America’s looming debt crisis
Kenneth Rogoff, the American economist, chess Grandmaster, professor of international economics at Harvard University, former International Monetary Fund (IMF) chief economist and co-author of This Time is Different: Eight centuries of Financial Folly, has spent his career chronicling the anatomy of financial collapses. In his latest article for Foreign Affairs (Sep/Oct 2025), Rogoff issues a stark warning: the U.S. is flirting with a once-in-a-century debt crisis – and its current political and economic trajectory makes a crisis not just possible, but probable.
The debt delusion: from free lunch to fiscal cliff
Rogoff’s core argument is that America’s long-standing belief in “costless” debt is rapidly crumbling. For decades, ultralow interest rates lulled policymakers into thinking deficits didn’t matter. Crisis after crisis – from the Iraq War to the COVID-19 pandemic – was met not with fiscal restraint but with debt-funded stimulus, enabled by cheap borrowing.
But the era of free money is over. Treasury yields are rising, debt-servicing costs have overtaken even the defence budget, and credit rating agencies have downgraded U.S. debt. Net public debt is approaching 100 per cent of gross domestic product (GDP), and the gross figure – now about US$37 trillion – dwarfs the combined debt of all other advanced economies.
What’s changed? Bond markets are pushing back. Long-term rates are rising not just because of Federal Reserve policy, but because investors are demanding a higher premium for holding increasingly risky U.S. debt. So, even as Trump wages “a caustic, unprecedented campaign” to push Federal Reserve (the Fed) Chair Jerome Powell into cutting interest rates, what he perhaps doesn’t realise is that even if the Fed acquiesces to his demand for lower rates – probably when he replaces Fed Chair Jerome Powell – bond rates will do their own thing.
Rogoff’s deeper warnings
Rogoff doesn’t stop at identifying the debt problem and several insights make his warning all the more urgent. I list these below before expanding on several.
- The end of the “Low-Rate Forever” orthodoxy
In the 2010s, economists like Larry Summers and Paul Krugman argued that secular stagnation justified endless deficit spending, while proponents of Modern Monetary Theory (MMT) claimed governments could spend without limit. That complacency has now been demolished by resurgent inflation and higher global borrowing needs. Yet Rogoff believes Washington continues to act as if the 2010s’ “free lunch” world still exists.
- Global debt pressures as a force multiplier
The U.S. isn’t the only offender. Across the G7, net debt-to-GDP ratios have surged from 55 per cent in 2006 to roughly 95 per cent today. With capital markets deeply integrated, America can no longer assume global savings will fund its deficits cheaply. The world is collectively straining under the weight of debt, and this leaves the U.S. exposed.
- The missing spark
Debt crises rarely result from slow drift alone; they require a trigger. The U.S. already checks three of the four boxes Rogoff highlights: high debt, high interest costs, and political paralysis. All that’s missing is the shock—a cyberwar, climate disaster, geopolitical conflict, or another pandemic—that tips a fragile system into outright crisis.
- The erosion of dollar hegemony
For decades, the dollar’s reserve status has been America’s “exorbitant privilege,” suppressing interest costs. But central banks are beginning to diversify into euros, yuan, and even digital assets and gold. History shows no empire – from Spain to Britain – sustained currency dominance once fiscal and geopolitical strength waned. The U.S. may soon face the same erosion.
- Dangerous policy temptations
When debt becomes unmanageable, governments reach for desperate tools such as weaponising inflation as a stealth default, financial repression (see footnote) that forces domestic savers and institutions to absorb government bonds, and selective defaults aimed at foreign creditors. Each strategy defers immediate pain but corrodes long-term confidence. Rogoff fears that Washington, unwilling or unqualified to make structural reforms, will embrace these temptations.
The Trump Factor: pressure, populism, and policy risk
Backed by decades of insights, Rogoff is merciless in his criticism of the Trump administration’s role as an accelerant. As has been well documented, Trump’s second-term economic agenda hinges on aggressive borrowing, deep tax cuts, and optimistic growth projections – backed by artificial intelligence (AI) -led productivity ‘fantasies’ and questionable assumptions – albeit possibly self-serving – about interest rate normalisation.
Even more troubling, Rogoff highlights a dangerous shift in institutional norms. Trump has not only blamed the Federal Reserve for high interest rates but also floated policies like the Mar-a-Lago Accord, a proposal to selectively default on foreign-held debt or impose punitive taxes on foreign bondholders. If Trump follows through with these destabilising plans, they will threaten the U.S. dollar’s global reserve status – a privilege that has long helped to suppress borrowing costs and fund its military might.
According to Rogoff, the consequences of undermining Fed independence, weaponising debt policy, and fostering default risk are severe and nothing less than capital flight, higher inflation, and an eventual debt spiral.
A playbook from history – with modern risks
In Rogoff’s piece, he walks through the toolkit available to crisis-era governments, nominating austerity, inflation, financial repression (1), outright default, and now, digital currencies and stablecoins. None is costless, however. Inflation and repression, for example, damage savers and distort capital markets. Defaults – whether legal or via inflation – undermine trust. And new instruments like stablecoins could backfire without proper oversight.
While these strategies may buy time, in Rogoff’s view, they won’t restore fiscal health unless paired with structural reform. He concludes with a sobering insight: history is replete with once-dominant empires undone by fiscal profligacy. The U.S. could be next.
“For too long, the status quo approach in Washington has been to ignore the massive debt problem and hope that a return to miraculous levels of growth and low interest rates will take care of it. But the United States is approaching the point at which the national debt could undermine not only the country’s economic stability but also the things that have sustained its global power for so many decades, including the military spending that it has leveraged in many ways to maintain the dollar’s formidable influence over the global financial system since World War II. Whether in the case of Spain in the sixteenth century, the Netherlands in the seventeenth century, or the United Kingdom in the nineteenth century, no country in modern history has been able to sustain a dominant currency without also being a superpower.”
The Trump bond play: self-insuring against the crisis?
Amid this backdrop, Donald Trump’s personal finances have been drawing fresh and increasing scrutiny. According to filings with the U.S. Office of Government Ethics, Trump has made over 600 financial purchases since returning to office in January 2025 – including, according to CNBC, more than US$100 million in corporate, municipal, and government bonds. His portfolio includes debt from Citigroup, Morgan Stanley, Meta, UnitedHealth, and various local governments and utilities.
Is this merely portfolio diversification? Or is it something more calculated? And should you be positioning your portfolio similarly? For Australian investors should Private Credit, such as the funds we offer, be an option?
If Trump anticipates an inflationary scenario – possibly one he helps engineer – then owning fixed-income securities could be risky. But many of his bond holdings are reportedly shorter-duration or inflation-hedged. Moreover, municipal (munis) and corporate bonds may offer relatively higher yields and potential tax advantages.
Alternatively, if Trump expects a flight-to-safety moment triggered by his own policies (e.g., default threats, fiscal chaos), U.S. bond yields may first spike – hurting bond prices – but later rally if the Fed intervenes.
Meanwhile, Rogoff warns of a coming era of “financial repression” – a world where the government forces banks and institutions to absorb vast quantities of public debt. Trump’s July 2025 legislation that supports Treasury-backed stablecoins could funnel even more capital into U.S. debt markets via crypto rails.
If Trump is aware that this is the likely trajectory, then early accumulation of fixed-income assets – before rates are forcibly suppressed – would prove prescient. That could be something you might want to discuss with you adviser.
It goes without saying that Trump’s role as both debtor-in-chief and bondholder-in-chief creates obvious, if not profound, conflicts of interest. He can benefit personally from policies that drive rates lower or protect specific issuers, for example, by directing stimulus to municipalities whose bonds he holds, or using tariffs and tax policies to prop up U.S. companies in which he owns debt.
Kenneth Rogoff paints a grim picture: soaring debt, fading monetary independence, political gridlock, and fragile global confidence. The U.S. is running out of time to fix its fiscal house. And the next crisis—be it geopolitical, economic, or climatic – could trigger a serious correction.
Meanwhile, Donald Trump’s bond-buying spree looks less like routine investing and more like strategic positioning. Something all investors should be alert to when considering their own tactical portfolio rebalancing. Whether to shield his wealth, influence policy, or profit from chaos, Trump’s financial moves are now inextricably linked to America’s fiscal fate.
The question investors should ask isn’t just when the next shock will hit – but how can you protect yourself, and perhaps even benefit when it does? As Rogoff suggests, the risk of a debt reckoning is no longer theoretical. It’s accelerating. And it seems, some are already betting on the fallout.
For what it’s worth, Rogoff’s posture is deliberately cautious, but it carries a clear warning. He doesn’t say a crash is inevitable or that he can predict its timing. Instead, he frames the U.S. as sitting on the brink of a crisis, with the preconditions already in place. They include:
- Debt levels at historic highs (close to WWII peaks).
- Interest rates structurally higher and unlikely to return to the ultra lows of the 2010s (unless his new Fed Chair appointment does Trump’s bidding).
- Political paralysis preventing meaningful fiscal reform.
- Eroding US Dollar hegemony, undermining the U.S.’s ability to borrow cheaply, especially to fund its military might.
All that’s missing, he argues, is an external shock – a war, climate catastrophe, cyberattack, or new pandemic – that tips the system over.
In Rogoff’s words, a “once-in-a-century debt crisis no longer seems far-fetched.” Even if the U.S. avoids an outright default, Rogoff warns that the likely outcomes are grim and include: inflationary spirals, financial repression, or prolonged stagnation akin to Japan’s “lost decades.” Any of these would erode the dollar’s reserve-currency dominance and weaken U.S. global power.
So, Rogoff concludes that without serious fiscal repair, the U.S. might be gambling that rapid AI-driven productivity gains will offset the debt burden. This is a long shot, if ever there was one. Meanwhile, a full-blown financial crash is possible, and more plausible now than at any point in living memory. The risk, however, is not necessarily sudden collapse but a grinding period of inflation, higher borrowing costs, and weak growth that leaves America, and investor returns, diminished.
(1) Financial repression is a set of government policies, such as interest rate ceilings and capital controls, that restrict financial institutions and markets to allow the government to channel funds to itself at artificially low costs, effectively “taxing” savers and eroding the real value of their savings to reduce its own debt burden
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
