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The sustainability of US debt and gold

28 April 2025
Paul Jackson
Paul Jackson
Global Head of Asset Allocation Research
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We have seen episodes in recent weeks of the US dollar falling at the same time as treasury yields rise. This could be due to a loss of faith in US treasuries. This may be linked to recent decisions by the US government but I think it also stems from worries about the path of government debt.

Congressional Budget Office projections suggest that government debt could reach 220% of GDP in 2055 and that net interest costs on that debt could be 8%-9% of GDP (if the 2017 tax cuts are made permanent rather than being reversed in 2025, as originally planned). 

My own "Best guess" scenario gives similar results for 2055 (see the chart for a range of scenarios). However, it also makes it clear that debt and net interest costs will continue rising thereafter (to 389% and 16% of GDP, respectively, in 2100). That sounds unsustainable, in which case interest costs are likely to rise even further. A 5% average interest rate (rather than the assumed 4%), would push debt to 627% of GDP in 2100 and net interest costs would be nearly one third of GDP.

Such unsustainable outcomes are not inevitable. A mix of lower primary deficits (higher taxes and lower spending), stronger economic growth (via immigration, say) and lower interest costs could stabilise debt and interest cost ratios.

However, if those difficult choices are not made, the US financial system could be in for a radical shake up. One possible outcome that is frequently mentioned is a return to the gold standard. My calculations suggest the price of gold would need to be $9,051 per ounce if US gold reserves were to fully cover cash and notes in circulation (or $22,085 if it also needed to cover bank reserves held at the Federal Reserve). I think gold is expensive but these sorts of tail-risk analyses may help explain why it is becoming ever more popular.

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