DailyFriend.co.za. April 26, 2026

In the novel The Sun Also Rises, Ernest Hemingway’s character Mike Campbell is asked how he went bankrupt.  He famously replies, “Two ways, slowly and then suddenly.” The United States today is in the “slowly” phase.

Savvy economist and interest rate guru Jim Grant agrees that “The U.S. government is going broke but is not now broke.”

In every year for two decades the US government spent more than it took in.  Warren Buffett, the oracle of Omaha, likes to say that typically government revenue is 16% of total output or GDP, while spending exceeds 22%.  That, says Buffett, is unsustainable.

The numbers are staggering.  In 2025 the fiscal deficit—the excess of spending over revenue— was $1.8 trillion. Deficits more than doubled from 2011 to 2025.

Johns’ Hopkins economist Steve Hanke says government financial mismanagement is akin to a household earning $52,000 but spending $73,000.  That household would quickly learn there are consequences to mismanagement.  Does that not apply to government?

Perhaps.  Back in the 1960s, French finance minister and later president Valéry Giscard d’Estaing complained that the US enjoyed an “exorbitant privilege”, because the dollar was the de facto world currency and countries needed dollars for trade.  That meant, he said, that the US could finance its deficits in its own currency: a flexibility that other countries didn’t have.

Sadly, after decades of exorbitant privilege, some politicians have concluded that deficits don’t matter, that the US government gets financed no matter what.   How does government finance deficits?  By printing IOUs, treasury bonds that investors purchase because they believe the US will make good on its promise to pay. 

Niall Ferguson, the respected historian at Stanford’s Hoover Institution, has formulated what he calls “Ferguson’s Law” about debt and interest on the debt. He argues that any great power spending more on interest than defence risks imminent decline. In 2024 the US violated this rule, as interest payments ($1.124 trillion) exceeded defence spending ($1.107 trillion). This tipping point, says Ferguson, signifies an unsustainable fiscal position that weakens national power and signals vulnerability to rivals.

Countries do go broke. Typically, the currency of a chronic debtor loses value, a country defaults on its debt, and needs to pay high, punitive interest to borrow.  Britain in 1945 is a case study. It had become a chronic debtor, borrowing heavily to finance the First World War and borrowing even more during the Second World War.  In 1941, the United States bailed out its friend with the Lend Lease Act. By 1945 Britain was broke, its debt exceeding 250% of GDP.  The US abruptly ended lend lease, and London had to beg for an emergency loan. In 1949 Britain was forced to devalue its currency, slashing the value of the pound from over $4 to $2.80, a 30% devaluation.  That impacted British consumers, with imports costing more. British people were poorer even though they won the war. All this translated into Britain’s global stature being drastically scaled back.

The US debt has reached $39 trillion, a number equal to 120% of GDP. And the debt is growing at an alarming pace.

Do these catastrophic numbers mean that we’re approaching the “suddenly” stage of bankruptcy?  Not necessarily.  Other countries, notably Japan and Italy, have even higher debt to GDP ratios. Many financial analysts believe America’s debt problem is fixable, but effective debt management means economic growth needs to exceed the rise in debt.  Currently the US fiscal deficit is six percent of GDP while the economy is growing by only two percent.

The dollar’s dominance in global transactions is slipping, but not by much. Sixty percent of global reserves are in dollars, down from 70% a decade ago. Most global trade is denominated in dollars with the euro and Chinese yuan far behind. China and some other countries would like to displace the dollar.  But unlike the dollar, the yuan is not freely traded on world markets.

Should the American deficit persist, the most likely result will be a weakening of the dollar against the euro, the yuan, the yen and the pound. Thus far, even with a war with Iran that is costing at least $1 billion per day, and an unpredictable president, the dollar remains strong and in demand.

For the present, the US remains in the ‘going broke slowly’ camp.

The views of the writer are not necessarily the views of the Daily Friend or the IRR.

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Barry D. Wood

Washington writer Barry D. Wood for two decades was chief economics correspondent at Voice of America News, reporting from 25 G7/8, G20 summits. He is the Washington correspondent of RTHK, Hong Kong radio. Wood’s earliest reporting included covering key events in South and southern Africa, among them the Portuguese withdrawal from Mozambique and Angola and the Soweto uprising in the mid-1970s. He is the author of the book Exploring New Europe, A Bicycle Journey, based his travels – by bicycle – through 14 countries of the former Soviet bloc after the fall of Russian communism. Read more of his work at econbarry.com. Watch https://www.youtube.com/watch?v=07OIjoanVGg