From Excess Savings to Debt Burden: The US fiscal trajectory is changing
In early 2001, the United States found itself in a situation that now seems like it belongs to another universe. Projections by the Congressional Budget Office (CBO) indicated such substantial budget surpluses that all redeemable public debt was predicted to be cleared by 2006. Fearing a shortage of global benchmark assets, the US Treasury bought its own debt in reverse auctions and suspended the issuance of certain maturities. Alan Greenspan, who was then chairman of the Federal Reserve, himself warned of the risk of "zero debt”, arguing that the state's forced accumulation of private assets could distort capital markets. The US Treasury – the foundation of the global financial system – was already experiencing operational dysfunctions, such as failures in the repo market. This forced an emergency issue of 10-year Treasuries in October 2001.
Twenty-five years later, the situation has been reversed. US public debt now exceeds $38 trillion, which is equivalent to over 124% of GDP – a figure not seen since the aftermath of the Second World War. Even in periods of economic growth, surpluses have been replaced by structural deficits amounting to several trillion dollars. Washington’s prevailing philosophy has shifted radically from viewing debt as a threat to be contained to viewing it as a permanent economic policy tool.
The period of surpluses between 1998 and 2001 resulted from a rare combination of factors. The technology boom of the late 1990s generated substantial tax revenues, primarily from capital gains and high incomes. This was coupled with budgetary discipline and consolidated by the Clinton administration's deficit reduction plan of 1993, which combined spending restraint with tax increases. This policy, known as Rubinomics (spearheaded by former Treasury Secretary Robert Rubin), posits that fiscal credibility reduces interest rates, boosts private investment, and strengthens economic growth.
From a political perspective, the slogan "Save Social Security First” protected the fate of surpluses, making it challenging to suggest tax cuts or new spending. Consequently, the proportion of public debt to GDP fell from 62.5% in 1996 to 54.8% in 2001. However, this discipline was built on fragile foundations. It depended on inflated revenues from an asset bubble, legislative paralysis in a divided government and an intellectual consensus that quickly unravelled.
The bursting of the technology bubble, the recession of 2001 and the 11 September attacks changed the situation. Three structural decisions were made, all of which were financed by debt:
1. The Bush tax cuts (2001 and 2003): these reduced marginal income tax rates and taxes on dividends and capital gains, while beginning to eliminate inheritance tax. Although justified by supply-side economics, the cuts did not pay for themselves and added billions to the debt. Sunset provisions also created a recurring political battle over their extension.
2. The wars in Afghanistan and Iraq: they were the first major conflicts to be financed almost exclusively by debt, outside the regular budget. The Costs of War project at Brown University estimates the total cost to be around $8 trillion, including future obligations to veterans.
3. Expansion of Medicare (Part D): the introduction of the drug benefit in 2003 marked the most significant expansion of the welfare state in decades. Supported by the pharmaceutical lobby, the law explicitly prohibited the government from negotiating prices, thereby increasing long-term costs without allocating dedicated funding.
Each measure would have been sufficient to reverse the surpluses on its own. However, together they created a deep structural deficit and normalised the use of public credit for all priorities.
The Great Financial Crisis (GFC) cemented this change. The government responded with:
• TARP (2008): a $700 billion bailout, with a final net cost of around $31 billion.
• ARRA (2009): a Keynesian stimulus package worth $831 billion.
The Fed's role was more enduring. With key interest rates at zero, it began Quantitative Easing (QE), buying billions of dollars’ worth of Treasuries and mortgage-backed securities (MBS), and expanding its balance sheet from less than $900 billion to $4.5 trillion by 2014. This mechanism pushed down long-term interest rates artificially and neutralised the "bond vigilantes”. The message was clear: huge deficits could be accumulated without incurring immediate penalties in the form of higher financing costs. Market budgetary discipline disappeared.
The crisis led to the creation of a new economic policy manual, which stated that high deficits would be tolerated, with the Fed acting as the buyer of last resort.
COVID-19 accelerated this trajectory. In two years, stimulus packages totalled $4.6 trillion. The Fed doubled its balance sheet to almost $9 trillion, pledging to make purchases 'in whatever amounts are necessary'. Unlike in 2009, concerns about the deficit have disappeared. Ideas like those of Modern Monetary Theory (MMT), which relativise the limits of indebtedness, gained political ground.
Janet Yellen is a prime example of this evolution: as Fed chair, she warned about unsustainable debt but then went on to advocate significant stimulus as Treasury secretary. The pandemic normalised the use of billion-dollar deficits in response to economic shocks.
The return of inflation and the Fed’s rate hikes substantially increased debt costs. Net interest now accounts for an increasing proportion of the budget, having already surpassed the defence and Medicare budgets. This means that each new billion of debt is more expensive than it was a decade ago.
CBO projections indicate that the debt-to-GDP ratio will exceed 156% in 2055 under current legislation, with alternative scenarios suggesting it could surpass 200%. The main risks are:
1. Lower economic growth: the deficit reduces the savings available to the private sector, which in turn reduces investment and productivity.
2. Pressure on the dollar: foreign central banks have been reducing the share of the dollar in their reserves and increasing the share of gold.
3. Intergenerational transfer: future generations of Americans will either face higher taxes or lower benefits to pay for past decisions.
4. Loss of fiscal space: high debt servicing limits the ability to respond to future crises, such as recessions or wars.
The favourable conditions of the 2010s, when interest rates were lower than economic growth [r
Over the last two decades, the fiscal history of the US has undergone a complete reversal: from a superpower grappling with how to manage surpluses, to a nation weighed down by successive historic deficit projections.
• The Rubin and Greenspan era was founded on the belief that fiscal discipline was the key to prosperity.
• The Mnuchin and Yellen era, economic growth and low interest rates were used as a justification for expanding government spending.
The bipartisan consensus on restraint in the 1990s was replaced by an implicit consensus on expansionism. Today, there is no credible political plan for consolidation. The debate focuses solely on blaming the opposition. Meanwhile, the current trajectory is unsustainable: it is eroding growth, burdening future generations, and undermining the United States’ global leadership, which is based on the strength of Treasuries.
In this environment, where money is no longer "free” and the cost of capital matters again, it is only natural that the focus has shifted towards more balanced portfolios with stable sources of income, and greater attention is being paid to quality.
Volatility is no longer just noise; over time, it can reveal more promising entry points. In the absence of miracle cures, a strategy that prioritises companies and issuers with robust fundamentals, business models, and financial discipline, alongside a diversified portfolio of maturities, regions and currencies, is gaining traction.
Rather than looking for "the next sure thing”, the focus shifts towards patiently building returns, adding income and protection, and capturing growth through optionality. This approach involves greater consistency and less dependence on market enthusiasm and is the hallmark of a strategy that seeks to turn a challenging cycle into a lasting opportunity.
This reflection was prepared with the specialised contribution of Miguel Ricon Ferraz, Financial Analyst and Head of Investment Advisory Services at Banco Carregosa.
Bibliography:
• Greenspan, A. (2001). Testimony before the Senate Budget Committee
• U.S. Department of the Treasury (2000). Treasury Department Launches Debt Buyback Program
• Congressional Budget Office (2025). The Long-Term Budget Outlook: 2025 to 2055
• U.S. Department of the Treasury (2025). Treasury Bulletin
• Board of Governors of the Federal Reserve System