Debt, Income, and the Arithmetic That Cannot Be Ignored

Debt, Income, and the Arithmetic That Cannot Be Ignored

Why the question is not just how much America and the world owe, but whether income is growing fast enough to carry it

May 7, 2026

A year can make a big difference. A decade can change the entire fiscal picture of a country. The United States entered the 2008 financial crisis with federal debt held by the public at roughly 39% of GDP. By the end of fiscal year 2026, CBO expects that figure to be 101%.¹ That is not a rounding error. It is a structural change in the way the country is financing itself.

I want to be clear at the outset: debt itself is not automatically bad. A household can borrow to buy a home. A business can borrow to build a factory. A government can borrow during war, recession, or national emergency. The question is whether the debt creates enough future income to justify the obligation. If it does, debt can be productive. If it does not, debt becomes a claim on future taxpayers, future savers, and future policy flexibility.

That is the issue today. As of May 6, 2026, total U.S. public debt outstanding was $38.92 trillion. Debt held by the public, the portion owed outside the federal government, was $31.26 trillion. The Joint Economic Committee estimates gross national debt was $2.70 trillion higher than one year earlier.² Meanwhile, the U.S. economy is still growing. In the first quarter of 2026, current-dollar GDP increased at a 5.6% annualized rate, while real GDP grew 2.0%.³ Those are not recessionary numbers. But the debt stock is still rising faster than the income base, and that is the part that matters.

The best way to think about this is not as a political issue. It is a math issue. If a family earns $250,000 a year and adds $50,000 of credit card debt every year, the problem is not the first statement they receive in the mail. The problem is the pattern. At some point, the interest becomes part of the monthly budget, then it crowds out other priorities, then the family's options narrow. Governments have more tools than households, but the arithmetic rhymes.

Figure 1 shows the basic federal budget problem. CBO projects revenues at 17.5% of GDP in fiscal year 2026 and outlays at 23.3%, leaving a deficit of 5.8% of GDP. By 2036, revenues are projected at 17.8% of GDP and outlays at 24.4%, with the deficit widening to 6.7%.¹ The gap is not primarily a temporary emergency measure. It is embedded in the baseline.

Figure 1: The Federal Budget Gap Is Structural. Source: Congressional Budget Office.

Debt becomes easier to carry when income grows faster than the debt service. It becomes harder to carry when debt grows faster than income, especially when interest rates rise.

For a household, the income base is wages and investment income. For a company, it is cash flow. For a government, it is tax revenue, which depends on the size and growth of the economy. A country can carry a large nominal debt if the economy grows faster than the interest cost and if deficits are under control. But if borrowing continues while interest costs compound, the debt ratio begins feeding on itself.

Economists often describe this with the relationship between the interest rate and the growth rate. If the effective interest rate on government debt is lower than nominal GDP growth, the debt-to-GDP ratio can fall even if the government does not pay down much debt in dollar terms. If the interest rate is higher than growth, the government needs a primary surplus - meaning tax revenue exceeds non-interest spending - just to stabilize the ratio.

That is why the current interest-cost dynamic matters. CBO projects net interest costs of $1.0 trillion in fiscal year 2026, rising to $2.1 trillion by 2036.¹ Interest is not a program Congress votes on every year in the same way it votes on defense, transportation, or education. It is the bill from prior borrowing. Once it grows large enough, it begins to drive the deficit rather than merely reflect it.

Put differently, the federal government is not just borrowing because a crisis hit. It is borrowing in normal times to fund a structural gap between what it spends and what it collects. Debt incurred during a crisis can be worked down when the crisis ends. Debt incurred because the baseline budget does not balance requires policy changes, faster growth, lower interest rates, or some combination of the three.

Figure 2 puts the U.S. debt path in historical context. Federal debt held by the public reached 106% of GDP in 1946, just after World War II. CBO projects it will rise from 101% in 2026 to 120% by 2036 and 175% by 2056 under its long-term outlook.^1,4^ The level matters, but the direction matters more. After World War II, the ratio fell. Today, under current projections, it rises.

Figure 2: U.S. Debt Held by the Public as a Share of GDP. Source: CBO, Treasury, CRFB.

This is not just an American story. The Institute of International Finance estimates that total global debt reached nearly $353 trillion by the end of March 2026, after rising more than $4.4 trillion in the first quarter alone.⁵ The IMF's narrower nonfinancial debt database, which excludes some financial-sector obligations included by IIF, puts global debt at $251 trillion, or just above 235% of world GDP.⁶ Those two numbers are not contradictory. They are measuring different definitions of debt. The common message is the same: the world is carrying historically large claims against future income.

Figure 3 shows the difference between those two global debt measures. IIF's broader measure captures government, corporate, household, and financial-sector debt. The IMF's database focuses on public and private nonfinancial debt. Either way, the number is enormous. More importantly, global public debt continues to rise even as some private debt measures have stabilized or declined.

The IMF estimates that global public debt rose to just under 94% of GDP in 2025 and is on track to reach 100% by 2029.⁷ The drivers are familiar: aging populations, defense spending, social commitments, energy security, strategic industrial policy, and rising interest burdens. These are not fringe items. They are the central pressures facing governments across developed and emerging markets.

There is also a major difference between today's debt problem and the one that preceded the 2008 financial crisis. In the decade before the global financial crisis, excess private borrowing was the obvious vulnerability. Today, the more obvious pressure is sovereign borrowing. Governments became the shock absorbers during the financial crisis, the pandemic, energy disruptions, wars, and now strategic competition. In some places, the private sector deleveraged. The public sector did not.

That is not automatically a crisis. Governments exist partly to absorb shocks that households and businesses cannot. But once the government balance sheet becomes the shock absorber for every crisis, investors eventually ask whether the shock absorber itself is wearing out.

Figure 3: Global Debt Is Large Under Either Definition. Source: IMF Global Debt Database; IIF Global Debt Monitor via Reuters.

There are only a few ways to handle a debt load that is growing faster than income.

The cleanest solution is real growth. If productivity rises, labor force participation improves, and capital investment produces higher output, the income base expands. That makes the denominator larger. This is the best outcome because it does not require creditors to be punished, savers to be inflated away, or taxpayers to absorb the entire adjustment. The problem is that growth cannot simply be declared. It has to be earned through investment, innovation, labor supply, stable policy, and time.

The second solution is fiscal adjustment. Governments can raise taxes, cut spending, reform entitlements, or slow the growth of future obligations. This is the most direct solution, but it is politically difficult because every dollar of deficit reduction is someone else's income, benefit, contract, subsidy, or tax preference.

The third solution is inflation. Inflation reduces the real value of fixed-rate debt, especially if interest rates are held below inflation. This is not a free lunch. It transfers wealth from savers and bondholders to borrowers, damages purchasing power, and can become difficult to control once expectations adjust.

The fourth solution is financial repression. That is a technical phrase for policies that channel domestic savings into government debt at yields below inflation or below market-clearing levels. It can include bank regulations that favor sovereign bonds, capital controls, yield caps, or central bank bond purchases. Carmen Reinhart and M. Belen Sbrancia describe this as a tax on savers through negative or below-market real interest rates. They estimate that in advanced economies, real interest rates were negative roughly half the time from 1945 to 1980, helping governments reduce the real burden of World War II debt.⁸

The fifth solution is default or restructuring. This can be explicit, as in missed payments or negotiated haircuts. It can also be implicit, through currency devaluation, forced maturity extensions, or changes in the terms under which debt is repaid. Reserve-currency issuers like the United States have more room than emerging markets because they borrow in their own currency. But more room is not the same thing as no limit.

Central banks sit in the middle of this. They do not determine fiscal deficits, but they influence the cost of financing them. When central banks buy government bonds, cut rates, or cap yields, they can make debt easier to carry. When they raise rates to fight inflation, they make the fiscal arithmetic harder. That is why high debt levels complicate monetary policy. A central bank fighting inflation in a low-debt world mostly worries about employment and prices. A central bank fighting inflation in a high-debt world also has to watch whether higher rates destabilize the Treasury market, banks, pensions, real estate, and the government's interest bill.

This does not mean central banks will always choose inflation over discipline. It means the trade-off becomes sharper as debt rises.

History offers several versions of this story. The institutions change, but the pattern is familiar: obligations rise faster than the income base, and the political system eventually chooses who absorbs the loss.

The Roman Empire is the oldest useful example, with an important caveat. Rome did not operate with a modern bond market, central bank, or GDP statistics. Its fiscal stress showed up through military spending, taxation, coinage debasement, and inflation. As military costs rose and the tax base came under pressure, emperors repeatedly reduced the precious-metal content of coinage. Research on the period leading up to Diocletian's Price Edict links government deficits in the first three centuries A.D. to money-supply expansion through silver debasement.⁹ The Federal Reserve's education material uses Rome as a case study in how debasement increased the money supply and contributed to inflation.¹⁰

Diocletian's response in 301 A.D. was a sweeping price-control edict covering commodities, freight rates, and wages. Cambridge's summary of H. Michell's study notes that the edict set ceilings for more than 900 commodities and 130 grades of labor, with severe penalties for violations.¹¹ The lesson is not that ancient Rome is America. It is that when governments try to finance promises without sufficient real resources, the adjustment eventually comes through money, prices, taxation, controls, or institutional change.

Early modern Spain provides a different lesson. Philip II is often remembered as a serial defaulter, but the best economic history is more nuanced. Drelichman and Voth's reconstruction of Castile's fiscal position found that Philip's debts were not necessarily unsustainable in a long-run solvency sense; the defaults were largely liquidity crises tied to short-term financing and the timing of revenues.¹² That distinction matters today. A country can be solvent over time but still suffer a market crisis if too much debt must be rolled over at the wrong moment, at the wrong rate, or with the wrong buyers.

Britain after the Napoleonic Wars and after World War II shows the more constructive path. During the wars with France, Britain's debt-to-GDP ratio exceeded 250% in 1815. It did not disappear through one dramatic repayment. It fell over the 19th century as the state maintained fiscal credibility, debt capacity, and growth.¹³ UK government debt later peaked around 270% of GDP after World War II and fell to around 50% over the next three decades. The nominal amount of debt actually rose from 1946 to 1976, but nominal GDP rose much faster. The Office for Budget Responsibility attributes the decline to a combination of primary surpluses, nominal GDP growth averaging 8.8% per year, an average effective interest rate of only 3.6%, and a long period of negative real interest rates supported in part by financial repression.¹⁴

Figure 4 illustrates why that postwar example is important. The UK did not eliminate its debt in nominal terms. The economy grew around it. That is the most constructive debt solution: keep the credit of the state intact, run a sustainable primary balance, keep interest costs below nominal growth, and let time do some of the work.

The United States after World War II followed a similar pattern, though from a lower peak. Federal debt held by the public reached 106% of GDP in 1946, then fell rapidly as wartime spending rolled off, growth was strong, inflation eroded the real value of fixed-rate debt, and interest rates were held down for a time. That is the hopeful historical analogy, but it comes with two uncomfortable differences. After World War II, the U.S. demobilized from a massive temporary spending surge. Today, the main drivers are structural: Social Security, Medicare, health care, interest costs, and a persistent gap between spending and revenue.

Japan offers another version of the story: very high public debt, low inflation for many years, heavy domestic ownership of government bonds, and aggressive central bank purchases. Japan has avoided a classic debt crisis, but the cost has been decades of low nominal growth, repeated fiscal packages, and a central bank deeply entangled with the government bond market. The lesson is not that high debt always causes immediate collapse. It is that high debt can also produce a long, slow narrowing of policy flexibility.

Figure 4: Debt Ratios Can Fall Even When Nominal Debt Rises. Source: UK Office for Budget Responsibility.

The current U.S. position shares pieces of several historical periods, but it is not identical to any one of them.

Like the postwar period, debt is high relative to GDP. Unlike the postwar period, the deficit is not simply the residue of a concluded emergency. CBO projects deficits above historical averages throughout the next decade, with debt continuing to rise even under current law.¹

Like the 1970s, inflation can help reduce the real burden of debt if rates lag prices. But unlike the 1970s, the Federal Reserve now has an explicit inflation target and more institutional credibility to defend. That credibility is valuable precisely because the temptation to inflate debt away grows as the debt stock rises.

Like early modern Spain, rollover risk matters. The U.S. is not likely to default in the ordinary sense because it borrows in dollars. But it still relies on investors absorbing enormous Treasury issuance at acceptable rates. The more debt that needs to be refinanced, the more important investor confidence becomes.

Like Japan, the United States has deep domestic capital markets and a central bank capable of supporting liquidity if markets seize up. But the U.S. dollar's reserve-currency role is also a global privilege. If foreign investors begin demanding a higher term premium to hold Treasuries, the math changes quickly.

The most important current comparison is this: debt is growing faster than the government's recurring income base. Federal revenues are projected around 17.5% of GDP in 2026, while spending is projected around 23.3%.¹ That gap is the issue. The dollar amount of debt gets the headline, but the flow problem is what drives the stock problem.

For investors, this is not a reason to panic. It is a reason to be clear-eyed.

High sovereign debt does not automatically mean a market crash. History shows that debt burdens can be reduced through growth, inflation, primary surpluses, and time. It also shows that when governments avoid hard choices, the adjustment often arrives through less transparent channels: lower real returns to savers, higher inflation, currency weakness, tax increases, or financial repression.

Nominal safety and real safety are not the same thing. A Treasury bill may repay every dollar promised, but if inflation runs above the yield, the investor loses purchasing power. That does not make Treasuries bad. It means the role of fixed income should be understood carefully: liquidity, ballast, income, and liability matching, not guaranteed preservation of real wealth in every environment.

Productive assets matter. Equities, real estate, infrastructure, and businesses with pricing power represent claims on cash flows that can adjust over time. They are not immune to valuation risk or recession risk, but they offer a form of participation in nominal income growth that fixed claims do not.

Global diversification remains important. Debt problems are global, but they are not evenly distributed. Countries with stronger fiscal positions, better demographics, credible institutions, and productive private sectors should command a premium over time. The U.S. still has extraordinary strengths: the world's deepest capital markets, a reserve currency, leading technology companies, energy abundance, and a flexible economy. Those strengths buy time. They do not repeal arithmetic.

Real assets and inflation-sensitive allocations also deserve a place in the conversation. That does not mean loading a portfolio with commodities or making a one-way bet on inflation. It means recognizing that in a world where governments may prefer inflation to explicit default, portfolios should not rely exclusively on fixed nominal claims.

The debt problem is not that America owes $38.9 trillion. The problem is that the debt is growing faster than the income streams that support it, and current projections do not show that changing on their own. Globally, the pattern is similar: governments have absorbed repeated shocks, private borrowers have deleveraged in some places, and public balance sheets have become the release valve.

There are constructive ways out. Faster productivity growth would help enormously. So would entitlement reform, tax reform, spending discipline, immigration and labor-force policies that improve the growth outlook, and a credible path to stabilize debt as a share of GDP. There are also less constructive ways out: inflation, financial repression, currency depreciation, and forced restructurings.

History does not say that high debt always ends in crisis. Britain and the United States after World War II are proof that debt burdens can be reduced without default. But history also says that debt does not disappear. It is paid by taxpayers, inflated away from savers, restructured onto creditors, or outgrown by a more productive economy.

The best outcome is to outgrow it. The second-best outcome is to reform it early. The worst outcome is to pretend the arithmetic does not apply until markets force the issue.

Our team will continue monitoring debt, deficits, interest costs, inflation expectations, and Treasury market demand. The goal is not to predict the exact day fiscal pressure matters. The goal is to build portfolios that do not depend on one policy outcome being correct.

All my best,

Brandon VanLandingham, CFA, CMT, CFP

 

 

 

 

 

 

 

 

 

 

 

 

1. Congressional Budget Office, "The Budget and Economic Outlook: 2026 to 2036," February 2026. Deficit, revenue, outlay, interest-cost, and debt projections. https://www.cbo.gov/system/files/2026-02/61882-Outlook-2026.pdf 2. U.S. Treasury Fiscal Data, "Debt to the Penny," API result for May 6, 2026. Total public debt outstanding: $38.91883792658290 trillion; debt held by the public: $31.26338376600016 trillion. https://api.fiscaldata.treasury.gov/services/api/fiscal_service/v2/accounting/od/debt_to_penny?sort=-record_date&page[size]=1; U.S. Congress Joint Economic Committee, "National Debt Reaches $38.91 Trillion, Increased $2.70 Trillion Year over Year, Increased $10.75 Trillion in Five Years," May 7, 2026. https://www.jec.senate.gov/public/index.cfm/republicans/2026/5/national-debt-reaches-38-91-trillion-increased-2-70-trillion-year-over-year-increased-10-75-trillion-in-five-years 3. U.S. Bureau of Economic Analysis, "GDP (Advance Estimate), 1st Quarter 2026," April 30, 2026. Real GDP increased 2.0% annualized; current-dollar GDP increased 5.6% annualized. https://www.bea.gov/news/2026/gdp-advance-estimate-1st-quarter-2026 4. Committee for a Responsible Federal Budget, "Debt Rises to 175% of GDP Under CBO's Long-Term Outlook," March 2, 2026, summarizing CBO long-term budget outlook data. https://www.crfb.org/blogs/debt-rises-175-gdp-under-cbos-long-term-outlook 5. Reuters via Investing.com, "Global debt hits record of near $353 trillion, with signs of move away from US," May 6, 2026, citing Institute of International Finance Global Debt Monitor. https://www.investing.com/news/stock-market-news/global-debt-hits-record-of-near-353-trillion-with-signs-of-move-away-from-us-4664127 6. International Monetary Fund, "Global Debt Remains Above 235% of World GDP," September 17, 2025. IMF Global Debt Database update. https://www.imf.org/en/blogs/articles/2025/09/17/global-debt-remains-above-235-of-world-gdp 7. International Monetary Fund, "Fiscal Policy under Pressure: High Debt, Rising Risks," Fiscal Monitor, April 2026. https://www.imf.org/en/publications/fm/issues/2026/04/15/fiscal-monitor-april-2026 8. Carmen M. Reinhart and M. Belen Sbrancia, "The Liquidation of Government Debt," Economic Policy, March 2015; Harvard Kennedy School publication summary. https://www.hks.harvard.edu/publications/liquidation-government-debt 9. Prodromos I. Prodromidis, "Economic Environment, Policies and Inflation in the Roman Empire up to Diocletian's Price Edict," The Journal of European Economic History, 2009. https://www.researchgate.net/publication/264536482_Economic_Environment_Policies_and_Inflation_in_the_Roman_Empire_up_to_Diocletian%27s_Price_Edict 10. Federal Reserve Education, "Inflation and the Fall of the Roman Empire." https://www.federalreserveeducation.org/teaching-resources/social-studies/inflation/inflation-and-the-fall-of-the-roman-empire 11. H. Michell, "The Edict of Diocletian: A Study of Price Fixing in the Roman Empire," Canadian Journal of Economics and Political Science, 1947; Cambridge Core summary. https://www.cambridge.org/core/journals/canadian-journal-of-economics-and-political-science-revue-canadienne-de-economiques-et-science-politique/article/abs/edict-of-diocletian-a-study-of-price-fixing-in-the-roman-empire/47837AFC17442503E6E90ED30FAD9D98 12. Mauricio Drelichman and Hans-Joachim Voth, "The Sustainable Debts of Philip II: A Reconstruction of Castile's Fiscal Position, 1566-1596," Journal of Economic History, 2010; Cambridge Core abstract. https://www.cambridge.org/core/journals/journal-of-economic-history/article/abs/sustainable-debts-of-philip-ii-a-reconstruction-of-castiles-fiscal-position-15661596/B1FB959C1208FAD270F3004D42A7858E 13. Pierre Dockes, "Crises and public debt capacity: the English financial revolution in the 17th and 18th centuries," Association Europe Finances Regulations, noting English debt-to-GDP exceeding 250% in 1815 and the subsequent 19th century decline. https://www.aefr.eu/en/article/3962-crises-and-public-debt-capacity-the-english-financial-revolution-in-the-17th-and-18th-centuries 14. UK Office for Budget Responsibility, "Post-World War II debt reduction," Fiscal Sustainability Report box, July 2013. https://obr.uk/box/post-world-war-ii-debt-reduction/

Perissos Private Wealth Management is a Registered Investment Adviser ("RIA"). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Perissos Private Wealth Management renders individualized investment advice to persons in a particular state only after complying with the state's regulatory requirements, or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital. Past performance is not indicative of future results.

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