A U.S. 'Debt Spiral' Could Start Soon as the Interest Rate on Government Borrowing Is Poised to Exceed Economic Growth, Budget Watchdog Says

 

# A U.S. 'Debt Spiral' Could Start Soon as the Interest Rate on Government Borrowing Is Poised to Exceed Economic Growth, Budget Watchdog Says

## The Fiscal Tipping Point: When the Cost of Debt Outruns the Economy Itself

**Published: Sunday, February 15, 2026 – 2:00 PM EST**

For years, economists have warned about America's unsustainable fiscal trajectory. For years, Washington has largely ignored them. But according to a stark new analysis from the Congressional Budget Office (CBO), the moment of reckoning may be closer than anyone wants to admit .

The numbers are staggering. Federal debt held by the public is projected to reach **101% of GDP in 2026**—meaning the government's obligations now exceed the entire annual output of the American economy . By 2030, that figure will surpass the all-time record set in 1946, when the nation was demobilizing after World War II . And by 2036, debt held by the public is expected to balloon to **120% of GDP**, with gross federal debt hitting **$63 trillion** .

But the headline-grabbing debt numbers tell only part of the story. The real alarm—the one that has budget watchdogs sounding sirens—is about **interest costs**.

Net interest payments on the national debt are projected to surge from just over **$1 trillion in 2026 to more than $2.1 trillion in 2036** . That's not just a line item; it's a fundamental shift in how the federal government allocates taxpayer dollars. By 2036, interest costs will account for **nearly 19% of all federal spending**—more than the government spends on Medicare .

And here's the crux of the warning: **The interest rate on government borrowing is poised to exceed the rate of economic growth** . When that happens, the math becomes inescapable. Debt grows faster than the economy, requiring more borrowing to service the debt, which in turn generates even more interest, in a self-reinforcing spiral that has historically ended badly for nations that fail to course-correct.

**Michael Peterson**, CEO of the Peter G. Peterson Foundation, called the CBO's report "an urgent warning to our leaders about America's costly fiscal path" .

**Maya MacGuineas**, president of the nonpartisan Committee for a Responsible Federal Budget (CRFB), was even blunter: "There are no surprises here or bright spots of encouraging news: Our nation's deficits, debt, interest payments and trust funds are all in terrible shape" .

This comprehensive 5,000-word analysis will walk you through every dimension of this fiscal crisis: the raw numbers from the CBO's latest projections, the mechanism of a potential "debt spiral," the political forces driving the deterioration, and—most importantly—what this means for American households, investors, and the nation's future.

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## The Keyword Goldmine: What America Is Searching for Right Now

A story blending fiscal policy, economic projections, and personal financial implications generates high-intent search traffic. Here are the most valuable, lower-competition keyword clusters dominating the conversation today.

**Table 1: High-Value Keyword Clusters – U.S. Debt Spiral 2026**

| **Keyword Cluster Theme** | **Sample High-Value, Lower-Competition Keywords** | **Commercial Intent & Advertiser Appeal** |

| :--- | :--- | :--- |

| **Debt & Deficit Analysis** | "US national debt by year chart 2026", "CBO budget outlook 2026 summary", "debt to GDP ratio history", "interest on national debt 2026" | **Extremely High.** Targets investors and policy professionals seeking hard data. Advertisers: Economic research subscriptions, financial planning services, government bond ETFs. |

| **Interest Rate Impact** | "will interest rates stay high 2026", "10-year Treasury yield forecast", "Fed policy and national debt", "mortgage rates and government borrowing" | **Very High.** Targets homeowners and prospective buyers. Advertisers: Mortgage lenders, refinance companies, real estate platforms. |

| **Fiscal Policy & Elections** | "2026 election fiscal policy issues", "entitlement reform 2026", "Social Security Medicare insolvency dates", "tax policy after Trump tax cuts" | **High.** Targets politically engaged voters. Advertisers: Political action committees, advocacy organizations, policy think tanks. |

| **Inflation & Dollar Concerns** | "dollar reserve status 2026", "inflation hedge strategies", "TIPS bonds explained", "fiscal dominance Fed independence" | **High.** Targets sophisticated investors hedging against macro risks. Advertisers: Gold dealers, inflation-protected securities, currency hedging services. |

| **Personal Finance Impact** | "national debt impact on retirement", "how does deficit affect my 401k", "government borrowing and savings rates", "generational wealth and fiscal policy" | **Moderate-High, Growing.** Targets families concerned about long-term financial security. Advertisers: Retirement planners, college savings advisors, financial literacy programs. |

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## Part 1: The Numbers That Should Terrify Everyone

### The CBO's Latest Outlook: A Fiscal Trajectory Like No Other

On February 11, 2026, the Congressional Budget Office released its annual **Budget and Economic Outlook**, covering fiscal years 2026 through 2036 . The report was notable not for any single shocking number, but for the relentless accumulation of grim data points.

**Table 2: Key CBO Projections – 2026 to 2036**

| **Metric** | **2026** | **2036** | **Change** |

| :--- | :--- | :--- | :--- |

| **Annual Budget Deficit** | $1.9 Trillion | $3.1 Trillion | +63% |

| **Deficit as % of GDP** | 5.8% | 6.7% | +0.9 pts |

| **Gross Federal Debt** | $39.4 Trillion | $63 Trillion | +60% |

| **Debt Held by Public** | $32 Trillion | $56 Trillion | +75% |

| **Debt Held by Public as % of GDP** | 101% | 120% | +19 pts |

| **Net Interest Costs** | ~$1.0 Trillion | $2.1 Trillion | +110% |

| **Interest as % of GDP** | 3.3% | 4.6% | +1.3 pts |

| **Interest as % of Federal Spending** | ~14% | ~19% | +5 pts |

| **Interest per Day** | ~$2.6 Billion | ~$4.9 Billion | +88% |

*Sources: CBO, PGPF, Fox Business *

**CBO Director Phillip Swaggel** noted that sustained deficits of this magnitude during a period of low unemployment are "historically unusual" . Since 1930, deficits have never remained above 5.6% of GDP for five consecutive years—yet CBO projects exactly that through 2036 .

### The Record That Will Be Broken

The most striking historical comparison involves debt held by the public as a percentage of GDP. The previous record of **106%** was set in 1946, as the nation demobilized after World War II . That debt was incurred for an existential national emergency, and it was rapidly paid down in subsequent decades.

CBO projects that the U.S. will surpass that record in **2030**—not because of war, but because of a sustained inability to align spending with revenue . By 2036, the ratio will hit 120%, far exceeding anything in American history outside of wartime.

**The CBO's own warning** is worth quoting directly: "The United States' fiscal position would be more vulnerable to an increase in interest rates, because the larger debt is, the more an increase in interest rates raises debt-service costs. The risk of a fiscal crisis—that is, a situation in which investors lose confidence in the value of the U.S. government's debt—would increase. Such a crisis would cause interest rates to rise abruptly and other economic and financial disruptions to occur" .

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## Part 2: The "Debt Spiral" – How It Works and Why It Matters

### When the Cost of Debt Exceeds Economic Growth

The concept of a "debt spiral" or "debt doom loop" is not theoretical economics. It is a mathematical inevitability when certain conditions align.

**The mechanism is simple:**

1. **The government runs persistent deficits**, requiring continuous borrowing.

2. **The national debt grows faster than the economy** (debt-to-GDP rises).

3. **Interest rates on that debt exceed the economy's growth rate**.

4. **Interest costs compound faster than the tax base expands**.

5. **More borrowing is required just to pay interest**, further increasing debt.

6. **The cycle accelerates**, eventually spooking investors and forcing even higher rates.

**Table 3: The Debt Spiral – A Visual Representation**

| **Stage** | **Condition** | **Consequence** |

| :--- | :--- | :--- |

| **1** | Deficits persist | Debt accumulates |

| **2** | Debt growth > GDP growth | Debt-to-GDP rises |

| **3** | Interest rate > GDP growth rate | Interest costs compound faster than economy |

| **4** | Interest consumes revenue share | Crowds out other spending |

| **5** | More borrowing to pay interest | Debt accelerates |

| **6** | Investor confidence erodes | Rates spike, crisis ensues |

**The Cato Institute's analysis** warns explicitly of this dynamic: "At any point, bondholders may lose confidence in the government's ability to service its debt without resorting to inflation and demand higher returns to compensate for elevated risk. Higher bond yields would then increase the cost of servicing the debt, leading to more borrowing, yet higher yields, and so on. Such a 'debt doom loop' could quickly escalate into a full-blown fiscal crisis" .

### The Current Math: Dangerously Close

According to CBO projections, net interest costs will reach **3.3% of GDP in 2026** and climb to **4.6% by 2036** . Meanwhile, CBO projects **real GDP growth averaging roughly 1.8-2.2%** over the same period .

The precise relationship between interest rates on government debt and economic growth determines whether the spiral begins. With 10-year Treasury yields currently around **4.1%** , the gap is uncomfortably narrow .

**Brian Mulberry** of Zacks Investment Management argues that concerns about fiscal sustainability are already affecting rates: "The bond market has been continuously expressing concerns about the fiscal outlook. The core issue is that the scale of the deficit shows an almost exponential trend. It is this very concern that keeps current interest rates higher than they would be if the fiscal situation were more manageable" .

Mulberry estimates that if markets had greater confidence in U.S. fiscal management, the Federal Reserve's policy rate could be about **100 basis points lower** .

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## Part 3: The Interest Explosion – $13.8 Trillion Over a Decade

### Putting the Numbers in Perspective

The Peter G. Peterson Foundation, a nonpartisan organization focused on fiscal sustainability, has attempted to translate the CBO's projections into terms Americans can grasp .

**Table 4: What $13.8 Trillion in Interest Actually Means**

| **Comparison** | **Value** |

| :--- | :--- |

| **Per Person (U.S. population)** | ~$40,500 |

| **Compared to Social Security's cash deficits** | More than 4x over next 10 years |

| **Compared to disaster costs** | Nearly 5x the cost of all U.S. weather/climate disasters since 1980 (each exceeding $1 billion) |

| **Compared to water infrastructure** | More than 20x the 20-year, $625 billion need |

| **Compared to prior interest costs** | Nearly double what the government spent on net interest between 2005 and 2024 (inflation-adjusted) |

**The daily interest bill** tells an even starker story. Right now, the Treasury pays about **$2.6 billion per day**, on average, just to service the debt . By 2035, that figure will reach **$4.9 billion per day** .

### The Crowd-Out Effect

Rising interest costs don't exist in a vacuum. Every dollar spent on interest is a dollar that cannot be spent on:

- National defense

- Infrastructure

- Scientific research

- Education

- Healthcare

- Tax cuts

- Emergency response

**The Cato Institute** warns of "the 'crowd-out' effect, wherein federal debt competes with more productive private enterprises for available capital, reducing private investment and slowing economic growth" .

**The Las Vegas Review-Journal editorial board** noted: "Higher costs for entitlements—an aging population carries a price tag—and interest payments on the debt will swallow up vast amounts of taxpayer money. This should concern both Democrats and Republicans. Rising debt payments represent the culmination of years of fiscal folly and threaten a number of progressive spending priorities" .

By 2036, **interest costs alone will consume nearly one-fifth of all federal spending** .

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## Part 4: The Drivers – Why This Is Happening

### Entitlements: The 800-Pound Gorilla

The primary drivers of long-term fiscal deterioration are not discretionary programs that Congress debates each year. They are **mandatory spending**—entitlement programs that grow automatically based on demographics and healthcare costs.

**Table 5: Entitlement Spending Growth – 2025 to 2036**

| **Program** | **2025 Spending** | **2036 Spending** | **Change** |

| :--- | :--- | :--- | :--- |

| **Social Security** | $1.6 Trillion (5.2% GDP) | $2.75 Trillion (5.9% GDP) | +72% |

| **Medicare** | $1.2 Trillion (3.9% GDP) | $2.4 Trillion (5.2% GDP) | +100% |

| **Medicaid & Other Health** | Not specified | Growing significantly | |

*Source: Cato Institute *

By 2036, **Social Security, Medicare, Medicaid, and interest costs will account for 73% of total federal spending**, consuming nearly **100% of all federal revenue** .

**Jonathan Burek** of the Bipartisan Policy Center noted: "Our fiscal situation is deteriorating. Our debt is now equivalent to 100% of GDP. Instead of hitting the brakes, we're accelerating. For a peacetime, growing economy, such massive deficits are unprecedented" .

### The Tax Cut Factor

The CBO's cumulative deficit projection from 2026 to 2035 is **$1.4 trillion higher** than its January 2025 estimate . The largest single policy change accounting for this increase is Republicans' flagship tax legislation, the **"One Big Beautiful Bill Act" (OBBBA)** , which CBO estimates will increase deficits by **$4.7 trillion over 10 years** .

This estimate is "dynamic," meaning it includes both interest costs and macroeconomic effects. If Congress extends certain populist provisions that are currently scheduled to expire (such as "no tax on tips"), the true cost could reach **$5 trillion to $6 trillion** .

### Tariffs: A Partial Offset

The OBBBA's cost is partially offset by tariff policy, which CBO projects will **reduce deficits by $3 trillion over 10 years** . The average effective tariff rate has risen to **13%** , the highest level since at least the 1940s .

However, these projections assume that tariff rates as of November 2025 remain permanent—a significant uncertainty. The Supreme Court may strike down parts of the tariff scheme, and future administrations could reduce rates .

### Immigration Enforcement: Adding to the Deficit

CBO estimates that the administration's deportation campaign has **increased deficits by $500 billion** over the 10-year period, partly because immigrants contribute more in revenue than they consume in benefits . More aggressive enforcement assumptions could push the true deficit impact past **$1 trillion** .

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## Part 5: The Consequences – What Happens If Nothing Changes

### Economic Growth Suffers

The most immediate consequence of unsustainable debt is slower economic growth. When government borrowing consumes available capital, private investment suffers. Productivity weakens. Wage growth slows.

**Kurt Couchman** of Americans for Prosperity warns: "Excessive federal debt is already weighing on economic growth. If left unchecked, it could expose the U.S. to a severe downturn, especially during the next global shock" .

CBO projects **GDP growth of 2.2% in 2026**, gradually slowing to an average of **1.8%** over the following decade . The Trump administration projects more optimistic growth of **3-4%** , but CBO's more conservative estimates are widely shared among independent forecasters .

### Inflation and Fiscal Dominance

Persistently high deficits risk **fiscal dominance**, where government borrowing undermines the central bank's ability to contain inflation . In this scenario, the Federal Reserve could face pressure to keep rates artificially low or to monetize deficits by purchasing Treasury bonds—effectively printing money to cover the government's bills.

Historically, fiscal dominance has resulted in painfully high inflation or even hyperinflation .

### The Dollar's Reserve Status at Risk

CBO explicitly warns that "higher inflation expectations could erode the dollar's status as the dominant international reserve currency" . This would have profound implications:

- Higher borrowing costs for the U.S. government

- Reduced global demand for Treasury bonds

- Weakened ability to impose financial sanctions

- Increased volatility in currency markets

### The Crisis Scenario

The worst-case scenario is not gradual decline but sudden rupture. As CBO notes, investors could "lose confidence in the value of the U.S. government's debt" . If that happened:

- Interest rates would spike abruptly

- The Treasury would struggle to finance operations

- Financial markets would freeze

- The government would face impossible choices: drastic spending cuts, massive tax increases, or inflationary money creation

**Ray Dalio**, founder of Bridgewater Associates, has repeatedly warned that excessive debt can eventually force governments into such painful trade-offs .

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## Part 6: What This Means for You

### For Homeowners and Borrowers

Rising interest costs on government debt put upward pressure on **mortgage rates, auto loans, and credit card rates** . Brian Mulberry of Zacks estimates that the 10-year Treasury yield—which directly influences mortgage rates—would be **50-75 basis points lower** if markets were more confident in U.S. fiscal management .

For a typical homebuyer, that could mean the difference between a 6.5% mortgage rate and a 5.75% rate—hundreds of dollars per month.

### For Investors

The bond market is already signaling concern. As one analyst noted, "The bond market has been continuously expressing concerns about the fiscal outlook" . Investors should consider:

- **Duration risk**: Long-term bonds are more vulnerable to rate spikes

- **Inflation protection**: TIPS and other inflation-linked securities

- **Diversification**: International exposure to reduce U.S.-specific risk

### For Retirees and Near-Retirees

Social Security and Medicare face insolvency dates within the next decade . The Social Security Trust Fund is expected to be depleted by **2033 or 2034** . Without reform, beneficiaries could face automatic benefit cuts of roughly **20-25%** .

Medicare faces similar challenges. The combination of demographic pressure (the "silver tsunami" of retiring Baby Boomers) and healthcare cost growth is unsustainable under current law .

### For Young Americans

The burden of today's borrowing falls disproportionately on younger generations. They will face:

- Higher taxes to service the debt

- Slower economic growth

- Reduced public investments

- Potential cuts to entitlement programs they've paid into

As one economist noted, this represents a fundamental intergenerational transfer that raises serious questions of fairness .

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## FREQUENTLY ASKED QUESTIONS (FAQs)

**Q1: What exactly is a "debt spiral"?**

**A:** A debt spiral, also called a "debt doom loop," occurs when interest costs on government debt grow faster than the economy . This creates a self-reinforcing cycle: more debt leads to higher interest costs, which require more borrowing, which leads to even higher interest costs. Eventually, investors may lose confidence, causing rates to spike and potentially triggering a fiscal crisis .

**Q2: How close are we to a debt spiral?**

**A:** CBO projects that net interest costs will reach **3.3% of GDP in 2026**, while economic growth is projected at roughly **1.8-2.2%** . With 10-year Treasury yields around 4.1%, the relationship between borrowing costs and growth is dangerously close to the point where the spiral accelerates .

**Q3: What did the CBO's latest report say?**

**A:** The February 11, 2026, CBO report projected:

- Deficits rising from $1.9 trillion in 2026 to $3.1 trillion in 2036 

- Debt held by the public reaching 101% of GDP in 2026 and 120% by 2036 

- Interest costs doubling from ~$1 trillion to $2.1 trillion 

- The U.S. surpassing its WWII debt record by 2030 

**Q4: What's driving the deficit growth?**

**A:** The primary drivers are:

1. **Entitlement spending** (Social Security, Medicare, Medicaid) driven by an aging population 

2. **Interest costs** on existing debt 

3. **Tax cuts**, particularly the "One Big Beautiful Bill Act," estimated to add $4.7 trillion to deficits over 10 years 

4. **Immigration enforcement costs**, estimated at $500 billion+ 

**Q5: Are tariffs helping or hurting?**

**A:** Tariffs are currently **reducing deficits by an estimated $3 trillion over 10 years**, partially offsetting the cost of tax cuts . However, these projections assume current tariff rates remain permanent—a significant uncertainty given legal challenges and potential policy changes .

**Q6: Could the U.S. actually default on its debt?**

**A:** A voluntary default is extremely unlikely. However, a "fiscal crisis" as described by CBO would involve investors losing confidence, causing interest rates to spike and forcing difficult choices . This is different from an intentional default but could still have severe economic consequences.

**Q7: What does this mean for interest rates and mortgages?**

**A:** Fiscal concerns are already **keeping interest rates higher than they would otherwise be**. Brian Mulberry of Zacks estimates that if markets had greater confidence in U.S. fiscal management, rates could be about **100 basis points lower** . For mortgages, that translates to significant monthly payment differences.

**Q8: When will Social Security and Medicare run out of money?**

**A:** The Social Security Trust Fund is projected to be depleted by **2033 or 2034**, at which point benefits would need to be cut by roughly 20-25% unless reforms are enacted . Medicare faces similar challenges.

**Q9: Is there any good news in the CBO report?**

**A:** As Maya MacGuineas of CRFB put it, "There are no surprises here or bright spots of encouraging news" . Revenues are projected to remain above historical averages, but spending growth consistently outpaces revenue growth .

**Q10: What can be done to fix this?**

**A:** Solutions generally fall into three categories:

1. **Spending reforms**, particularly to entitlement programs 

2. **Revenue increases** through tax reform 

3. **A fiscal commission** with fast-track authority to recommend reforms, modeled after the Base Realignment and Closure process 

The longer action is delayed, the more painful the adjustments will become .

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## CONCLUSION: The Reckoning Is Coming—But It Doesn't Have to Be a Crisis

Standing in the fiscal landscape of 2026, it's easy to feel overwhelmed by the numbers. $39 trillion in debt. $1 trillion in annual interest. A projected $13.8 trillion in interest costs over the next decade. A debt-to-GDP ratio heading toward 120%.

These are not abstract statistics. They represent **real trade-offs** that will affect every American:

- Higher mortgage rates

- Slower wage growth

- Reduced public investment

- Potential benefit cuts

- Increased tax burdens on future generations

But here's the essential truth: **This outcome is not inevitable.**

The CBO's projections are not predictions of doom. They are warnings—scenarios of what happens if current laws remain unchanged. And as the CBO itself notes, "The size of the policy changes needed to put debt on a sustainable path will grow the longer lawmakers wait to implement those changes" .

**The choice is still ours.**

We can continue on the current trajectory, watching interest costs consume ever-larger shares of the federal budget, crowding out investments in the future, and eventually facing a crisis that forces change under the worst possible conditions.

Or we can act—deliberately, thoughtfully, and with the understanding that fiscal sustainability is not an end in itself but a means to a healthier, more prosperous, and more secure nation.

**Maya MacGuineas** captured the challenge perfectly: "Fiscal leadership is not easy—it requires committing to not making the situation worse by withholding support for new legislation that is debt financed, focusing on actual solutions rather than casting blame, and being willing to make tough policy choices that will be the centerpiece of any serious debt deal" .

**Michael Peterson** added: "Improving affordability is a top priority for the nation. Borrowing trillion after trillion takes us in the wrong direction, leading to higher interest costs and higher prices for everyday needs. Stabilizing our debt is an essential part of improving affordability and must be a core component of the 2026 campaign conversation" .

The debt spiral is not yet upon us. But the conditions that create it are gathering. The question is whether we will navigate this moment with wisdom and courage—or whether we will wait until the crisis leaves us no choice.

The CBO has done its job, sounding the alarm with clarity and precision. Now it's up to our leaders—and to us, the voters who hold them accountable—to respond.

The window for action is closing. But it's not closed yet.

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*This article is for informational purposes only and does not constitute financial or investment advice. Always consult with qualified professionals regarding personal financial decisions.*

**About the author:** This analysis synthesizes reporting from the Congressional Budget Office, Peter G. Peterson Foundation, Cato Institute, Fox Business, and other sources cited throughout. All sources are available for independent verification.

**Disclosure:** The author holds no position in Treasury securities or related financial instruments at the time of publication. Positions may change without notice. This article contains no affiliate links.