costs. His warning extends beyond the immediate trajectory of US government finances. Higher American interest rates, he argued, have consequences across the global financial system.
For years, real interest rates — rates adjusted for inflation expectations — remained exceptionally low. Policymakers, economists on Wall Street, central banks and academics increasingly assumed that this environment would persist. Rogoff argues that such expectations were misplaced. Rates were always likely to rise, and much of what is now occurring represents a return towards historical norms.
Donald Trump’s fiscal policy is part of the explanation, but Rogoff does not regard it as the principal reason for rising real rates. He points instead to a combination of war, higher military spending, populism and investment in artificial intelligence. Over the past 150 or 175 years, he said, real interest rates have been relatively stable on average, although marked by substantial fluctuations.
That normalisation, however, becomes painful when debt levels are exceptionally high. The United States, Rogoff noted, is the world’s largest debtor. With $40 trillion in debt, even a substantial rise in interest rates can translate into enormous additional costs.
He does not predict an immediate US debt crisis. But he believes one is possible in the future, and that the country is less resilient than it was two decades ago. A future cyberwar, major environmental crisis or conflict over Taiwan could require Washington to borrow heavily, as it has traditionally done during major emergencies. Rising debt and interest costs could make that response increasingly difficult.
The problem, Rogoff argues, extends beyond the federal government. Social Security and Medicare represent major pressures on public finances, while the debts of US states and local governments are now considerably larger than they were during earlier periods of crisis. Private and corporate borrowing also adds to the burden, with corporate debt higher than in any other industrialised country. The result is a debt problem affecting the wider economy rather than the federal government alone.
The implications are not confined to Washington. The yield on 10-year US government bonds acts as a benchmark for international financial markets. When it rises, borrowing costs increase throughout the United States and around the world. Consumers encounter the consequences through higher mortgage rates and more expensive car loans, while companies face greater costs when borrowing to invest.
Rogoff also challenges the belief that artificial intelligence will quickly provide enough economic growth to neutralise these pressures. While AI could generate significant growth in the distant future, he expects it to contribute no more than one percentage point to US growth in the foreseeable future. Demographic changes and Trump’s immigration restrictions, meanwhile, exert downward pressure on incomes.
Europe faces a particularly difficult combination, he said. It may experience higher interest rates without enjoying the same growth generated by the American economy. The AI boom remains far less developed in Europe, leaving the continent potentially exposed to higher financing costs without a comparable expansion in output.
For the Trump administration, the immediate political problem is the cost of servicing the debt. Rogoff said interest payments have already exceeded defence spending and are on course to become the largest item in the US federal budget. At the same time, neither Republicans nor Democrats appear willing to embrace the measures that could place public finances on a more sustainable path.
Rogoff was particularly critical of Treasury Secretary Scott Bessent’s efforts to influence the bond market and keep long-term borrowing costs down. Bessent, he said, believes unusually high long-term rates are an anomaly that will eventually fall. Rogoff disagrees, arguing that the government will discover that both interest rates and borrowing costs continue to rise.
A sustainable fiscal policy, Rogoff suggested, would normally involve relatively modest but effective tax increases. Such measures could reassure financial markets. But politically, he said, higher taxes are impossible for Trump, while the administration instead argues that the economy will grow its way out of the problem, helped by an extraordinary AI boom.
Neither party, he added, has much interest in cutting expenditure, particularly ahead of the midterm elections.
Rogoff expects the 10-year US government bond yield to rise above 5 per cent next year, and possibly reach 5.5 per cent. The future path of real interest rates remains unpredictable, but the direction of the risks is clear: higher borrowing costs would leave an already heavily indebted country with fewer choices.
His assessment also challenges assumptions about where the next debt crisis might begin. France and Italy face serious problems, but Rogoff believes the risk is greater in the United States or Britain. Japan is another candidate. He rejects the idea that Japan demonstrates that extremely high public debt can persist without severe consequences.
Japan’s debt, at roughly 200 per cent of gross domestic product, is about twice the US level. Yet, Rogoff argues, the debt burden has constrained growth and narrowed the country’s economic options. Japan has also relied on what economists call financial repression, effectively requiring pension funds, insurers and financial institutions to hold large quantities of government debt.
That strategy may contain a crisis, but it can also weaken economic growth. Rogoff now believes Japan itself is approaching a financial crisis, with many financial institutions, including smaller regional banks and some insurers, effectively facing insolvency after being required to hold long-term government bonds issued when interest rates were close to zero.
For Germany, however, Rogoff sees a different calculation. The country has loosened its debt brake and is borrowing substantially more, but he argues that the purpose of sound fiscal policy is precisely to preserve the ability to borrow during an emergency. Germany, he said, is facing one, citing pressure from military spending, immigration and populism.
Yet Rogoff also warns that Germany cannot ignore the longer-term consequences of its economic choices. Over roughly the past seven or eight years, he argues, reforms that helped make Germany an economic powerhouse were reversed, particularly under the previous government and perhaps towards the end of the Merkel era.
The choice ahead, he suggests, is ultimately between two models: whether Germany wants to resemble France or return towards the Germany of the 2010s.
His broader warning is stark. The immediate danger is not necessarily a sudden collapse. It is the gradual erosion of the financial capacity governments depend upon when the next crisis arrives. And as rising interest rates make that capacity increasingly expensive, the question is no longer simply how much countries owe, but how much freedom they will retain when they need to borrow most.
