Five Scenarios for the Federal Debt

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The Financial Accounts of the United States is a quarterly Federal Reserve publication containing a great many large numbers but very little commentary, presumably because the authors feel the numbers speak for themselves. And the numbers do speak rather loudly.\n","enclosure":{"url":"https://mcdn.podbean.com/mf/web/ph3fvvufjce9w2a3/notwa_audio-052526.mp3","type":"audio/mpeg","length":15747331,"content":""},"author":"Dr. David Kelly","duration":"1028","episode":"340","image":null,"transcript":null},"podcastFeedTitle":"Notes on the Week Ahead","podcastFeedImage":{"href":"https://pbcdn1.podbean.com/imglogo/image-logo/4666493/jpm-am_podcast_cover_NOTWA_1400x1400.png","content":""},"podcastFeedDescription":"Listen to the latest insights from Dr. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management to help prepare you for the week ahead.","podcastShowPath":"","appleFeedURL":"https://podcasts.apple.com/us/podcast/notes-on-the-week-ahead/id394242270","spotifyFeedURL":"https://open.spotify.com/show/3MYCUstxIHd5KSlETmzhyJ","i18nKeysJson":"{\"jpm.am.general.podcasts.stopandexit\":\"Stop playback and exit\",\"jpm.am.general.podcasts.opennewtab\":\"Open in new tab\"}"}" data-module="jpm-am-podcast-teaser">

The Financial Accounts of the United States is a quarterly Federal Reserve publication containing a great many large numbers but very little commentary, presumably because the authors feel the numbers speak for themselves. And the numbers do speak rather loudly.

The latest edition, published in March, provides among other things, a snapshot of the liabilities of American households at the end of 2025. At that time, total household debt, including mortgages, credit card debt, student loans, auto loans and all other personal debt, was almost exactly $20 trillion, or $58,300 per person. However, in addition, Americans, by virtue of being citizens, indirectly owed $30.9 trillion, or $90,192 per person in federal government debt.

It should quickly be noted that total household assets, at over $195 trillion, far exceed household liabilities. However, neither assets nor debt are spread evenly and many Americans lose sleep over their personal indebtedness.

The federal debt, however, induces no similar insomnia, for the obvious reason that, while people can calculate their own assets and liabilities, they have no way of estimating how much of the federal debt they will ultimately be responsible for.

Still it is an important issue, with federal debt rising from a low of 31% of GDP in the second quarter of 2001 to 101% of GDP by the first quarter of 2026. This number will almost certainly rise further in the years ahead, but how fast it does so and any attempts to slow its increase could have significant impacts on the economy and investing. This being the case, it is worth tracing out alternative scenarios for the path of federal debt and what they imply for the investment outlook. In particular, we consider:

Steadily rising debt-to-GDP with rising borrowing costs

Slowly rising debt-to-GDP with little market reaction

A fiscal crisis

Slower growth in federal debt via spending cuts, and,

Slower growth in federal debt via higher taxes

The Current State of the Federal Finances

Before digging too deeply into these scenarios, let’s review where the federal finances are today.

On February 11th, the Congressional Budget Office (CBO) released its latest projections on the federal budget1. The date is important, because just nine days later, the Supreme Court ruled that the administration’s IEEPA tariffs were illegal. This ruling, on its own, has the potential to add considerably to future federal deficits. However, in addition to this, by convention, the CBO projections assumed that new OBBBA tax breaks would expire, on schedule, at the end of 2028. If, as is likely, they are extended, this would further add to future deficits. Finally, April data on the tax filing season allows us to estimate the impact of OBBBA on the budget a little more clearly, while the war with Iran will obviously add something to defense spending.

The federal fiscal year runs from October 1st of the prior calendar year to September 30th of the current one and so, there are today, just over four months left in fiscal 2026. It now appears that the fiscal 2026 deficit will come in at roughly $1.890 trillion or 5.9% of GDP, up from $1.775...