US Sovereign Debt Crisis
There are two sides of the scale with respect to and interest rates. The Fisher equation explains this: i = p + r, where i = nominal interest rate, p = , and r = real interest rate. The government is increasingly running larger deficits, and these need to be financed. The choices are very simple: raise revenues through taxation, print new dollars, or borrow using US treasuries. Raising taxes is unfavorable, so we are left with the two latter choices. By printing money, the supply of dollars increases in the economy, reducing the purchasing power of the dollar and increasing . Borrowing money is also an option, but it requires the borrower to provide a real rate of return to the creditor.
After 2008, the US Fed began the process of , which injected trillions of USD into the economy. Typically, lags the capital stimulus, as it takes time for the velocity of money to begin increasing. However, when credit gets squeezed and debits start to rise, the starts to get recognized. As rises, creditors demand higher interest rates to offset the rising . The US govt relies on cheaply borrowed money, and they finance the deficit by rolling over short term treasuries. Now that is rising, the government will pay a higher interest rate when US treasuries mature. Thus, the cost of servicing the national debt is increasing.
As the cost of carry goes up, the debt service will comprise a larger portion of US national GDP. Considering the simple model that GDP = C + I + G + NX , as the debt service begins to rise, then it must be that either consumption, investment, government spending, or net exports must fall. The government is increasing spending and the tariffs on foreign goods is reducing demand for imports, so in my opinion, consumption and/or investment must fall to make room for the increase in debt service. Should consumption and investment slow, this will likely be enough to cause a recession.
The second option is to hyper inflate the currency. We have done this twice before in US history, but I'll list the earliest example because I believe it's the most relevant. Following the revolutionary war, our debt to GDP was estimated to be somewhere in the 80% - 90% range; much of our debt was lent by France to finance war efforts. As the cost of carry increased for the US government, and since they could not raise taxes (for which they just fought a war), and as foreign credit dried, the only option available was to print money to pay down the debt. The result was that the US currency at the time, the Continental, suffered hyperinflation. Thus came about the expression "not worth a continental".
While the exact inflection point is difficult to time, the premise of the argument is still sound: the national debt is not a perpetual cash machine and overconsumption today must be followed by underconsumption tomorrow. Perhaps my timing is off, but there absolutely will come a period in time where the lack of credit in the world market will cause a yield spike and significantly contract the US economy.