When the national debt topped $40 trillion last week, it was a round-number milestone that grabbed mainstream media attention. It also coincided with a rough week in the news for Treasury Secretary Scott Bessent, whose intervention in the bond markets was widely viewed as a failure.
Undeterred, Bessent on Thursday seemed to dismiss the ballooning national debt as a relative blip on the Treasury’s radar.
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“There’s nothing magic about the $40 trillion number, and we can grow our way out of that,” Bessent told CNBC host Sarah Eisen.
Likewise, Vice President JD Vance said Thursday night that Bessent has a plan, backed by President Donald Trump, “to get the United States to a point where our economy is growing faster than our debt.”
“So, even though the debt is too high, even though we inherited this debt bomb from the Biden administration, we actually do have a plan to get the economy growing faster than the debt and that’s the most important thing,” claimed Vance during a Newsmax appearance.
The debt-to-GDP ratio now stands at approximately 122-124%, and many economists note that what matters most is this ratio rather than the absolute dollar figure.
However, leading budget economists and fiscal analysts are deeply skeptical that growth alone can close the gap. Critics note that without structural reforms to expenditures and revenues, including potential reversal of recent tax cuts and healthcare system overhauls, tackling $40 trillion in debt through growth alone represents wishful thinking rather than credible fiscal strategy.
Why the US Can’t Grow Out of $40T
Kent Smetters of the Wharton School has called the growth strategy a “fantastic story” that is “pretty clearly” not feasible, arguing that people have the causality reversed – i.e., addressing debt supports growth, not the other way around.
Bridgewater Associates founder Ray Dalio has warned that a debt crisis could materialize within three years and called on the government to reduce budget deficits to approximately 3% of GDP, roughly half their current level of nearly 6%.
According to research from Fiscal Lab on Capitol Hill, the real GDP growth rate would need to average approximately 4.31% annually over the next decade to eliminate the deficit through growth alone, which is more than double the Congressional Budget Office’s projected baseline growth of 1.8% per year through 2036.
In other words: “The US has no chance of growing out of its debt problem through growth only,” said Alicia Garcia-Herrero of Natixis, chief economist for the Asia-Pacific region at Natixis, as reported by the South China Morning Post.
Why AI Growth Won’t Save the Economy
Structural features of federal spending create a particularly stubborn obstacle to the growth thesis.
Social Security benefits are initially calculated with productivity growth built in on top of inflation, so even if AI-driven productivity gains were to double, it would barely move the fiscal balance because benefit obligations would rise in tandem.
In any case, the artificial intelligence (AI) capital expenditure boom currently sustaining economic growth is widely viewed as transitory and insufficient to address the structural fiscal imbalance even under optimistic productivity assumptions.
Healthcare spending presents an additional complication, as a booming economy would drive up wages for medical professionals, forcing the government to spend more to retain doctors in Medicare and Medicaid programs.
Interest payments on the debt have already surpassed $1 trillion annually and now exceed the defense budget, creating a vicious cycle where higher borrowing costs widen deficits and necessitate further bond issuance.
Red Flags from the Bond Market
The bond market has been signaling distress, with 30-year Treasury yields recently touching 5.34%, their highest level since 2007, prompting the Treasury to deploy emergency buyback operations of at least $4 billion per session.
Stanley Druckenmiller, Bessent’s former mentor at Soros Fund Management, publicly rebuked the buyback strategy in The Wall Street Journal, arguing that artificial yield suppression merely subsidizes government procrastination on fiscal reform.
Barchart’s own Senior Market Strategist John Rowland, CMT, critiqued Bessent’s bond intervention as a “buy recommendation for gold.”
The three largest foreign holders of U.S. Treasuries — Japan, the UK, and China — all trimmed their holdings in June, while net purchases by private foreign investors have fallen more than 40% year-on-year.
The credibility of policymakers is now the central variable. If bond markets do not see improvement within a year of growth promises, the result could be a self-reinforcing crisis of confidence that no amount of Treasury intervention can contain.
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On the date of publication, Sarah Holzmann did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
