Jim Bianco on the National Debt: We're Going Bankrupt Slowly, For Now

The national debt is about to hit $40 trillion. Here's what could happen.

This is Part 2 of my interview with Jim Bianco of Bianco Research at Camp Kotok in eastern Maine on August 9. The first segment focused on the July jobs report, which might not have been as bad as it seemed. I’m hoping to do two more segments featuring Jim, one on the changing nature of the Federal Reserve’s “forward guidance,” and another on broader reforms taking place at the Fed.

The national debt will hit $40 trillion sometime in September, and many economists think it is finally starting to force interest rates higher. That would be one of the first manifestations of a debt crisis. Here’s the video with Jim’s take. Bullet points follow.

Slowly, then suddenly. Jim describes the US debt situation by paraphrasing Hemingway: “How does one go bankrupt? Slowly, then suddenly. We are in the slowly camp.”

Why slow? Markets are absorbing all the debt the Treasury issues these days without much trouble. That’s happening as artificial-intelligence “hyperscalers” are also issuing tons of debt to help finance the AI buildout. That debt competes with government securities for buyers. “The bond market is more concerned about borrowing from hyperscalers,” Jim said during a separate panel at the Kotok event. That hyperscaler borrowing will total at least $1.2 trillion during the next couple of years.

[The gigantic national debt is starting to matter]

What could speed up a debt crisis? “It could be the next recession,” Jim said during the panel. “The bond market might say, fine, you need to do more borrowing, you’re going to have to do it at sky-high interest rates.” The government typically borrows more during recessions to enact fiscal stimulus as a means of combating the downturn. But if that triggers substantially higher rates on business and consumer loans, it could make a recession worse.

The Liz Truss moment. There’s a template for upshifting from a slow to a sudden crisis: The 2022 UK bond crisis. In September of that year, Prime Minister Liz Truss’s government announced a set of tax cuts that would have pushed government debt substantially higher. Long-term interest rates spiked to unacceptable levels, forcing Truss to abandon the plan. It was a fiasco and Truss resigned after just 49 days in the job, the shortest tenure of any British PM.

What other major event happened in the UK around that time? Jim quizzed me. I didn’t know the answer. Watch the video to see if you can get it right.

Here’s my full interview with Jim: