From 2019 to today, the United States has grown faster than any other major developed economy. Nominal GDP is up roughly 30%. Equity markets, despite periodic corrections, are near all-time highs. Unemployment has stayed low. The headlines tell a clean story: American exceptionalism, delivered on schedule.
The fiscal story underneath is less clean. Federal debt held by the public now sits above 100% of GDP, up from 80% pre-pandemic. Interest expense is the fastest-growing line in the federal budget. The deficit in a period of full employment is running close to 6% of GDP — a level historically associated with recessions, not expansions.
The balance is getting harder to maintain
Three dynamics are colliding at once. First, the cost of servicing the existing debt is rising. As older, low-coupon Treasuries roll off and are refinanced at current yields, the interest expense line keeps compounding. This is mechanical, not a forecast.
Second, the political appetite for fiscal restraint is absent on both sides. Tax cuts and spending increases have continued under administrations of both parties. There is no credible path in the current political configuration to a sustained surplus.
Third, the demand for long-dated Treasuries from traditional foreign buyers has softened. China’s holdings are declining. Japan’s ability to absorb more US paper is constrained by its own yield dynamics. The marginal buyer increasingly is a domestic mutual fund or the Fed itself during stress episodes.
Fragile does not mean imminent. It means the system requires increasingly favorable conditions to hold together.
What this means for European allocators
For a European investor, the temptation is to read this as a US-specific story and move on. We think that is a mistake. Three implications carry across the Atlantic.
Duration risk in USD assets is underpriced. The consensus view is that the Fed will cut rates as growth slows, bringing long yields down and delivering capital gains on long-duration Treasuries. That view assumes the fiscal side does not dominate. If fiscal stress pushes term premia higher independent of Fed policy, long Treasuries can underperform cash even in a rate-cutting cycle.
The dollar is not a one-way bet. US exceptionalism has driven a strong-dollar regime for much of the last decade. But the same fiscal dynamics that undermine Treasury demand also undermine the structural case for the dollar. A slow regime shift is possible without a crisis. European investors with USD-denominated private market positions should think carefully about FX hedging policy.
Alternatives with real-asset backing look relatively better. If the scenario is a slow rise in long-term yields, moderate inflation stickiness, and pressure on fiat reserves, real assets — infrastructure, private credit backed by hard collateral, selected commodities — tend to outperform nominal fixed income. This is not a new insight, but the urgency of it is.
What we are not saying
We are not forecasting a US fiscal crisis. The United States retains reserve-currency privilege, a deep capital market, and a global role that no other economy can replace in the medium term. Treasuries will not default, and nothing in this note is a call on imminent disruption.
What we are saying is that the margin for error is narrower than it was. Conditions that supported the last cycle — low yields, strong foreign demand, low debt servicing cost — are no longer present in the same combination. Portfolios built on the assumption that they are will find the next cycle harder than the last one.
The American economy is still the strongest game in town. It is also the one with the most visible fiscal arithmetic. Both things are true. Both need to be in the portfolio.
For our clients building long-horizon alternative allocations, this strengthens the case for diversification across jurisdictions, for hedged duration exposure, and for private strategies with real-asset anchoring. The American economy is still the strongest game in town. It is also the one with the most visible fiscal arithmetic. Both things are true. Both need to be in the portfolio.