R > G: The Silent Threat to American Stability

If interest rates rise faster than growth, debt becomes a trap.

I. Introduction – The Spread That’s Breaking the System

For decades, America managed to grow its economy faster than the cost of borrowing. That dynamic kept deficits manageable and debt levels sustainable. But today, a worrying shift is underway: the effective interest rate on government debt (R) is now greater than the real growth rate of the economy (G). In economic shorthand, we’ve entered an era of R > G.

This equation may sound academic, but it has very real consequences. When borrowing costs exceed economic growth, the debt burden doesn’t just increase – it compounds. This creates a growing strain on the federal budget, limiting our ability to invest in future needs.

The R > G concept was popularized by economist Thomas Piketty in his book Capital in the Twenty-First Century, where he applied it to inequality: when the return on capital exceeds the rate of economic growth, wealth concentrates at the top. But the same logic can apply to nations. When the interest rate on debt exceeds growth, public debt compounds and can overwhelm fiscal capacity.

As of 2024, the U.S. national debt reached $36.2 trillion[1], with annual net interest payments of $1.125 trillion, consuming approximately 22.0% of all Federal revenue, according to the latest FRED data[2][3]. This means that more than $1 of every $5 dollars in revenue goes just to service debt. In fact, interest has now surpassed National Defense spending to become the third-largest Federal expense, after Social Security and Medicare[4].

II. What Happens When R > G? A Costly Imbalance

There are negative consequences when the government’s interest payments (R) rise above its economic growth rate (G), and those consequences can build quickly. The result is a compounding debt burden that becomes more difficult to manage each year.

At its core, the National debt grows based on a simple formula:

Debt(T+1) = Debt(T) × (1 + R – G)

Where:

Debt(T) = total debt in the current year
Debt(T+1) = total debt in the following year
R = effective interest rate on the debt
G = real GDP growth rate

As long as Growth (G) exceeds Interest Rates (R), debt tends to shrink relative to the economy – that’s GOOD! But when R > G, even a stable budget with no new spending deficits leads to rising debt as a percentage of GDP – that’s BAD! This is worse in the U.S. context, because the Federal government has run over 20 consecutive years of deficits. We are compounding the problem even before adding the negative effects of R > G.

In 2023, the average interest rate on publicly held debt rose above 3.3%, while real GDP growth hovered near 2%[2]. This gap means the government must devote more revenue for the same services just to stay in place—and even more to reduce debt.

III. The Cost Spiral: Interest is Crowding Out the Future

Interest on the National debt is now the fastest-growing part of the federal budget. In FY2024, interest payments exceeded $1.1 trillion, surpassing military spending for the first time[3][4].

As interest rises, it reduces the budget available for priorities like:

• Infrastructure and clean energy projects
• Scientific and medical research
• Education, public health, and social services

These tradeoffs are already showing up in budget negotiations. If trends continue, interest could consume more than 25% of federal revenue by 2030, even under conservative projections[5]. That would mean better than 1 in 4 dollars would be spent servicing debt payments. Imagine the dinner table discussion if your credit card interest alone was taking a quarter of your income, that is the situation America could soon face.

IV. Why are Interest Rates Rising? What It Means for the Future?

To understand the R > G dynamic, we first need to ask: why are interest rates rising?

Interest rates are set by a combination of factors:

• The Federal Reserve’s target rates
• Investor expectations about inflation
• The supply and demand for government bonds

Since 2022, the Federal Reserve has raised rates to fight inflation. Meanwhile, investors have demanded higher returns to protect against rising prices from inflation. Additionally, increasing government borrowing has added more bonds to the market, pressuring yields upward[6]. All of which are putting upward pressure on interest rates.

Can we control interest rates?

The Federal Reserve’s role in Monetary policy gives them huge power to influence rates, however even they are subject to market forces during their Open Market Operations. So in short, yes they have great influence, but not control and where that control occurs changes based on the term.

• Short-term rates? Generally yes, the Federal Reserve sets the Fed Funds rate which sets short term rates.
• Long-term rates? No—those are driven by global investor confidence, inflation expectations, and the perceived durability of U.S. fiscal policy and trust in the dollar.

That’s why many economists believe elevated interest rates may persist, especially if inflation remains sticky or if global lenders become more cautious about U.S. debt levels. In fact, nearly $11 billion exited U.S. long-term bond funds in Q2 2025 amid concerns over debt and inflation, while investors favored short-term securities[6]. Federal Reserve Chair Jerome Powell recently emphasized that the Fed will maintain its “wait-and-see” approach due to persistent inflation risks shaped by tariffs and uncertainty[7].

What it means for the future?

When looking at our current situation and what the future may hold, you must evaluate the impact of rising Interest Rates (R) would have on the budget and our debt costs. We created a sensitivity table using our current National Debt to show the effects of a 1% to 3% increase in Interest Rates (R). As you can see the increase in Debt Servicing costs goes up substantially, exacerbating an already challenging problem. Is this likely to happen? Interest rates have been fairly stable and the Federal Reserve monitors this closely, but is it unheard of? In the late 70’s early 80’s with inflation out of control, interest rates peaked over 20%, and were over 10% for more than 3 years, and never dropped below 6% for Paul Volker’s entire term as Chair of the Federal Reserve from 1979-1987.

V. Ignoring the Problem Makes It Worse

The future may come faster than we expect, and this isn’t one of those challenges that if you ignore gets better on its own.

Just a few years ago, some projections warned interest might eventually exceed 30% of Federal revenue[5]. But with today’s rate environment, we’re already at 22%, and climbing – you don’t have to imagine too hard with annual structural Federal Budget deficits adding to the National debt, reaching 30% no longer seems like a stretch.

If left unresolved, rising debt interest may eventually leave policymakers with only difficult choices:

• RAISE TAXES: Broad increases that may include middle-income earners
• REDUCE SPENDING: Cuts to Social Security, Medicare, defense, or other mandatory programs
• PRINT MONEY: Central bank debt monetization—risks inflation or currency credibility

This is no longer a theoretical risk. It’s embedded in the current budget and growing with every year of inaction. Interest is no longer just a line item — it’s becoming as challenging as Medicare, and Social Security entitlements. All growing, or having funding challenges simultaneously.

VI. Japan: A Glimpse into the future? A Blueprint to Not follow?

Some point to Japan as evidence that high debt can be sustained without any issues provided inflation remains under control if the debt is held in the states fiat currency. But key differences limit the comparison:

• Japan’s debt is largely owned domestically
• It has a current account surplus
• It battled deflation, not inflation

However, even Japan is now being tested. After years of ultra-low rates and decades of stagnant growth, it has begun reversing policy, increasing interest rates, and weakening the long-standing yen carry trade where people would borrow from Japan at low interest rates and invest in higher returning areas outside of Japan. These shifts have raised Japan’s borrowing costs and led to rising debt service burdens as interest rates rise (R) [8][9].

Analysts from Barclays and the IMF have noted that Japan’s growing interest expenses could strain its fiscal outlook if growth remains weak[10]. This has important implications for the U.S., which faces a more inflation-prone environment and heavier reliance on foreign buyers of US Debt.

VII. How Do We Escape? The Tough but Necessary Choices

Solving the R > G imbalance will require a mix of political will power, discipline, and hard policy choices:

1. RAISE REVENUE: Greater revenue sources through taxation, tariffs, and fees
2. SPENDING DISCIPLINE: Slow or reduce spending, reevaluate larger budget items including mandatory spending on entitlements
3. BOOST GROWTH: Invest in productivity, innovation, infrastructure, and labor force participation
4. RESTORE FISCAL CONFIDENCE: Send clear signals that America’s Fiscal position is sound to reduce risk premiums
5. AVOID MONETARY SHORTCUTS: Don’t Print Money to ease debt that risks creating runaway inflation

It is likely to require a combination of a number of these solutions. The solutions are not mysterious—they’re well known. As noted by the Committee for a Responsible Federal Budget, former Fed Chair Ben Bernanke, and former CBO directors, the issue isn’t technical—it’s political will[11].

VIII. Conclusion

We are no longer warning about R > G — we’re living it. It may not scream that the sky is falling or that America will become insolvent tomorrow. However, it is quietly altering the structure of our National budget by crowding out other items, limiting our ability to provide services, putting pressure on our structural annual deficits, and creating growing economic risks that continue to build over time creating great and greater consequences for the health of America’s future.

In the past, fiscal hawks cautioned that rising interest costs could one day consume a dangerous share of revenue. That day has arrived. As of 2024, 22.0% of federal revenue is already going to interest — and rising.

This isn’t theoretical. It’s a structural shift embedded in the fiscal outlook. Every year we delay action compounds the problem. Interest becomes the dominant force in our fiscal future — not a side expense, but a driver of debt itself.

The good news? The earlier we act, the more options we have, and the easier (not easy) managing it becomes. With thoughtful, balanced reform, the U.S. can navigate this challenge and return to fiscal stability. However, it starts with recognizing that this isn’t about politics or beliefs — it’s about math.

Because when the Rate of interest (R) exceeds the rate of Growth (G), time is not on our side.

Citations

[1] U.S. Debt Clock, 2024. https://usdebtclock.org/

[2] FRED Series ID: A204RC1A027NBEA (Federal Government: Net Interest Payments, Annual). https://fred.stlouisfed.org/series/A204RC1A027NBEA

[3] FRED Series ID: AFRECPT (Federal Government: Current Receipts, Annual). https://fred.stlouisfed.org/series/AFRECPT

[4] Congressional Budget Office (CBO). “Federal Budget Outlook: 2024 to 2034.” https://www.cbo.gov/publication/59096

[5] Committee for a Responsible Federal Budget. https://www.crfb.org

[6] Financial Times. “Investors flee long-term US bonds amid debt and inflation concerns.” https://www.ft.com/content/75a4acf6-b3fa-4a90-8b4e-4c0724afd407

[7] Associated Press. “Powell says Fed will ‘wait and see’ on rate cuts, citing persistent inflation risks.” https://apnews.com/article/df5b9ac09f0cd283797c6c294a98da9c

[8] Nikkei Asia. https://asia.nikkei.com/Economy/BOJ-faces-fiscal-strain-as-government-debt-service-rises

[9] Reuters. https://www.reuters.com/markets/asia/japan-debt-costs-hit-record-boj-policy-shift-raises-yields-2023-10-01/

[10] IMF. https://www.imf.org/en/News/Articles/2023/11/15/japan-staff-concluding-statement-of-the-2023-article-iv-mission

[11] Brookings. https://www.brookings.edu/events/ben-bernanke-on-americas-fiscal-future/