The United States in the mid-1940s, the country had just financed the most expensive and bloody war in history. Something new is occurring: paychecks for the first time begin withholding income tax out of those paychecks as they are earned. The so called “Gold Standard” where Gold backs every dollar as a legal promise is gone for Americans. The Federal Reserve is learning how to steer interest rates for a peacetime economy. Beardsley Ruml, a former Macy’s finance chief turned New York Federal Reserve chair steps into this backdrop and writes an article in the January 1946 American Affairs publication with a simple but provocative statement:
“Taxes for revenue are obsolete.”
Beardsley Ruml
He isn’t trolling – he meant what he said. He’s telling readers that the way money works has changed, and if we keep thinking about Federal taxes like a family checking account, “first earn, then spend”, we misunderstand how money works in a fiat currency not backed by a hard asset (like gold) and what taxes actually do in a monetary system. The government no longer needs to wait for tax revenue to spend. Stop for a second and think about this statement, it is a Matrix like moment where Morpheus asks Neo if he wants the Red Pill or the Blue Pill. The Red Pill represents the truth and how fiat currency actually works, and the Blue Pill represents just ignoring the truth and going back to your comfortable understanding of how money works. A full copy of Ruml’s Thesis can be found here.
Fiat currency is money that is not backed by a physical commodity like gold or silver, but is instead backed by the government that issued it. Its value comes from the public’s trust and the government’s authority, which decrees it as legal tender. Examples of fiat currency include the U.S. Dollar, the European Union’s Euro, and the Japanese yen.
The Backdrop for Ruml’s Thesis
When Beardsley Ruml wrote “Taxes for Revenue Are Obsolete,” he was synthesizing his experiences of how American money actually worked, and the changes going on around him. As a Federal Reserve chair, participant in Bretton Woods, and someone who shaped policy, like Pay as you go payroll, he had a first hand view.
1933–1934: Off domestic gold—constraint shifts inside the border
In the early New Deal years, the U.S. ended domestic gold convertibility and reorganized the gold regime under the Gold Reserve Act. Inside the country, dollars were no longer legally IOUs for a fixed weight of metal. The binding constraint on federal finance began to migrate from gold reserves to inflation, real capacity, and statute (law). Ruml’s essay explicitly ties his thesis to this inconvertible-currency reality: a national state “with a central banking system… [whose] currency is not convertible into any commodity.” [1]
“Final freedom from the domestic money market exists… where [there is] a modern central bank, and [the] currency is… not convertible into gold.” [1]
1942–1943: Pay-as-you-go withholding—taxes become continuous
With wartime employment booming, Ruml helped push paycheck withholding (the Current Tax Payment Act of 1943), turning the income tax from an April settlement into a real-time flow. Withholding didn’t just improve administration; it made taxes a live instrument for managing purchasing power across the year, reinforcing Ruml’s view that taxes should be judged by effects—on prices, distribution, and behavior rather than as a cash bucket to “fund” future outlays (spending). [5]
1944–1946: Bretton Woods and the New York Fed vantage point
As Bretton Woods took shape (par exchange rates, gold convertibility for foreign official holders, capital controls), Ruml was chairman of the New York Fed (wartime through 1946). He watched the Fed support Treasury borrowing for war finance and then toward peacetime normalization. In that setting, Ruml saw operationally how Treasury spending settled through the Federal Reserve, and how taxes and bond sales later lowered purchasing power and supported interest-rate control. He previewed his thesis in a 1945 address and then published the 1946 essay, sharpening the claim that taxes are essential for what they do, not to generate revenue before spending. [1]
“All federal taxes must meet the test of public policy and practical effect.” [1]
1951: The Treasury–Fed Accord—roles clarified
Ruml’s essay was given before the Treasury–Fed Accord, but the Accord (1951) confirmed the institutional direction he was pointing toward: monetary-policy independence to target rates and prices, separate from Treasury’s debt-management imperatives. After pegging wartime yields, the Fed reclaimed the ability to resist fiscal pressure when inflation called for tighter settings—strengthening the case that budgets should be judged by employment, prices, and distribution, not balanced-budget rituals. [3]
Ruml died in 1960, but his logic became even more straightforward after Nixon suspended official dollar–gold convertibility and major currencies moved to floating exchange rates. From then on, the United States was unambiguously a fiat-currency issuer: spending cleared through the Fed first; taxes and bond sales followed to manage inflation, distribution, market structure, and interest rates. Ruml’s once-provocative line read less like heresy and more like a plain description of operations—with the real constraints now fully on inflation, capacity, and institutional credibility. [4]
“The public purpose… should never be obscured in a tax program under the mask of raising revenue.” [1]
So the events and experiences: moving internally away from gold backed assets at home (1933–34), real-time taxation (1943), Fed Monetary Autonomy (1951), and externally away from gold (1971–73) together explain how Ruml could say, without gimmicks, that taxes are essential for what they do: price stability, distribution, behavior, and currency demand—rather than as a prerequisite to spend. He believed the question for any program was:Can the real economy deliver, and how will policy manage the price-and-capacity path along the way?[1][3][4][5]
Follow the dollar: how “mark-up” works
To see understand Ruml’s Thesis more concretely, we can use by example a single payment.
A federal contractor finishes a bridge repair job. Treasury authorizes payment to the contractor. The Federal Reserve, which is the government’s bank, marks up the contractor’s checking account at their commercial bank. Two things happen at once:
The contractor’s deposit goes up (their balance goes up, they have more spendable money).
The contractor’s commercial bank’s reserve balance at the Fed goes up (the bank’s settlement cash).
No one at the IRS had to collect that exact amount yesterday for this payment to clear today. In other words, the government did not have to wait for revenue before spending. The payment clears because the United States operates the dollar system. Once that payment is made, taxes later can remove some of those dollars from private hands; and bond sales can swap some deposits/reserves for Treasury securities to help the Fed keep interest rates where it wants them.
That’s the basics of Ruml’s claim. In a fiat system with a central bank, spending isn’t bottlenecked by prior tax receipts. The real limits are inflation and real capacity – how many workers, machines, homes, kilowatts, and microchips the economy actually has.
“Federal taxes can be made to serve four principal purposes…” [1]
Ruml’s Four Functions for federal taxes then are as follows:
Price stability (control inflation by removing purchasing power when the economy runs hot)
Distribution (redistributing wealth (purchasing power) based on policy)
Behavior/structure (altering behavior with economic incentives e.g. carbon, tobacco, alcohol, etc.)
Currency demand/legitimacy (creating demand for currency by requiring Federal taxes be paid in Dollars)
Questions from Ruml’s thesis
Not only was Ruml’s thesis provocative, if true it brings up a whole set of new questions, and challenges a lot of our notions of money and taxes.
Question: If spending can come before tax revenue, and the government doesn’t need it to spend, why are we paying taxes at all? This is the heart of Ruml’s Thesis, that while the government did not need taxes to allow the government funding to spend, taxes did play an important role. Ruml believed taxes were a way to manage price stability (inflation): they help keep prices in check by reducing purchasing power (demand), they shape who holds purchasing power, and they anchor the currency by requiring dollars to settle tax bills. Without taxes, you could spend for a time but you would lose price stability and the public’s confidence in the stability of the dollar itself.
Question: Why do politicians still ask “How will you pay for it?” if taxes aren’t needed to spend? Because you hit walls long before you “run out of money”:
You can’t print money for Imports. If spending weakens the value of the dollar, import prices jump or supplies dry up. That impacts living standards fast. [18][19][20]
Boom–bust finance. Prolonged easy fiscal + easy money can inflate asset and credit bubbles; when they pop, banks retrench and recessions deepen—costlier than using modest drains (purchasing power reductions) earlier. [9]
Tax-base erosion (seigniorage limit). If people expect rising prices and weak policy response, they flee into hard assets/FX; real tax intake falls just when control is needed (seen in hyperinflations). [16][17]
Real-world choke points. Money doesn’t increase productivity, create nurses, build cars, ports, or grid lines; increasing demand into bottlenecks yields price instability, not output. [10][12][13][14]
Interest-cost feedback. Rate hikes to cool inflation raise government interest bills, shifting income toward bondholders and forcing tougher trade-offs later. [11][9]
Predictable Policy keep costs low. Predictable authorizing/phase-out rules lower risk and support long-term contracts; junk the rules and borrowing costs/investment worsen even before inflation moves. [11][9]
Ruml’s point isn’t spend in excess, it’s that taxes aren’t required to spend. Taxes and pacing are the governors that keep prices stable, protect access to vital imports, prevent financial bubbles, and align demand with what the real economy can actually deliver. [1][2][3][6][7]
Question: Why not just make everyone a billionaire? This is an interesting thought exercise, if everyone was a billionaire would the purchasing power of the currency be the same? Since money is a claim on real output, not actual output (productivity) if everyone was a billionaire most certainly the purchasing power of the fiat currency would be substantially lower. More money without more productivity (nurses, houses, energy, widgets, etc.) brings higher prices (inflation), not greater prosperity. Ruml’s thesis keeps taxes (and other monetary mechanisms to reduce purchasing power) in the toolkit precisely to match purchasing power to capacity.
Japan: Use Case and cautionary tale
Japan is the cleanest real-world test of part of Ruml’s thesis. For decades, Japan’s gross public debt sat well above 200% of GDP—yet long-term interest rates were near zero under Bank of Japan (BOJ) policy. The Yen has had no solvency crisis, of major uncontrolled inflation. That supports Ruml’s point that a nation which issues debt in its own currency faces inflation and capacity constraints more than a “running out of money” constraint [12][13].
However, during the same period shows why Ruml’s mechanics don’t solve the growth problem by themselves:
The “lost decades.” Japan endured a multi decade stretch of weak real growth and disinflation/deflation. Even with easy financing conditions Japan was not able to create growth and productivity improvements or new sectors on their own [14][16].
Balance-sheet hangover. After the 1990s asset bust, households and firms deleveraged for years—private demand stayed weak even when public deficits filled part of the gap.
Wages and demographics. An aging population, shrinking workforce, and corporate practices contributed to sluggish productivity and flat real wages for many workers [14][16].
Foreign Exchange (FX) and imported prices. Episodes of yen weakness raised import costs (notably energy), squeezing households and complicating the path out of very low inflation.
Policy evolution. The BOJ cycled through low rates including zero and even negative interest rates for 8 years!, Quantitative Easing, and yield-curve control, then gradual adjustments. These tools stabilized finance but didn’t create robust growth, reminding us that supply-side capacity (energy, housing, innovation, corporate reform) still determines living standards.
Monetary sovereignty may avoid immediate solvency issues in your own currency, but prosperity still depends on productivity, demographics, and the supply side. The policy art isn’t printing more money; it’s about managing the balance between demand and capacity so money meets output rather than outruns it. [12][14][16]
Where Ruml’s Thesis fails
Ruml presumes monetary sovereignty – you tax and spend in your own currency, with credible institutions, and you don’t owe large amounts in someone else’s money, or require external inputs like energy, food, or other goods and raw materials. It also assumes you don’t outspend the productive capacity of the country. If and when those conditions vanish, significant and detrimental impacts could fall upon the country. There are a number of examples of hyper inflation, that have damaged the economic and well being of countries.
Weimar Republic Germany (1921–23). Huge reparation obligations (external), political fracture, and aggressive central-bank financing into a collapsing anchor produced hyperinflation. The issue wasn’t “deficits” in the abstract; it was external liabilities + institutional breakdown + supply dislocation [18].
Zimbabwe (2000s). Radical output collapse (agriculture and supply chains), governance failures, and money creation against shrinking real capacity drove prices into hyperinflation. Too many nominal claims, too little real output [19].
Sri Lanka (2022). A foreign-currency crisis: depleted FX reserves, weak tax base, and large hard-currency debts. You cannot print your own fiat money when your liabilities are in dollars/euros; the constraint becomes imports and external financing, not domestic “solvency” [20][21][22].
Ruml’s Thesis exists when you issue your own currency, are not dependent on externalities or foreign debt, and spending does not outpace productive capacity and credibility in currency is maintained. Lose those – and inflation, devaluation, and/or default can take the driver’s seat.
How most Economists think about Ruml’s Thesis
Most modern economists agree on the operational basics: in a fiat currency system, the Treasury and central bank can ensure payments clear in the home currency; taxes/bonds then drain purchasing power and help the central bank hit an interest-rate target. That’s not controversial [6].
Where Economists caution starts – real life, not the textbook:
Prices can jump if demand outruns supply. If new spending hits an economy short on cars, nurses, chips, or houses, prices rise. That happened in 2020–22 during the COVID Pandemic: demand recovered while supply was jammed. Changing taxes or budgets is slow, so economists like built-in brakes (automatic stabilizers) and phased rollouts. [6][7][2]
Higher interest rates make debt cost more. The U.S. can always pay in dollars, but when the Fed hikes to fight inflation, the interest bill on government debt climbs. If that bill grows faster than the economy or tax revenue, Congress faces tougher trade-offs. Last year Net Interest on the US National Debt was over $1 trillion. The 1951 Accord exists so the Fed can fight inflation even if it makes borrowing costlier. [3][10][11]
Consumer Sentiment and Beliefs matter. Prices stay more stable when people trust leaders will cool inflation off if needed. If policy looks like “spend without limits,” businesses and workers build in higher inflation into their cost models and pass that along, and it’s harder to bring back down once its gone up.
Not every side effect shows up in the Consumer Price Index (CPI). Inflation can manifest itself in many ways that trickle down to the ordinary consumer in ways that aren’t tracked well by major indexes like the CPI. Big deficits with low rates can push up stock and house prices and widen wealth gaps, even if everyday inflation isn’t high. That can erode support for useful programs. [10]
At full tilt, something has to give. When the economy is already near full capacity, more public spending creates demand that competes with private demand for the same workers, resources, and materials. The result isn’t “no money”; it’s higher prices or shifting resources away from something else. This can be managed with taxes destroying demand, phased timing reducing demand peaks, or adding supply.
America, and most countries are deeply intwined in Global Trade We import energy, food, critical resources, and key parts from a Global Supply chain. If the dollar weakens or suppliers get nervous, import prices rise and shortages can appear. Building domestic capacity (energy, logistics, housing) and self sufficiency can offset that, but it also comes at a cost.
Where Economists actually stand on Ruml’s thesis
Broad agreement on the plumbing: Most economists accept that in a fiat system the government can pay first in its own currency, and that taxes/bonds are tools to manage demand and interest rates. That’s mainstream (see the Bank of England explainer). [6][7]
Support for using deficits in slumps: In recessions or emergencies, many economists favor deficit spending to protect jobs and speed recovery. (Ruml’s taxes aren’t required for spending fits this.) [6][7]
Caution about pushing it too far: Many are wary of treating “spend first” as a green light without a clear plan for inflation, ensuring demand doesn’t outpace supply and productive capacity, and the outside world (Global trade, key economic inputs from outside the U.S.). They stress guardrails, automatic stabilizers, and credible roles for the Fed and Congress (the spirit of the 1951 Accord). [3][10][11]
Split on the stronger claims (often linked to MMT):
Critics say relying mainly on taxes to stop inflation is too slow and political, and they worry about fiscal dominance (pressuring the Fed to accommodate debt). They also flag open-economy risks and asset-price side effects. [9]
Supporters respond that good design (automatic tax/benefit adjusters, phasing, targeted drains) can handle those issues, and that recognizing the fiat mechanics helps us focus on real limits (people, machines, energy) rather than imaginary cash limits. [9]
Economist View Summary:
They mostly agree on the mechanics.
They agree deficits can be useful tools.
They differ on how far you can push spending before you risk inflation, financial stress, or FX problems
They differ on whether taxes can be used quickly and fairly enough to cool inflation off. [6][7][3][10][11][9]
A Ruml-style way to judge any Spending program
The Congressional Budget Office estimates the cost and budget impact of programs. Using a Ruml Thesis style way to evaluate programs might look something like this.
Capacity: Do we have the people, skills, materials, energy, and productive capacity? If not, what’s the plan to expand supply?
Inflation plan: If demand overheats, what automatic brakes kick in—phasing, adjustable credits, temporary surtaxes? [2]
Distribution: Who gets the new purchasing power and who gives something up?
External exposure: Are we import or FX sensitive in the relevant inputs? Do we hold external exposures?
Institutional alignment: Are fiscal choices made with a central bank focused on price stability (the post-1951 lesson)? [3]
Summary: Ruml’s answer to the question
In summary we ask the title question: “Are taxes needed,?” Ruml’s answer—in his own words—is that their revenue role is not the point in a fiat system:
“Taxes for revenue are obsolete.” [1]
They are needed for what they do: to keep prices stable, shape distribution and behavior, and anchor demand for the dollar:
“Federal taxes can be made to serve four principal purposes…” [1]
And the standard for judging them is not myth or ritual but outcomes:
“All federal taxes must meet the test of public policy and practical effect.” [1]
Read that together and you have the summary of his thesis: the United States does not tax so that it can spend; it taxes so that the money it spends produces stable prices, fair distribution, incent certain behaviors, and ensure a credible currency. While his beliefs were provocative at the time, and still controversial, the mechanics of his thesis remain true and you can see his influences in the roots of Neo Chartalism, Functional Finance and all the way to Modern Monetary Theory (MMT) today.
The terms “surplus”, “deficit” and “debt”, or “National Debt”, are often used at the same time, and sometimes interchangeably, but they represent distinct concepts in government finance. Understanding the difference is crucial for grasping the fiscal health of our nation. This article discusses the differences, helps define them and put them in terms Citizens can use.
What is a Surplus & Deficit?
Imagine your household budget for a given period, say a month. You have money coming in (your income) and money going out (your expenses).
Deficit: If in that period you spend more money than you earn, you have a deficit. You’ve spent more than your current income . For a government, a budget deficit occurs when its total expenditures (spending on programs, services, etc.) exceed its total revenues (money collected from taxes, fees, and other sources) within a specific fiscal year (typically October 1 to September 30 in the U.S.) [3]. That is to say Total Expenses exceed Total Revenue.
Deficit
Inadequacy or insufficiency. “a deficit in revenue.”
The amount by which a sum of money falls short of the required or expected amount; a shortage. “budget deficit.”
Deficiency in amount or quality; a falling short; lack. “a deficit in taxes, revenue, etc.”
Surplus: Conversely, if you earn more money than you spend in a given month, you have a surplus. The government experiences a budget surplus when its revenues exceed its expenditures in a fiscal year. This means that your Total Revenue exceeds your Total Expenses and you have money left over [3].
Surplus
Being more than or in excess of what is needed or required: synonym: superfluous. “surplus revenue.”
Being or constituting a surplus; more than sufficient. “surplus revenues; surplus population; surplus words.”
An amount or quantity in excess of what is needed.
What is a National Debt?
Now, let’s extend that household analogy. If you consistently spend more than you earn each month, you’ll likely need to either a) Reduce Spending, b) Increase Revenue, c) Take from Savings, or d) Borrow money (use credit). Your use of credit might be a credit card, a loan from a bank, or borrowing from friends and family. This accumulated borrowing represents your total debt.
National Debt: The National Debt (or public debt) is the cumulative total of all the money the federal government has borrowed over its entire history to cover past deficits, minus any surpluses [1, 3]. When the government runs a deficit, it has to borrow money, usually by issuing Treasury bonds, bills, and notes. This new borrowing adds to the National Debt. When it runs a surplus, it can use that extra money to pay down a portion of the existing debt, or put into funding other programs and services.
While the US Government has mechanisms that you and I don’t have that make it different than a Credit Card, for our analogy the National Debt accumulates like the total balance on your credit card or loan statement, which reflects all the outstanding purchases (expenses) you’ve made over time and haven’t fully paid off (debt). Every time you have a monthly deficit (spend more than you earn and put it on credit), your overall credit card debt increases.
Debt
Something owed, such as money, goods, or services.”used the proceeds to pay off her debts; a debt of gratitude.”
An obligation or liability to pay or render something to someone else.”students burdened with debt.”
The condition of owing. “a young family always in debt.”
National Debt and Deficits in Context, why does it matter?
For the United States, carrying some debt is nothing new, with rare exception the U.S. has carried debt since its inception [2]. Carrying some debt is normal, and perhaps beneficial – say like a Mortgage and a Credit Card bill you pay each month. However, the scale and trajectory of the US National Debt have dramatically changed over the last few years. The US has had some economic shocks that increased the debt rapidly including the 2008 Great Recession, and the COVID Pandemic. What is different now with our current National Debt is that it is the highest it has ever been ($36.95 Trillion) [10] greater than our entire country’s annual economic output of $29.18 trillion in 2024 (Debt to GDP > 100%) [11]. Troubling is that this is a peace time debt surpassing World War II levels of spending. To some, more concerning is that each year we have a deficit in our budget, now exceeding over a trillion dollars annually, that appears to be a structural shortfall. Meaning, the government’s revenue is consistently below its expenses and commitments that isn’t one time or transient, and must borrow each year to meet its funding needs.
The last time the U.S. federal government ran an annual budget surplus was in 2001 [1, 3]. Since then, the nation has experienced a continuous string of deficits (over 20 years in a row). This persistent pattern isn’t just a result of temporary economic downturns; it’s driven by structural deficits.
Structural deficits refer to a persistent imbalance between government spending and revenues that exists even when the economy is operating at its full potential (i.e., not in a recession, or major economic shock) [1, 3]. These are not caused by the ups and downs of the business cycle but by fundamental, long-term mismatches in revenue and expenses [3]. Key drivers of structural deficits in the U.S. include:
Aging Population: As the population ages, programs like Social Security and Medicare face increasing demands, leading to higher spending. Fewer working-age individuals contribute taxes relative to the growing number of retirees receiving benefits [1].
Rising Healthcare Costs: Healthcare costs consistently outpace economic growth, putting upward pressure on government spending for programs like Medicare and Medicaid [1].
Tax Policies: Decisions to cut tax rates without corresponding spending reductions, or a tax base that doesn’t keep pace with the modern economy, can contribute to insufficient revenue.
Increased Spending Commitments: Long-term commitments to various government programs and services, without sustainable funding mechanisms, create an ongoing gap.
These underlying factors mean that even during periods of economic prosperity, the U.S. government is projected to continue spending more than it collects, contributing to the ever-growing national debt [1].
Are Deficits Bad? What about Interest?
Deficits, and Debt spending are not all bad. Government can step in to “prime the pump” in times of economic turbulence to smooth a business cycle, and some government investments add to overall productivity. However, while sometimes beneficial (e.g., during wars, pandemics, or severe economic crises to stimulate recovery), persistent and large deficits are generally not a good thing because they directly lead to a larger national debt, and a larger national debt brings its own set of challenges:
Increased Interest Payments: Just like you pay interest on your credit card debt, the government must pay interest on the National Debt [8]. As the debt grows, so does the amount of interest the government has to pay. If your credit card balance keeps growing, a larger and larger portion of your monthly payment goes just to interest, leaving less money to pay down the principal or for other essential spending.
Real-World Impact: For the U.S. federal budget, interest payments on the national debt have become one of the fastest-growing “programs” [8]. These payments are mandatory and siphon away funds that could otherwise be used for other programs like education, infrastructure, scientific research, defense, or reducing taxes [8]. In 2024 Interest expenses exceeded $1 trillion dollars, passing the US Military as the 3rd largest expense in the Federal budget [12].
Crowding Out Budget Items: As the Interest payments grow, if they get large enough it puts the government in a difficult situation. If they are unable offset the deficits with more Revenue they may be forced to reduce other programs, or add to the Debt compounding the challenge. This has the effect over time of crowding out other government expenses in order to pay the rising Interest expenses.
Higher Interest Rate Expenses: When the government borrows heavily to finance its deficits, it competes with private businesses for available capital in the financial markets [9]. This increased demand for capital can drive up interest rates from investors who are taking on more risk from a highly leveraged seller. Higher interest rates make it more expensive for the government to borrow money to finance the debt. This leads to increasing Interest expenses. For example if you’re constantly maxing out your credit cards, banks might be less willing to lend you money or increase your interest rate to compensate for their higher risk.
Reduced Fiscal Flexibility: A large and growing national debt limits the government’s ability to respond effectively to future crises (like recessions or natural disasters) or to make necessary investments [8]. With a significant portion of the budget already allocated to interest payments, policymakers have less room to maneuver. If your household expenses match your income, an unexpected medical emergency or job loss can be catastrophic if you have no financial buffer or ability to borrow more without extreme difficulty. This can lead to difficult choices, potentially requiring painful tax increases or spending cuts during times when economic stimulus or social support is most needed [8].
Risk of Fiscal Crisis: In extreme cases, if investors lose confidence in a government’s ability to manage its debt, they may demand much higher interest rates or stop lending altogether. This could lead to a fiscal crisis, where the government struggles to pay its bills, potentially causing economic instability, inflation, and a loss of trust in the nation’s financial system [8]. This situation is unlikely to happen in the US as the Reserve Currency in the World, and backed by the US Governments unlimited ability to tax.
US Advantages: The Reserve Currency and Fiat Money
It’s important to acknowledge that for countries like the United States, whose currency (the U.S. dollar) holds reserve currency status, there’s a unique advantage. As the world’s primary reserve currency, the dollar is widely used in international trade, finance, and as a store of value by central banks globally [5]. This creates a consistently high demand for U.S. Treasury bonds, even amidst large deficits, making it easier and often cheaper for the U.S. government to borrow money [5]. Foreign governments and investors are generally willing to lend to the U.S. at relatively low interest rates because U.S. Treasury securities are considered extremely safe and liquid [5]. However, this ability is not unlimited and we may get to a point where that is tested (See our article Return of the Bond Vigilantes).
Furthermore, because the U.S. government issues its debt in its own fiat currency (a currency not backed by a physical commodity like gold, but by government decree), it theoretically has the ability to “print” more money to pay its debts. This gives it a degree of flexibility that countries borrowing in foreign currencies do not possess [5].
However, most mainstream economists believe that while these factors allow for higher debt levels, they do not negate the long-term risks associated with persistent structural deficits and a continuously rising national debt. Even with the reserve currency advantage and the ability to issue debt in fiat currency, there are still significant potential downsides:
Inflation: While printing money can address debt, doing so excessively without a corresponding increase in goods and services (productivity) can lead to inflation, eroding the purchasing power of the currency [7].
Loss of Confidence: Even for a reserve currency, if debt levels become truly unsustainable or if the government appears unwilling to address its fiscal imbalances, investors could eventually lose confidence, leading to a depreciation of the currency and higher borrowing costs as demand moves away from the dollar.
Intergenerational Equity: Accumulating massive debt effectively transfers the burden of repayment (through future taxes or reduced services) to younger and future generations.
It’s worth noting that a minority school of thought, known as Modern Monetary Theory (MMT), holds a different perspective. MMT proponents argue that a sovereign government, which issues its own fiat currency, is not financially constrained in the same way a household or business is [6]. They contend that such a government can always create enough money to meet its obligations and finance spending, as long as it avoids inflation [6]. From this viewpoint, the primary limit on government spending is the availability of real resources in the economy, not the ability to finance deficits [6]. While MMT has gained some academic traction, its policy prescriptions and core tenets remain largely outside the economic mainstream and are considered outside of the mainstream by most economists, who emphasize the importance of fiscal sustainability and the risks of unchecked government spending and debt [7].
Conclusion
In conclusion, surpluses are annual measures of revenue outpacing expenses, deficits are an annual measure of overspending, and the national debt is the cumulative total of all borrowing less surpluses. Persistent deficits lead to growing debt, which in turn leads to higher interest payments, potential crowding out of private investment, reduced fiscal flexibility, and an increased risk of economic instability. While the U.S. dollar’s reserve currency status and the nature of fiat currency provide certain advantages in managing debt, most economists agree that these do not make the nation immune to the long-term structural problems that large and growing deficits entail [13][14]. Addressing these long-term fiscal challenges requires difficult policy choices to ensure a sustainable economic future.
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.
Figure 1 Source: FRED
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.
Figure 2 Source: FREDFigure 3 Source: FRED, CBO
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 $11 billion exited U.S. long-term bond funds in Q2 2025 amid concerns over debt and inflation, while investors favored short-term securities[6]. Federal Reserve Chair Jerome Powell recently emphasized that the Fed will maintain its “wait-and-see” approach due to persistent inflation risks shaped by tariffs and uncertainty[7].
What it means for the future?
When looking at our current situation and what the future may hold, you must evaluate the impact of rising Interest Rates (R) would have on the budget and our debt costs. We created a sensitivity table using our current National Debt to show the effects of a 1% to 3% increase in Interest Rates (R). As you can see the increase in Debt Servicing costs goes up substantially, exacerbating an already challenging problem. Is this likely to happen? Interest rates have been fairly stable and the Federal Reserve monitors this closely, but is it unheard of? In the late 70’s early 80’s with inflation out of control, interest rates peaked over 20%, and were over 10% for more than 3 years, and never dropped below 6% for Paul Volker’s entire term as Chair of the Federal Reserve from 1979-1987.
Avg Interest Rate (%)
Est. Interest Cost ($T)
Increase from 2024 ($B)
0% (2024 Actual 3.36%)
$1.10T (Actual)
0
1% Increase (4.36%)
$1.43T
$327B
2% Increase (5.36%)
$1.75T
$655B
3% Increase (6.36%)
$2.08T
$982B
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.
Figure 4 Source: FRED, CBO
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:
RAISE REVENUE: Greater revenue sources through taxation, tariffs, and fees
SPENDING DISCIPLINE: Slow or reduce spending, reevaluate larger budget items including mandatory spending on entitlements
BOOST GROWTH: Invest in productivity, innovation, infrastructure, and labor force participation
RESTORE FISCAL CONFIDENCE: Send clear signals that America’s Fiscal position is sound to reduce risk premiums
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.
The United States finds itself at a critical juncture, facing a national debt of unprecedented scale in peacetime. As of early 2025, the total national debt exceeds $36.2 trillion, with the debt-to-GDP ratio hovering around 124%, a level last consistently seen only in the immediate aftermath of World War II [1, 2]. This towering figure casts a long shadow over the nation’s economic future, raising urgent questions about its sustainability and the path forward. While the U.S. has a history of managing significant debt burdens, the current challenge is distinct in its magnitude and the underlying structural imbalances driving it. As in the old adage “When you’re in a hole, first step is to stop digging” – there is gaining recognition of the scope and scale of the challenge. Understanding the perils of this high debt and the various strategies available for its reduction is crucial for navigating America’s fiscal future.
The Current Debt Landscape and its Dangers
The current debt level is not merely a number; it represents a fundamental imbalance between federal spending and revenue. Projections indicate that, without significant policy changes, federal debt held by the public could rise to 156% of GDP by 2055 and 206% by 2075 [3]. This trajectory is driven primarily by increasing outlays on major entitlement programs like Social Security and Medicare, coupled with surging net interest costs and a revenue stream that isn’t keeping pace with expenditures [3].
The dangers associated with such high and rising national debt are multifaceted and can have profound impacts on the economy and the lives of ordinary Americans:
Slow Economic Growth: High government borrowing can “crowd out” private investment. When the government demands a large share of available capital, it can drive up interest rates, making it more expensive for businesses to borrow and invest in job creation, innovation, and expansion. This ultimately dampens long-term economic growth and reduces wages [3, 4]. Studies have indicated a statistically significant negative relationship between high federal debt and economic growth [4].
Inflation and Devaluation of the Dollar: While not a direct cause-and-effect relationship, persistently large deficits financed by money creation can increase the money supply without a corresponding increase in goods and services, leading to inflationary pressures. Inflation erodes purchasing power, diminishing the value of savings and making everyday goods and services more expensive for households [4, 5]. In extreme scenarios, a loss of confidence in the dollar due to fiscal instability could lead to its devaluation, further exacerbating inflation and reducing America’s global standing [4].
Higher Interest Rates: A growing national debt means the government must borrow more, increasing demand for loanable funds. This puts upward pressure on interest rates, not just for the government but also for consumers and businesses. Higher interest rates translate to more expensive mortgages, car loans, and business credit, further dampening economic activity [3, 4].
Higher Debt Service Crowding Out Other Spending: As the debt grows and interest rates rise, a larger portion of the federal budget must be allocated simply to pay interest on the existing debt. In 2024, the U.S. spent $1.1 trillion on interest, nearly doubling from five years prior, surpassing spending on national defense [6]. This rapidly increasing debt service limits the government’s flexibility to invest in crucial areas like infrastructure, education, research and development, and national security, which are vital for future prosperity [3, 4].
Risk of a Fiscal Crisis: Perhaps the most severe, albeit less predictable, danger is the risk of a fiscal crisis. This occurs when investors lose confidence in the government’s ability or willingness to manage its debt, leading to an abrupt increase in interest rates, a collapse in bond prices, and widespread economic disruption. Such a crisis could jeopardize the dollar’s status as the world’s reserve currency, making it exceedingly difficult for the federal government to borrow and fulfill its essential functions [4].
Historical Paths Out of Debt: Lessons from the Past
Despite the daunting nature of the current debt, the United States has successfully reduced significant debt burdens at various points in its history. These periods offer valuable, albeit not perfectly transferable, lessons.
Period
Initial Debt-to-GDP (Approx.)
Final Debt-to-GDP (Approx.)
Key Strategies Employed
Post-Revolutionary War (late 1700s – early 1800s) [7]
Significant, but variable
Reduced substantially
Fiscal consolidation, establishment of federal credit, tariffs, land sales.
Post-War of 1812 (1815-1835) [7]
~16% (1815)
0% (1835)
Sustained budget surpluses, significant land sales, spending cuts, strong political will to eliminate debt.
Post-Civil War (1865-early 1900s) [7]
~31% (1865)
~3% (early 1900s)
Economic growth, deflation, consistent budget surpluses, relatively frugal government spending.
Post-World War II (1946-1974) [7, 8]
117.5% (1946)
~23% (1974)
Rapid economic growth, primary budget surpluses, “surprise” inflation, financial repression (low-interest rate policies by the Federal Reserve).
The most relevant historical parallel to today’s situation is the post-World War II era, where the debt-to-GDP ratio was even higher than it is currently. While significant economic growth played a role, it was complemented by other factors like sustained budget surpluses, unexpected inflation, and periods of financial repression [8].
Ways Out of Debt, US Options
Reducing the U.S. national debt to a manageable amount (Roughly 20%-50% of GDP) would require a combination of difficult and politically challenging measures. Here are eight potential strategies:
1. Increase Taxes
How it would work: This involves directly increasing government revenue. Various approaches could be employed:
Raising Income Tax Rates: Both individual and corporate income tax rates could be increased. For individuals, this could mean higher marginal rates across income brackets or specifically for high-income earners. For corporations, reversing some recent tax cuts would increase federal revenue.
Implementing a Value-Added Tax (VAT): A VAT is a consumption tax levied at each stage of production and distribution. Many developed countries use VATs, and a broad-based VAT in the U.S. could generate substantial revenue [9].
New Payroll Taxes: Expanding the base of earnings subject to Social Security taxes or increasing the payroll tax rate could bolster these critical programs and contribute to overall revenue.
Eliminating or Limiting Deductions: Reducing tax breaks, such as itemized deductions or certain tax preferences, broadens the tax base and increases effective tax rates for many taxpayers [9].
“Sin Taxes” or Carbon Taxes: Taxes on goods like tobacco, alcohol, or carbon emissions could provide revenue while potentially discouraging certain activities.
Challenges: Tax increases are often politically unpopular and can face strong opposition from various interest groups and taxpayers concerned about their impact on economic growth and personal income.
2. Lower Spending (Austerity)
How it would work: This involves reducing government expenditures across the board.
Mandatory Spending Reform: The largest portions of the U.S. budget are mandatory programs, primarily Social Security, Medicare, and Medicaid. Reforms could include adjusting eligibility ages, altering benefit formulas, or establishing caps on federal funding for these programs. Given the aging population, these reforms are often cited as critical for long-term fiscal sustainability [3, 9].
Discretionary Spending Cuts: This category includes defense spending, education, infrastructure, scientific research, and other government operations. Reductions could involve limiting new projects, cutting personnel, or reducing funding for specific agencies. For example, options include reducing the Department of Defense budget or cutting funding for international affairs programs [9].
Improving Efficiency and Reducing Waste: Efforts to streamline government operations, reduce improper payments, and combat fraud and abuse can contribute to savings, though often not on the scale required to significantly impact the overall debt.
Challenges: Spending cuts, especially to popular entitlement programs or critical services, are intensely debated and politically difficult due to their direct impact on citizens and various sectors of the economy.
3. Economic Growth
How it would work: Rather than directly cutting spending or raising taxes, this strategy focuses on growing the economy faster than the debt. As Gross Domestic Product (GDP) expands, the debt-to-GDP ratio naturally decreases, and a larger economic pie generates more tax revenue even with existing tax rates.
Investing in Productivity: Government investments in infrastructure (roads, bridges, broadband), education, and research and development (R&D) can boost long-term productivity and innovation.
Pro-Business Policies: Policies that foster a favorable environment for businesses, such as regulatory reform, reduced bureaucratic hurdles, and incentives for private investment, can spur economic activity.
Trade Liberalization: Expanding trade opportunities can lead to increased exports, economic growth, and job creation.
Challenges: While desirable, relying solely on economic growth is often insufficient, especially with very high debt levels. Sustained high growth rates are difficult to achieve and maintain, and the benefits can take time to materialize. The post-WWII debt reduction showed that growth alone wasn’t enough; it required accompanying fiscal surpluses and other factors [8].
4. Inflation (Devalue Dollar)
How it would work: This involves allowing or actively encouraging a higher rate of inflation. Inflation erodes the real value of existing debt, particularly fixed-rate debt, because the government repays creditors with dollars that are worth less in real terms. Many consider this an indirect tax as it is a willful means of devaluing dollar and reducing the buying power of citizens savings. However, this maybe more palatable to politicians as they don’t have to be blamed for raising taxes.
Monetary Policy: While central banks primarily target price stability, a more permissive stance towards inflation, or even policies that actively increase the money supply, could lead to higher inflation.
Fiscal Stimulus: Large, debt-financed fiscal stimulus without corresponding increases in productive capacity can also fuel inflation.
Challenges: This is a risky strategy. While it can reduce the real burden of debt, it comes at a significant cost:
Erosion of Purchasing Power: Inflation acts as a “stealth tax,” diminishing the value of citizens’ savings, wages, and fixed incomes. A high likelihood of creating economic strife.
Uncertainty and Instability: High and volatile inflation creates economic uncertainty, discouraging investment and long-term planning.
Loss of Confidence: Persistent high inflation can undermine confidence in the national currency, potentially leading to capital flight and a loss of the dollar’s global reserve status.
Higher Future Borrowing Costs: Lenders will demand higher interest rates to compensate for anticipated inflation, making future government borrowing more expensive. Attempts to inflate away debt are rarely a sustainable solution for a major economy [5].
5. Asset Sales
How it would work: The government could sell off federal assets to generate one-time revenue that could be used to pay down the national debt.
Real Estate: This could include selling underutilized federal buildings, land, or other real property. While the federal government owns a vast amount of property (e.g., millions of acres of land and thousands of buildings), the revenue generated from selling these assets, while significant, is often a small fraction of the total national debt [10].
Natural Resource Rights: Selling drilling rights for oil and gas, or mining rights on federal lands, could also generate revenue. Estimates suggest that recoverable energy resources on federal property could be valued in the trillions of dollars, potentially making a more substantial contribution [10].
Government-Owned Enterprises: While less common in the U.S. than in some other countries, the privatization of certain government-owned entities could also generate funds.
Challenges: Asset sales face considerable political opposition, often from those who believe public assets should remain publicly owned. Furthermore, a large-scale “fire sale” could depress market values, limiting the actual revenue generated. The revenue from such sales, while not negligible, would likely only make a dent in the current scale of the U.S. debt [10].
6. Modern Monetary Theory (MMT)
How it would work: MMT fundamentally redefines the role of government debt. Proponents argue that a sovereign government, as the issuer of its own currency, is not financially constrained in the same way a household or business is. It can “print” money to finance any spending it deems necessary, as long as there are available real resources (labor, materials) to employ.
Direct Money Creation: Instead of borrowing, the government would directly create new money to fund public spending, such as infrastructure projects, universal healthcare, or a job guarantee.
Inflation as the Only Constraint: Under MMT, the only true limit to government spending is inflation. If spending leads to an overheating economy and rising prices, then taxes would be used to reduce demand and cool the economy, rather than to fund spending itself.
Challenges: MMT is highly controversial among mainstream economists. Critics warn that:
High Inflation Risk: The theory’s premise of “unlimited” money creation, even with the caveat of inflation control, is seen as inherently risky and prone to leading to rampant, uncontrollable inflation. Historical examples of countries that resorted to large-scale money printing often experienced hyperinflation and economic collapse [5, 9, 13, 14, 15].
Loss of Dollar’s Status: Abandoning fiscal restraint and traditional debt management could severely undermine international confidence in the U.S. dollar, jeopardizing its critical role as the global reserve currency [9].
Political Discipline: MMT requires immense political discipline to raise taxes or cut spending at the precise moment inflation becomes a problem, which is challenging in a democratic system.
7. Default/Restructure
How it would work: These are extreme measures typically only considered by countries in severe financial distress.
Default: An outright refusal by the government to pay its debt obligations. This would involve simply not making interest or principal payments on outstanding bonds.
Restructuring: Negotiating new terms with creditors. This could involve extending repayment periods, reducing interest rates, or even accepting a haircut (a reduction in the principal amount owed).
Challenges: For a major economy like the U.S., which issues the world’s reserve currency and has a deeply integrated financial system, the consequences of default or even a forced restructuring would be catastrophic:
Loss of Creditworthiness: The U.S. would immediately lose its standing as a reliable borrower, making it extremely difficult and expensive to borrow in the future.
Financial Market Chaos: It would trigger a global financial crisis, as U.S. Treasury bonds are a cornerstone of the international financial system. Banks, pension funds, and investors worldwide hold vast amounts of U.S. debt, and a default would cause massive losses.
Economic Collapse: Domestic interest rates would skyrocket, the dollar would likely plummet, and the economy would plunge into a deep recession or depression.
Geopolitical Impact: The U.S.’s global influence would be severely diminished.
Given these dire consequences, default or forced restructuring is widely considered an unthinkable and non-viable option for the United States [11].
8. Nationalizing Resource Revenue
How it would work: This strategy involves the government taking greater control over valuable natural resources, directly collecting and utilizing the revenue generated from their extraction for public coffers, rather than primarily through taxes or royalties on private companies. A prominent example discussed in popular discourse, notably by Kevin O’Leary (“Mr. Wonderful”), suggests tapping into oil fields, such as those in Alaska, and nationalizing the revenue generated to pay down the national debt [16].
Direct Control and Revenue Collection: Instead of leasing drilling rights or collecting royalties from private companies, the government could directly own and operate extraction facilities, with all profits flowing to the Treasury.
Dedicated Debt Reduction Fund: Revenue generated from these nationalized resources could be specifically earmarked for debt reduction, similar to how some countries use sovereign wealth funds.
Challenges: This approach faces significant hurdles and criticisms:
Political Feasibility and Opposition: Nationalization of industries, particularly major ones like oil and gas, is a radical shift in U.S. economic policy and would face immense political and legal opposition. It would likely require significant compensation to existing private leaseholders and companies, potentially offsetting much of the initial revenue benefit.
Operational Expertise and Efficiency: Running complex industries like oil extraction effectively requires specialized expertise, capital investment, and efficient management, which critics argue governments often lack compared to private entities.
Market Dynamics and Volatility: Oil prices are highly volatile. Relying heavily on oil revenue for debt reduction would expose the national budget to significant swings based on global energy markets.
Environmental Concerns: Increased extraction, even under government control, could conflict with environmental goals and climate change mitigation efforts.
Limited Impact on Total Debt: While a large sum, the current annual revenue from federal oil and gas leases (around $8.5 billion in FY2023) is a tiny fraction of the over $36 trillion national debt [17, 18]. Even if all potential revenue were nationalized, it would take a very long time to make a substantial dent in the debt, especially considering the ongoing annual deficits.
Our Way Out
The path to significantly reducing the U.S. national debt is not simple, nor is there a single magic bullet. Another old adage, “It’s easy to get into something (debt), but it’s hard to get out.” History shows that debt reduction often involves a combination of strategies, with each period having its unique mix of choices and mechanisms. The post-World War II success was a rare alignment of rapid economic growth, sustained primary surpluses, and unexpected inflation. Today, the challenge is amplified by the sheer scale of the debt and the political difficulty of implementing the necessary fiscal adjustments.
Historically, the duration of significant debt reduction efforts has varied, but they are not short or easy. For instance, the dramatic decline in the debt-to-GDP ratio after World War II took nearly three decades (from 1946 to 1974) to reach its low point [8]. The period after the War of 1812, leading to the complete elimination of debt by 1835, spanned roughly 20 years [7]. These examples suggest that, even with concerted effort, significant and sustainable debt reduction is typically a multi-decade endeavor, requiring consistent policy choices across several administrations and legislative cycles on the order of a generation.
Achieving a substantial reduction, particularly to an ambitious 20-50% debt-to-GDP ratio, will almost certainly require a strong will and bipartisan commitment to a multifaceted approach. This would likely include:
Targeted spending cuts, especially to slow the growth of mandatory programs.
Strategic revenue enhancements, potentially including a broadening of the tax base.
Policies that consistently foster strong and sustainable economic growth.
These efforts are particularly critical in periods of a “shrinking credit cycle.” A shrinking credit cycle typically refers to a phase in the economic cycle characterized by:
Tightening Lending Standards: Banks and other lenders become more cautious, making it harder for businesses and consumers to access credit.
Reduced Availability of Capital: Less capital flows into the economy for investment.
Higher Borrowing Costs: Even for those who can get credit, interest rates tend to be higher.
Slower Economic Growth or Recession: As borrowing and investment decline, economic activity slows, leading to reduced corporate profits, job losses, and lower consumer spending [12].
Increased Defaults: Businesses and individuals struggle to repay existing debts, leading to higher default rates.
In such an environment, the challenges of debt reduction are exacerbated. Government tax revenues decline due to slower economic activity, while demand for social safety net programs (like unemployment benefits) often increases. This creates a painful squeeze on public finances, making it even harder to cut spending or rely on growth to improve the debt-to-GDP ratio. The current fiscal situation, with high debt and rising interest rates, means the U.S. is particularly vulnerable to the negative impacts of any future shrinking credit cycle, underscoring the urgency of proactive fiscal reforms.
Beyond economic considerations, debt discipline is a moral imperative for the well-being of future generations. Each dollar borrowed today represents a claim on future economic output and income, effectively shifting the burden of repayment to those who have yet to earn it. A nation that consistently lives beyond its means risks handing down a legacy of diminished economic opportunity, higher taxes, reduced public services, and greater financial instability to our children and grandchildren. Responsible fiscal stewardship ensures that future generations inherit a strong economy with the flexibility to address unforeseen challenges and invest in their own prosperity, rather than being perpetually constrained by the choices of the past. The journey out of the current debt levels will demand difficult choices and a sustained commitment to fiscal responsibility. The journey out of the current debt levels will demand difficult choices and a sustained commitment to fiscal responsibility.
[17] Congressional Research Service. (2025, April 23). Revenues and Disbursements from Oil and Natural Gas Leases on Onshore Federal Lands. Retrieved from https://www.congress.gov/crs-product/R46537
Mary Meeker’s highly anticipated “USA, Inc.” report, released in March 2025 by Bond Capital, once again delivered a meticulously researched financial assessment of the United States. Following her seminal 2011 “USA Inc.” report, this 2025 iteration provides a critical updated snapshot, viewing the U.S. federal government through the lens of a corporate balance sheet and income statement. The core message remains consistent: America’s fiscal trajectory is a pressing concern, though the urgency and prescribed solutions vary wildly depending on one’s economic philosophy.
The original 2011 “USA Inc.” report served as a stark wake-up call, highlighting accelerating debt accumulation and growing unfunded liabilities, particularly in Social Security and Medicare [1]. It laid out a business-like accounting of the nation’s finances, suggesting that without significant changes, the U.S. was heading towards an unsustainable path.
Themes and Key Findings from USA, Inc. 2025
Fast forward to March 2025, and the latest “USA, Inc.” report paints a picture of deepening fiscal challenges. The delta from 2011 is not merely a quantitative increase in debt; it’s a qualitative shift where previously projected liabilities have materialized and accelerated, exacerbated by recent global events and policy responses.
Key findings and themes from the USA Inc. 2025 report:
Escalating National Debt: The national debt has surged to levels exceeding historical peaks relative to GDP, projected to continue its upward trajectory [2]. Figure 3
Crowding Out by Interest Payments: A significant and alarming finding is the rapid growth in net interest payments on the debt, which are now consuming an ever-larger portion of the federal budget, crowding out other critical federal investments like infrastructure, education, or defense [3]. Figure 4
Accelerated Unfunded Liabilities: The “epic” and rising nature of off-balance sheet liabilities, primarily for entitlements like Social Security and Medicare, continues to be a central theme. These commitments amount to multiples of the on-book debt, a warning bell that was already ringing in 2011 but is now blaring louder [1, 4]. Figure 2
Deteriorating Net Worth: Mirroring a corporate entity, the report likely shows a continued deterioration of USA Inc.’s net worth, implying a diminished financial flexibility to handle future national crises or unexpected economic shocks [1]. Figure 1
Figure 1 Deteriorating Net Worth, USA Inc.Figure 3 Escalating National Debt, USA Inc.
Figure 2 Unfunded Liabilities, USA Inc.Figure 4 Crowding out by interest payments, USA Inc.
Economic Interpretations: A Spectrum of Views
This grim outlook, however, isn’t universally accepted. Mainstream economics broadly encompasses traditional (neoclassical) views and Keynesian economics. Traditional economists often emphasize the importance of balanced budgets, fiscal discipline, and minimal government intervention, fearing that large deficits lead to crowding out of private investment and inflationary pressures. Keynesian economics, while acknowledging the long-term need for fiscal sustainability, emphasizes the role of government spending in stimulating demand during economic downturns, arguing that deficits can be beneficial when the economy is operating below its potential.
Modern Monetary Theory (MMT) represents a more heterodox, almost “post-Keynesian,” perspective. MMT posits that a sovereign government, which issues its own fiat currency, cannot technically “run out of money” and therefore isn’t constrained by debt in the same way a household or business is [6]. From an MMT perspective, the numbers presented in “USA, Inc.” might be seen not as an impending crisis, but rather as an accounting of necessary public spending to achieve societal goals, with inflation being the true constraint, not debt levels. Proponents of MMT would likely argue that government spending creates the very financial assets that fund the debt, and that fears of “crowding out” are overblown for a currency issuer [6].
Support for MMT remains a minority view [10] within the broader economics community. While it has gained increased public discussion, particularly since the 2008 financial crisis and in response to discussions around large-scale public spending, most mainstream economists, including many Keynesians, remain skeptical of its core tenets regarding government debt limits. They typically acknowledge a currency-issuing government’s ability to print money but emphasize the severe inflationary and currency devaluation risks associated with doing so without corresponding real economic output [7].
Conversely, mainstream economists and fiscal conservatives, supported by research from institutions like the Congressional Budget Office (CBO) [2], Brookings Institution [3], and the Peter G. Peterson Foundation [4], see the escalating debt as a significant long-term threat. These analyses consistently project that without policy changes, deficits will remain unsustainably high, leading to increased interest costs that consume a growing share of the federal budget.
The Impact If Nothing Is Done
If the trends highlighted in “USA, Inc. 2025” remain unaddressed, the potential economic ramifications could be severe and far-reaching:
Increased Taxes and/or Reduced Public Services: To service the growing debt, the government would eventually face difficult choices: raise taxes, cut spending on essential public services (like education, infrastructure, or defense), or a combination of both [5, 9].
Crowding Out of Private Investment: As the government borrows more, it competes with the private sector for available capital. This can drive up interest rates for businesses and consumers, making it more expensive for companies to invest and expand, ultimately stifling innovation and economic growth [5].
Stagflation Risk: An uncontrolled increase in the money supply to finance deficits, coupled with supply-side constraints, could lead to stagflation—a damaging combination of stagnant economic growth, high unemployment, and rising inflation [8].
Devaluation of the Dollar: Sustained large deficits and a perceived inability to manage debt could erode international confidence in the U.S. dollar. This could lead to a devaluation of the currency, making imports more expensive, reducing purchasing power for Americans, and potentially undermining the dollar’s status as the world’s reserve currency [9].
Reduced Fiscal Flexibility: A high debt burden leaves the government with less capacity to respond to future crises (e.g., pandemics, natural disasters, economic recessions) without further destabilizing its finances [2, 5].
The Importance of Government Financial Literacy
The underlying message of “USA, Inc.” – both the 2011 and 2025 versions – transcends partisan economics: government financial literacy is paramount. For citizens to make informed decisions and hold their elected officials accountable, a basic understanding of the nation’s financial statements is crucial. Meeker’s report, while crafted with an investor’s precision, is seemingly intended for a broad audience, distilling complex financial data into digestible charts and narratives.
Paradoxically, while the report aims for public comprehension, its detailed nature means it will likely be consumed and debated most rigorously by researchers, academics, economists, and financial industry professionals. Yet, those who will be most profoundly impacted by the underlying fiscal events – average citizens whose future taxes, public services, and economic opportunities are at stake – may be the least likely to fully engage with or understand the nuances of the document. This highlights a critical challenge: translating complex fiscal realities into actionable insights for the very public it seeks to inform. While there maybe disagreement over the impact, the trends and path are troubling and we hope that all Americans make informed choices regarding America’s future.
[7] Mankiw, N. G. (2020). A Skeptic’s Guide to Modern Monetary Theory. NBER Working Paper No. 26650. National Bureau of Economic Research. https://www.nber.org/papers/w26650
Tax Project Institute is a fiscally sponsored project of MarinLink, a California non-profit corporation exempt from federal tax under section 501(c)(3) of the Internal Revenue Service #20-0879422.
