Closing Bell - CNBC Special Report: America's Deficit Reckoning 7/7/25

Episode Date: July 7, 2025

AMERICA’S DEFICIT RECKONING: What happens if the U.S. doesn’t rein in the budget deficit? CNBC Senior Finance & Banking Reporter Leslie Picker interviewed a dozen experts, investors and former government officials over the course of five months to explore the consequences of America’s fiscal path – not how to solve it, but what’s at stake if we don’t. This special report unpacks how rising debt threatens markets, hinders economic growth, and fractures international relations. From trillion-dollar annual interest payments to bond-market tremors to geopolitical vulnerability, CNBC explores the tipping point that the U.S. may be approaching – and whether it’s still possible to change course.

There's no shortage of voices sounding the alarm about the national debt. Our fiscal situation is a 350 pound, two pack a day smoker on the ICU table. The U.S. federal budget is on an unsustainable path. We're going to be broke really quickly unless we get serious about dealing with our spending issues. I do believe that fiscal policy needs to be put on a sustainable course. The U.S.'s borrowing levels are currently the same size as the entire economy and are expected to skyrocket from here.

That's because America spends way more than it brings in and then borrows to cover that deficit. And there's plenty of debate on how to close that gap, raise taxes, cut spending, a combination of both. No doubt, any solution demands hard choices. But what are the actual consequences if the deficit gets out of control? I often liken this to the invisible dog fence

where you really don't want to hit it, but you won't know until you do. And it seems like the U.S. is almost intent on finding out where that tipping point is. That's Maya McGuinness of the Committee for a Responsible Federal Budget. Business leaders, politicians, economists, investors, almost all share a common fear that the U.S. is playing with fire when it comes to its deficit. But less clear, what the actual ramifications look like if we reach that tipping point. This is CNBC's goal here, to explore not how to fix the deficit, but rather what happens if we don't.

Over the course of five months, we interviewed a dozen people for the project and even more off the record. We surveyed everyone from former Treasury Secretary Robert Rubin to PIMCO's CIO Dan Ivison to former Chairman of the Joint Chiefs of Staff Michael Mullen about what they think will happen if the deficit gets out of control. We dug into the empirical research and the history of how we got here. We took the pulse of a Gen Z-er who is among the younger generations that will likely face this issue head on if it's not reconciled soon.

To begin, we'll share with you the backdrop and context of our debt. Then we'll tackle the potential fallout related to three key areas. The markets, the U.S. economy, and international relations. I'm Leslie Picker from CNBC, and this is America's Deficit Reckoning. The U.S.'s borrowing levels are about the same size as the entire economy. In just four years, the ratio is expected to exceed the historical peak it reached right after World War II and skyrocket from there. But debt in America is nothing new. It has been central since the beginning. In 1776, a committee of founders secured funding for the

Revolutionary War by borrowing from France and the Netherlands. The first U.S. Treasury secretary, Alexander Hamilton, said, quote, a national debt, if it is not excessive, will be to us a national blessing. The War of 1812, the Mexican-American War, the Civil War, the World Wars. They were each funded at least in part through public debt. But up until 1969, the U.S. at least aimed for budget surpluses, especially when there wasn't a war or economic crisis or other type of emergency. That changed under President Richard Nixon when deficit spending became the mainstay. The 70s were ripe with volatility,

the deficit in part to blame, and yet the government kept running up its tab over the next few decades. 1990, 1991 were periods when there was a lot of uncertainty about our economy. I remember I was at that time co-senior partner with Goldman Sachs, and a lot of our clients were very uncertain

of what was going to happen, and deficits played a big role in that. This is Robert Rubin. He advised Bill Clinton on his presidential campaign, the transition, and later joined the administration. He ultimately served as the 70th Treasury Secretary. Rubin says the deficit was always a key focus. I'll never forget, we had a meeting of the economic team, what would be the incoming

economic team, and we sat around with the President-elect and we had a debate about fiscal policy and at some point he looked at us and he said, this is a threshold issue, it's going to be difficult politically but this is what we have to do and that is indeed what we did. What was it that made him say that? What was it that made him realize the? What was it that made him realize the magnitude and the importance of the issue? He was deeply steeped in economic issues

because he focused on these for many, many years. So I don't think it was that he came to realize something. I think that what we had to debate was other purposes that you can serve and then deficit reduction. And we wound up with a balance, which was the Deficit Reduction Program in 1993, which was adopted by Congress, which was a combination of deficit reduction and at the same time, had some room for the public investment that all of us felt we should do.

In 1998, President Clinton announced the first balanced federal budget since 1969. Tonight at midnight, America puts an end to three decades of deficits and launches a new era of balanced budgets and surpluses. The surplus was short-lived. Since then, the U.S. has had several rounds of tax cuts, multiple expensive wars, a financial crisis and a pandemic. If you look at how we got here from when we had budget surpluses, it's very, very roughly about one third from tax cuts,

one third from spending increases, and one third from emergencies. Those emergencies were the right time to borrow, the other two not so much. So there's lots of blame to go around. And the situation is becoming more dire by the day, says Kent Smetters. His team at the Penn-Warton budget model found that the U.S. has a maximum of 20 years to fix the deficit. Fiscal policy is not sustainable. The economy essentially blows up in the sense that there's so much debt

on their current law that fixed income markets, bond markets basically will collapse. If Congress really doesn't get its act together and try to figure out some grand bargain that solves this problem, then there's only one mathematical way of getting out of this, and that is for some type of default to happen. Smetter says there are two types of defaults. There's an explicit default, meaning the Treasury doesn't make full payments on its interest. Most economists believe that's extremely unlikely because before that happens, the Federal Reserve would step in.

If Congress doesn't fix it and Treasury doesn't default, mathematically the only option left is that we pay back the debt by printing more currency. In other words, there's essentially no chance the U.S. goes bankrupt. Here's former Fed chair Alan Greenspan from 2011. The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default. And Berkshire Hathaway's Warren Buffett from 2020. If you print bonds in your own currency, what happens to the currency is it can be a

question because you don't default. Now, this is a privilege that the U.S. and some other large economies enjoy. When you issue debt in your own currency, you have the option of creating money to pay back borrowed money. That's not the case for smaller economies like Argentina and Greece, which have each gone through technical defaults and sovereign debt crises. So if the U.S. can't actually go broke, why should anyone take these levels of debt seriously? If the

Fed can just print money and solve the problem, why should anyone care about an implicit default? After all, we've heard for years that this is an issue, and so far nothing has happened. I ask this question to former Treasury Secretary Rubin. I've said this before, a different moment, we are on the threshold or in the cusp of this uncharted territory we've never been in before. I think that these dangers are real. And I think all the discussion that has taken place in the past, although it hasn't had an effect at the time, maybe hopefully somewhat better prepares us to deal with might lie down the road. down the road. The concern is that excessive money printing could lead to inflation, which would push up interest rates and that could create issues in the bond and foreign exchange markets, slow down the economy and suck up too

many resources to pay that interest. The current Treasury Secretary Scott Besant has said that the issue is a top priority of the Trump administration. When I look in the mirror, I see a deficit halt. Secretary Besson's goal of bringing the deficit to GDP ratio down to about 3% is one that McGinnis of the Committee for a Responsible Federal Budget applauds. I like the goal set out by the Secretary of Treasury, which is bringing our deficit down to 3% of GDP.

I think that Secretary Besson's goal of three percent of GDP is both an ambitious one and a doable one. We'd have to save about seven and a half trillion dollars over a decade. But so far, the deficit trajectory appears to be headed in the opposite direction, thanks to the tax and spending legislation that just passed. The nonpartisan CBO estimates that the one big beautiful bill act would increase the deficit by trillions over the next decade. Absent the hard work of budgeting, are there other ways to chip away at the deficit? The Department of Government Efficiency aimed to cut costs by $2 trillion, a goal quickly reduced to $1 trillion and then just $150

billion, which skeptics say is still too optimistic. Even the libertarian think tank, the Cato Institute recently said Doge was never going to close the deficit without Congress. Former Secretary Rubin is also skeptical. I think Doge is not a thoughtful, I think a masterly counterproductive effort for all kinds of reasons. The effect it can have on our growth and our economy and standards of living and everything else. Furthermore, the debt ceiling is supposed to keep the debt in check, but it's been raised 90 times since 1959.

In fact, the debt ceiling doesn't actually limit spending, but rather it authorizes the Treasury Department to fund commitments the government has already made. In recent years, the debt ceiling has been weaponized for political purposes and has yet to meaningfully address the nation's fiscal situation. McGinnis says this is emblematic of the, quote, dangerously polarized moment we're in where partisan politics seem to be far more important to lawmakers than actually governing. It's going to be very difficult to turn this fiscal situation around without also looking at the underlying political challenges and huge levels of partisanship that are really keeping us from making any of the difficult but clearly necessary choices that we should be making in governing.

Representative Jody Errington, a Texas Republican and chair of the House Budget Committee, recently wrote in a Wall Street Journal op-ed, quote, Washington has a surplus of possible avenues, but a deficit in political will to get the job done. This year, the budget deficit is estimated to surpass 6% of GDP. That's about 63 percent higher than the average level from the past 50 years, a particularly severe statistic considering there's no recession or war or natural disaster that justifies the spike. Most investors, particularly bond investors, are on alert right now because budget deficit levels are starting to become uncomfortably high. Let's dive into the potential market fallout

that could stem from the future fiscal picture. What do you think the likelihood is that the U.S. does experience a crisis related to its deficit or debt levels? I think that there's more than a 50% chance that in three years, give or take a year or two, that we will experience a trauma if we don't deal with this. Ray Dalio has been a global macro investor for 50 years, known for starting Bridgewater

Associates, the world's largest hedge fund. He says he's been concerned about government debt levels since the financial crisis in 2008. But over the last couple of years, they've become more problematic in his view. I think of myself being very much like a doctor and a mechanic that is looking at that. I watch the plaque build up in the system,

and I watch the numbers, and I have not said before, I always said it was unhealthy, but I've not said before that the supply demand picture is a very serious picture as it is now. So it was really over the last, I would say, three years as we started to see the mechanics that I felt really compelled to explain the mechanics. Dahlia recently wrote a book, How Countries Go Broke, studying debt bubbles and busts. He says he's found patterns across 750 markets that have existed since 1700. Drawing from that research, Dahlia says the U.S. is showing classic signs of the later parts of the cycle, given the

supply and demand dynamic of the nation's debt issuance. You start to see that there's a supply demand problem and a debt maturity problem. In other words, the supply that's going to be produced by deficits is greater than the demand for that debt. These are classic signs that happen in that progression. So that one gets by following these numbers and seeing these things, one can see that progress like watching somebody having a heart condition or circulatory system condition,

you can measure those things. And you can see right now it's getting very severe. To fund a growing deficit, the U.S. government has been issuing more treasuries, but introducing additional supply into the market often pushes down bond prices and increases rates. When demand doesn't match supply, investors insist they get paid even higher rates to buy the debt, making the cost of borrowing more expensive. Investor jitters stem from concerns about an implicit default. Smetter says even the prospect of cranking up the printing press to pay back our debt could instigate a bond market revolt.

I tell policymakers in D.C. you might have your big beautiful plan, but fixed income markets through the Mike Tyson, you might have your big beautiful plan until you get punched in the face because they often are not polite. They often just break instead of bend. Here Smetters details what goes on in the mind of a bond investor as debt levels rise. I know that now interest payments by the government are going to go up in the future. Well, how are they going gonna make those interest payments? They're gonna pay me back.

I also know they're gonna crank up the printing press to pay me back. So now I say, you know what? I really need a much higher return in order to, that is even lower price, in order to make that investment. But if I'm really smart and other investors in this market are smart, they're like, but wait a minute, how is the government

going to cover that even higher interest payments in the future? They're gonna crank up the printing press even more. And so if we're smart, we come back and say, oh, therefore I should want even a lower price. And that's where this price spiral comes from. And that is the price goes down. It's a confidence issue. It's a confidence issue. In this scenario, Treasury prices would go lower, yields higher, and the dollar devalued. Inflation would spike with the additional money in circulation, and all of this volatility

would bleed into other markets, according to D'Alio. It would be bad for both the bond market and the dollar. OK, and those markets, the bond market and the dollar, particularly, they're one in the same in that a debt is a promise to receive currency. You know, in other words, the money. And you hold, if you're saying, I'm holding a currency, you hold it in the form of debt. And so that will be devalued. And that'll be devalued to produce inflation pressures and so on. That market is the backbone of all capital markets.

So if you devalue that, you're going to see the effects on all markets. And that'll be very disruptive. Ed Yardenne first started noticing this bond investor behavior in the 1980s. Ten years prior, there had been raging inflation, and many of them had lost a ton of money. So this time, they were on guard for the next spike. There was a lot of fear among investors that they could get burned again. And as a result of that, I coined the phrase bond vigilantes with the notion that if the Fed and the government weren't going to be responsible,

weren't going to be the sheriffs in town to manage the economy in a way that would keep inflation down, that the bond vigilantes would do it. Yardeni wrote in his newsletter then that the vigilantes were concerned about a 200 billion dollar deficit. Today the levels are ten times that. The bond vigilantes are more powerful than ever and the question is are they going to use that power, that extraordinary impact that they could have on the bond market, which is now more important than ever, and push bond yields up to levels that cause a recession in order to bring inflation down.

One country that experienced a mini budget crisis in the fall of 2022 was the United Kingdom. Liz Truss, who was then the prime down. One country that e crisis in the fall of 202 Kingdom. Liz Truss, who w unveiled a plan to cut ta pounds without a way to p a bold plan to grow the e cuts and reform. Immediat investors dumped UK bonds

funds were forced to sell to manage their risk, all of which threatened a downward spiral. The Bank of England had to come in and stabilize the market, and the government quickly undid the tax cuts. But Prime Minister Trust never regained credibility, and she resigned after just six weeks in the role. I have therefore spoken to His Majesty the King to notify him that I am resigning as leader of the Conservative Party. But can that type of crisis

where the market quickly loses confidence happen in the U.S.? It's a risk that we think remains low. This is Dan Iveson, the group CIO of the world's largest bond manager, PIMCO, which oversees $2 trillion. If we don't see signs of attempting to get debt under control, those probabilities of a more crisis level type situation occurring, I will steadily go higher with time. Then again, when people worry about these tail scenarios, including Pimco, we want to get paid a little bit more to combat against those types of risks. I know that back in December Pimco said it was cutting exposure to long-dated U.S. debt

because of deteriorating deficit dynamics. Can you explain more about your positioning there and just your overall concern as it pertains to the deficit? The U.S. continues to be the global reserve currency. We have an incredibly dynamic economy. We have very strong institutions. So we will likely continue to attract a significant share of global capital. We do see other countries' sovereign debt that looks at least as good as the rate levels

of the United States and is running much more prudent overall fiscal policy. So we're not running from U.S. treasuries. We're just looking to diversify. When Iveson says the U.S. is the global reserve currency, what he means is that the dollar is widely used outside of the U.S. It's a big part of global trade, it's held by central banks and it's the currency of choice for many international transactions in everything from oil to gold. This privileged status allows the U.S. to borrow more cheaply because the dollar's wide-ranging use means there's steady demand, even when the fiscal picture is messy. Most economists believe the U.S. will continue to hold the largest reserve currency share,

but it's been declining in recent years and the status depends on continued confidence in the dollar and treasuries as safe havens or places to part capital when times get tough. When you talk to clients abroad, how often do they bring up the U.S. deficit? Very interesting question. I travel a lot. When I go to Asia, was there late last year, it's by far the single biggest question that I get. Probably in nearly every meeting, it's top of the board in terms of questions. They are confused as to why the US economy can be so strong.

And despite significant economic strength, we can still be running deficits in that 6% to 7% range. Our answer is usually that, hey, yes, it's a concern, but we likely have some time on our hands. But it's a reminder that these are global markets. And if we don't show signals that we're addressing the fiscal situation over time, those investors that are asking the questions

may look for answers that involve a little bit less investing in US government securities. And of course, that will have fallout as we talked about in other areas of the capital markets. Is there almost a moral hazard though, given that because the US is the reserve currency, they won't default necessarily on their obligations. They'll just print more money.

I mean, does that create kind of a unique dynamic? And what does that mean for someone who is a tremendous investor in US treasuries? It's either moral hazard or some form of complacency because we do have the significant advantage of being the global reserve currency. And sure, you've seen some diversification over the last several years away from US dollar denominated investments, particularly foreign central banks, at least have slowed the pace of acquisition of US treasuries.

But there's still tremendous confidence in the United States in this idea of US exceptionalism. And perhaps because of that, you haven't had the same type of political catalyst to address the deficits. But up until now, and we still think, although there's an increased focus on deficits, it's probably not sufficient. And we probably need to see a little bit more volatility or some other type of catalyst to get us to seriously think about the debt picture. Economists try to estimate how much investors want to be compensated for longer term risks such as the federal budget and inflation. It's called the term premium. If the term premium is rising, it may mean that investors are experiencing more uncertainty about macro conditions. Whereas if it's declining, there's likely more stability.

It's not a perfect statistic and models tend to vary. But in January, the term premium hit its highest level since the post-financial crisis era. It's pulled back a bit since then, but remains elevated. JPMorgan chairman and CEO Jamie Dimon recently offered a warning. You are going to see a crack in the bond market. OK, it is going to happen. I just don't know if it's going to be a crisis in six months or six years. And unfortunately, it may be that we need that to wake us up.

It's an unfortunate thing. Moody is lowering its credit rating on the United States debt one notch to AA from AAA due to increasing government debt and interest payments. In May, Moody's became the third major ratings agency to downgrade the U.S. from top-tier status. Americans often see immediate benefits from policies that widen the deficit, things like tax cuts and spending increases, making them politically popular.

So then why should everyday Americans be concerned about the deficit? This is the question I asked former Treasury Secretary Robert Rubin. I think that's a very difficult issue because it's not obvious to people how it affects their standards of living, how it affects the economy, how it affects jobs, how it affects wages. But it does. It can profoundly affect all of this because it can affect our economy, the health of our economy and the growth of our economy. Let's dig into exactly how the deficit impacts the U.S. economy. We will be in very shortly into the highest debt to GDP ratio, ratio of our debt to our economy that we've been in our history,

and it is decreasing very rapidly. If you go from 100% to 130 to 135% over 10 years, that's an immense increase with, and we've never been in that territory before. Yeah, I think it has multiple risks. What do you think those risks are? One is that it affects interest rates. And I think that's probably a little bit now, but maybe not.

But I certainly think that's a material risk as you go out in time. It can affect business confidence. I don't think it is now. But once again, we saw that once before and I think you certainly have a material risk as we go out in time. Our resilience, our ability to deal with emergencies, geopolitical or economic, it can affect those. And it can affect what is called crowding out, that is to say, the more capital the federal government is, or the larger claim on our savings that the federal government is making because of our deficits, the less capital is there available. But the private sector now manifests itself in higher interest rates.

And finally, and ultimately, if we don't deal with this, we run the risk of a fiscal crisis. What does that look like? Well, nobody knows what it looks like. We haven't had one of those. But I think what it looks like is rapidly escalating interest rates, the deep concern about our economy and our markets and interest rates around the world instead of global capital coming into the country, which it has now for such a long, long period of time, global capital moving

out of the country, and then a very serious, at least potentially, a very serious adverse effect because of all of that on our economy, on growth, on weight, on standards of living and the economic well-being of average Americans. Why is the debt to GDP ratio skyrocketing? Well, demographic shifts and pricier health care have caused Social Security and Medicare costs to soar. These are mandatory outlays, federal spending required by law. Deepening the hole? How much the government is paying to service the debt? Nearly one trillion dollars annually.

That's more than the U.S. spends on defense or Medicaid or Medicare. And that interest expense is rising relative to the revenue the government is taking in, leading to an unhealthy situation, according to macro investor Ray Dalio. Debt isn't a problem if there's enough earnings that allows you to pay back that. When you start to see that debt and debt service payments rise relative to earnings, it's like plaque in the system. The amount of plaque is expected to double from just four years ago. This year, the cost to service the U.S.

debt is expected to be a whopping 18 percent of total tax revenue. In 2022, that figure was less than 10 percent. Higher interest rates are keeping these costs elevated. Last year, the government paid an average rate of about 3.3 percent on its outstanding debt, the highest since 2009. Spending more money on interest means there's less for other important line items, according to Maya McGuinness, president of the Committee for a Responsible Federal Budget. The price we're paying with growing interest rates leading to higher interest payments

squeezing out other parts of the budget, whether it's tax cuts you want, whether it's higher defense, whether it's higher social spending, all of those things get squeezed out when your interest piece of the pie is growing as it is now. As we discussed earlier, the U.S. is unlikely to ever run out of money to service the debt itself. It won't go bankrupt. Before something like that were to happen, the government would print more currency to fulfill its obligations. But doing so would likely be inflationary,

meaning rates would go even higher and debt servicing would become even more expensive, risking a vicious cycle. Here's Wharton's Kent Smetters. By printing more currency, yes, we pay back our debt, but how do we do it? We just cranked up the printing press. That now means there are more dollars in the economy that are chasing the same amount of goods and services. You know, instead of having one dollar chasing, you know, a bundle of food, you know, now it's two dollars.

Well, what's going to happen to the price of the bundle of food? It's going to double. That's where inflation comes from. The higher inflation and higher interest rates from the debt load have a knock on effect, making borrowing more expensive for businesses and individuals. This is known as crowding out. In simple terms, the economic theory implies that the more public sector spending, funded by debt, drives down private sector spending. When the government sells debt, it actually reduces total investments.

That's known as what's called a crowding out effect. And so that crowding out lowers productivity in the future, lowers wages, increases interest rates and ultimately reduces the standard of living. The brunt of these issues will be felt by future generations, if not tackled sooner. We are leaving an economy that is much weaker to the next generation than it otherwise would have been. And it used to be that people would say, it's OK.

It's OK to borrow from the future generations because they're going to have a higher standard of living anyhow. But right now, it's a very risky moment, where it's quite clear for younger generations, they don't know exactly what they're inheriting. But it's certainly a changing economy what's going to need a new social contract. Kyla Scanlon is a Gen Z-er who was an author, public speaker and content creator focusing on the economy.

I sold cars when I was in college and people would come in and you know not know what an interest rate was. And it was really challenging because that's super important to know. And at the time I was studying economics and I realized that there would be a lot of power in helping people understand the economy and that they should understand the economy. And so that's been my goal over the past several years is to help people understand the world around them. When we met up with Scanlon, she was being interviewed at George Mason University.

What structural issues do you see as the most significant threats to economic stability or growth in the next decade? What's your view of debts and deficit in that assessment? I think the debt and the deficit like have to be analyzed. The interest payments are quite a weight and rates probably aren't going down anytime soon. Who knows how the Federal Reserve will respond but yeah I think it's definitely a very pressing problem that we can't continue to ignore. Scanlon says young people risk not having access to Social Security, Medicaid, and Medicare in the future, despite paying into those services now. And a lot of the issue with spending is that it's going towards essential services, right,

like Social Security, Medicare, Medicaid. And if that doesn't get solved by the time that young people need those services, not only are they not going to have access to those services, but they're also going to have to pay for those who did before them. It's kind of this two-part issue where things are very expensive, somebody has to pay for them, and then the services could disappear. In the more immediate term, a growing debt load limits the government's ability to fight off an emergency should one arise, Wharton Smetter says. We've had crises in the past and you know we've gotten through them recently. 2008 for example and the financial crisis,

COVID, another big financial crisis in many ways. How do we get through both of those crises is that we actually use debt to get our way out. What happens now when debt itself is the problem? You can't use debt to get out of the debt problem. It's too late at that point. To be sure, most budgetary solutions for the U.S. deficit, essentially tightening the fiscal belt through austerity, would also hinder growth.

Well, we could raise taxes to try to deal with the problem, but we would need 30 percent more tax revenue immediately and forever just to have enough money to pay for spending and interest payments. So the tax revenue we have right now doesn't cut it? Nope. We need about 30 percent more revenue if we only use taxes to try to deal with this problem. Now suppose that we try to cut spending. Spending is a bigger base. That's the reason why we have a deficit. We would have to cut spending immediately and forever across all programs by 25%. And so if

your grandma's getting social security checks, she won't be exempt from that. Her checks are going down 25%. But some Republicans believe theINS, National Public Radio, Newsweek, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The

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York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New York Times, The New debt. His long term goal is to cut in half the current deficit to GDP ratio, which is the highest outside of war or recession. But a solution to the deficit needs to happen within the next two decades matters team at Wharton found at that time it will be too late. No matter how much taxes are hiked, no matter how much spending is cut, the government will run out of money to pay its debt obligations. So knowing what you know about the deficit, about the 20-year time horizon, maybe even sooner, is there anything you've personally done to prepare for this? I have.

In particular, I don't think it's a terrible idea. They have a backup plan, maybe some storage of things like food and rations and even maybe a getaway place. You've got a bunker with canned goods. It's not a bunker. It's a getaway place. But I do. Yeah, I do.

And I hope it never has to be used other than just enjoying the mountains and so forth. But it is a backup plan. When Admiral Michael Mullen was asked back in 2010 what he thought was the biggest threat to national security, his answer shocked the nation. I responded that the most significant threat was our national debt, which was a bit of a surprise. The reporter and others actually would have expected some kind of weapon system or some kind of country or something like that. And it wasn't a glib response because I actually, from a military standpoint, have looked at

economic conditions around the world and I've been all over the world. And notionally throughout my life, the better the economies were in certain regions, the more stable the regions were. So it was not something that I had just made up. Admiral Mullen served as the chairman of the Joint Chiefs of Staff under George W. Bush and Barack Obama. Since then, the national debt has nearly quadrupled. Now let's explore Admiral Mullen's concern.

Why would the national debt impact national security? Typically each year in the budget, the Defense Department budget takes up about half of that uncommitted money. And so what I saw was as interest rates possibly would go up, as our debt continued to increase, and we pay off our debt with some of that uncommitted money as well, it would just squeeze the defense budget. And so I saw over time the defense budget coming down at a time of increasing international and geopolitical concerns, where it was my view the defense budget really needed to at least be maintained or rise over time. So that's how I got involved in this. Experts have warned that when a government owes so much related to its debt load,

it can't spend what it needs to on the military. This year, the U.S. is expected to spend about $93 billion more on interest payments than on defense, deepening a critical tipping point that America hit in 2024. Ferguson's law states that if a great power is spending more on interest payments than on defense, it won't be great for very much longer. The U.S. crossed that threshold last year. That's historian Neil Ferguson. He recently wrote in The Wall Street Journal, the centripetal forces of the aggregate debt burden tend to pull apart the geopolitical grip of a great power, leaving it vulnerable to military challenge.

That was the case, according to Ferguson, in 17th century Spain, 18th century France, 19th century Ottoman Empire, and 20th century British Empire. I don't see a way in which the deficit is bigger in 2025 than it was in 2024. And that also means that the debt burden grows and unless interest rates come crashing down, which they haven't yet done, that means that interest payments are going up. So that's that is a really major problem for a superpower that it is in a game of chicken with another superpower.

Servicing high levels of national debt erodes resources that could otherwise go toward military readiness or investing in new technology or conflict deterrence. These tradeoffs may leave the country more vulnerable if there's a crisis, according to Maya McGuinness of the Committee for a Responsible Federal Budget. We still have a deficit and a debt that are growing faster overall than we can manage in our budget. And what it also does is it leaves us completely unable to respond if there's an emergency. And one thing that the past years and the growing geopolitical environment have shown us is that we should assume there will be future emergencies.

We are not in an emergency free moment. In the meantime, how much are America's foes paying attention to this fiscal imbalance? It's a question I asked Admiral Mullen. Do our adversaries pay attention to our debt levels and our deficits and see that as a potential vulnerability and a potential kind of weakness in light of all this instability. I would think that Putin and Russia, Xi Jinping and China see this as a vulnerability. And you've heard President Xi in China over the last certainly decade plus talk about the United States being in decline. I worry, and that's gone up and down with him a little bit. He certainly 10 years ago, 10 plus years ago when he came in, that was one of his main themes.

I think he moderated that in recent years. And then I've heard more recently that that that may still be a significant priority. It's operative for him that he thinks we're in decline. significant priority that's operative for him that he thinks were in decline. The irony is China is one of the largest foreign holders of U.S. treasuries, although it's been steadily reducing its stash in recent years. Overall, international holdings of U.S. treasuries are near a record nine trillion.

Experts have warned that foreign creditors theoretically could use their bonds as financial leverage in a geopolitical squabble. And so if you just look at China and we don't know exactly how many treasuries they have, certainly it's probably about 800 billion, but there's more that's not even transparent. It's not clear that this would happen, but you could dump treasuries. If one wanted to create a lot of different fiscal risks at one time or a lot of risks at one time, manipulating treasuries or not showing up for auctions could be just one of the pieces of a modern day warfare posture, which is very different than what we used to have. However, China or any other large foreign creditor may hesitate to sell their treasuries all at once because in doing so,

they'd have to take steep losses in their own portfolio. Here's more from my conversation with Admiral Mullen. China holds about 800 billion dollars worth of US Treasury. Does that matter in the context of national security? Is that something that we need to be concerned about? You know I had a conversation in the late 90s with a banker who was a global banker, a US but global banker, who described that he was very close to the leading economics guy, finance guy in China in the late 90s.

And the way he described it was, there's not a lot I can do to hurt you that I would do to hurt you, because if I hurt you, I hurt me. So if you take that 800 billion, probably, I mean, it wouldn't surprise me to get to a trillion at some point. And if China started to call that debt, and we would have to pay, I mean, that's almost as a leader, I don't think he wants

to get into a conflict with the United States. But in theory, they could dump all of that debt. No question. They could. And that would put us in a very, very difficult position. Back to this conversation in the late 90s, which I think has held true all this time, is where we are co-dependents on each other so that neither one of us would do something really stupid to try to crush the other one, both from an economic standpoint and then subsequently from a military standpoint.

The largest foreign holder of U.S. debt is Japan, an interdependence that was exacerbated through trade according to George Goncalves. He runs U.S. macro strategy for MUFG, Japan's largest bank. What is the backstory as to why Japan would hold so much, both from an individual standpoint and from the Japanese government standpoint and from a banking sector standpoint? Why is it that the Japanese own so much U.S. federal debt? How much time do we have? We've got 30 minutes. No, I'm kidding.

I mean, it's a long story. You have to go back chronologically to kind of understand how Japan amassed all these dollars, how they amassed all these treasuries. It initially started off really from the official sector, from the central bank, which is the Bank of Japan, and the Ministry of Finance as an arm of Japan. Over time, you know. This was back post-war, post-World War II?

So this really, really took off in the late 70s and the 80s as Japan was an exporting nation, accumulating dollars over time through the trade balance side of things, and they had to reinvest that money. So that was the big starting point, the building blocks for how Japan got dollars and treasuries. And then it moved on over the course of the 20 years after the 1980s, the 90s, and 2000s, where they started to be concerned about the currency strength.

So during the early 2000s, there was a lot of FX interventions where they would sell yen and buy dollars. And then they would have to reinvest those dollars somewhere. Let's say a Japanese automaker sells a car to a U.S. consumer. The company receives $30,000, but the automaker needs to convert that cash to yen to pay its expenses like workers and suppliers. So it goes to a Japanese bank for help with the exchange. The bank then invests the dollars it receives into U.S. treasuries because they're safe and easily traded. And this is a way that Japan can prevent the yen from getting too strong, which would

make exports more expensive. I asked MUFG's Goncalves whether the Trump administration's reworking of global trade relationships changes the appetite for foreign entities to hold U.S. treasuries. Now that we are in the midst of a different trade regime, some might call it a trade war, does that change the dynamic? Does that attenuate the need for Japanese to hold as much treasuries if they're not going to potentially be exporting as much or have to pay more when those those exports enter the US? Well I mean so that's a really good point and this is it goes back to the heart of why do you need dollars to

begin with right? I mean there's still a an interest and a need to engage with the US marketplace the US economy so that's just not going to go away right and if you need to pay tariffs, you might have to raise dollars anyway. So I think that that's not gonna be what changes things. It's, and let's not forget that the investments that are being done by overseas investors into U.S. markets, it's kind of a, it's a give and a take.

I mean, if they're accumulating dollars, you're gonna have to put them somewhere. The White House says higher tariffs will generate additional revenue to shrink the budget deficit. For years, hardworking American citizens were forced to sit on the sidelines as other nations got rich and powerful,

much of it at our expense. But now it's our turn to prosper, and in in so doing use trillions and trillions of dollars to reduce our taxes and pay down our national debt. And it'll all happen very quickly. The Tax Foundation estimates that a 10 percent universal tariff could bring in trillions of dollars, but that revenue would diminish when accounting for the broader economic impact. Eventually, the solution to the deficit is likely to come down to the hard work of budgeting, according to McGuinness. I think the dangerously polarized moment that we're in, where partisan politics seems to

be far more important to lawmakers than actually governing, has led both parties to adopt all of the easy things. They both love cutting taxes and growing spending. It's going to be very difficult to turn this fiscal situation around without also looking at the underlying political challenges. Amid the ongoing battles in D.C. and the worsening plight of the nation's deficit challenges, I wanted to know whether Admiral Mullen's concerns have changed. Do you still see this as the biggest threat to national security?

Great question, and a fair question. And my answer is no. I think actually what I now see, I now put it at number two. I actually think the political division in the country has risen to our biggest threat and to the degree that we continue to tear each other up and not move forward in a constructive way, I think that offers a much more significant threat now to our future as a democracy. And so in the last, I don't know, 10 years or so, I've seen that threat to democracy, threat to who we are as a country, threat to the things that I grew up with, not just here but also globally, is really significant.

So I think the biggest threat to us is us. America's Deficit Reckoning was written, reported, and hosted by me, Leslie Picker. This series is produced by Rithika Shah. The podcast was edited by Edward Fetner, Daniel Glazi, and Evelio Rodriguez. We had production support from Gillian Kreitzman, Anthony Velastro, and Caroline Rehodes. Our production crew includes Darren Geter, Aaron Black, Magdalena Petrova, Carlos Waters, Natalie Rice, David Soltis, Leroy Jackson, Alex Bedoya, Mark Astor, Michael Luciano, Tyler Roth, Jordan Smith, Miles Ross, Tara McCurry, Vincent Castaldo and Marco Mastorilli.

CNBC's Talha Hadavi and Lacy O'Toole oversaw this project.