The inevitable mathematics of sovereign debt
Tue Oct 06 2026
Central banks understand it, so should individual investors
There is a point in any debt spiral at which the question stops being political and becomes arithmetic. The US – and much of the developed world – has reached that point. Understanding why requires no ideological priors. It requires only a calculator.
Global public debt rose to just under 94% of world GDP in 2025, according to the IMF, and is projected to reach 100% by 2029. Among the G7, Japan's debt is above 260% of GDP, Italy's above 138%, France's above 110% and the UK's above 100%.
For most of the past two decades, large debt burdens were manageable because interest rates were near zero. That era is over. The rate-hiking cycle that began in 2022 changed the arithmetic of sovereign balance sheets. Governments must refinance maturing debt at prevailing rates.
The US has approximately $9tn of debt maturing in the next 12 months. Much of that debt was issued at rates between 0.5% and 2%, meaning refinancing at current rates of 4%-5% embeds higher costs for the life of the new securities. The CBO estimates the average interest rate on federal debt held by the public at 3.4% in 2026, rising towards 3.9% later in the decade.
The US is expected to spend more than $1tn on net interest in fiscal 2026, exceeding its entire defence budget. By 2036, the CBO projects net interest will more than double to $2.1tn, and by 2056 reach 6.9% of GDP, exceeding both Social Security and Medicare.
Gross US federal debt exceeds $40tn, approximately 126% of GDP on the IMF's internationally comparable measure, and is projected to reach 142% by 2031. The fiscal 2026 deficit is approximately 5.8% of GDP, compared with a 50-year historical average of 3.8%. Rising interest costs drive larger deficits, which require more borrowing and further increase future interest costs.
Is the debt sustainable?
The article applies the debt-dynamics equation associated with economist Evsey Domar. For debt to be sustainable, the interest rate on government borrowing must be lower than the nominal growth rate of the economy. When borrowing costs exceed growth, the debt-to-GDP ratio rises automatically unless the government produces a primary surplus.
The US currently has a total deficit of approximately 5.8% of GDP and a primary deficit of approximately 2.6%. Under the Domar framework, the US would need to move from that primary deficit to a surplus of roughly 1% of GDP – an adjustment of nearly 4 percentage points – merely to stop the debt ratio from rising.
Four ways out, none easy
The article identifies four broad ways to change an unsustainable debt trajectory:
1. Faster growth
2. Fiscal adjustment
3. Default or restructuring
4. Inflation or financial repression
None is painless, and governments may use a combination of them.
Sustained economic growth above the effective interest rate would make debt easier to carry, but trend growth across advanced economies is modest. The IMF projects US real growth slowing towards roughly 1.8% later in its forecast period.
Fiscal adjustment through higher taxes and/or lower spending is mathematically the cleanest solution but politically difficult. The article argues that meaningful consolidation generally becomes politically possible only when an emergency or market constraint makes inaction unavoidable.
Explicit default or restructuring by a major reserve-currency sovereign would be profoundly disruptive to financial markets and is not considered the base case.
The fourth option is inflation or financial repression – reducing the real burden of debt by allowing nominal growth and inflation to outpace the effective interest paid on the debt, potentially alongside regulation or central-bank policies that contain funding costs.
What the institutions are telling you
The article points to central-bank balance sheets as evidence of a long-term shift.
Official-sector gold purchases exceeded 1,000 tonnes in each of 2022, 2023 and 2024, more than twice the 2010-21 annual average. The author argues this reflects a sustained reallocation towards an asset with no counterparty risk, which cannot be printed and sits outside another sovereign's liability structure.
A reserve manager from a central bank that had recently begun accumulating gold described the motivation in one word: “diversification.” The author interprets that diversification as being away from sovereign paper issued by governments facing the fiscal pressures described above.
The individual investor corollary
The article argues that the same arithmetic affecting reserve managers also applies to individual savers, although on a different scale.
If sovereign debt problems are ultimately resolved through some combination of inflation, financial repression and currency debasement, the real value of cash and fixed-income savings is potentially at risk. The author presents this not as a prediction but as a consequence of the policy options available to heavily indebted governments.
The article's conclusion is that gold is not simply a trade on this view. It is an asset that has no liability on the other side of it. In an environment characterised by increasing liabilities, the author argues that this characteristic is significant.
Steven Feldman is Co-founder and Chief Executive Officer of GBI, the institutional infrastructure for physical precious metals, serving global wealth managers, banks and fintechs. GBI is a member of OMFIF's Gold and Precious Metals Working Group.
Source: https://www.omfif.org/