The coming storm of America’s debt correction
Story by Jeremy Warne, The Telegraph, 10/24/26
What Valéry Giscard d’Estaing called America’s “exorbitant privilege” still seemingly reigns supreme. But for how much longer?
The one-time French prime minister was referring to the commanding position that the American dollar occupies in global finance as the world’s dominant reserve currency, a role that allows the US federal government to borrow almost without limit at relatively favourable interest rates.
This advantage has been much in evidence over the past few weeks. With Paris and other major French cities in flames, money has been pouring out of France and into the traditional safe-haven asset of US Treasuries.
Even UK gilts have benefited from France’s misery; the spread with French national debt has narrowed markedly over the last month.
But the big winner is the US, which ignoring exorbitant privilege might count as odd because objectively, America’s fiscal predicament is in some respects no less dire than that of France.
Never mind the UK’s £3tn of sovereign debt and the equally hefty French tally, the US recently surged through $40tn (£30tn), with seemingly no end in sight to 6pc-plus budget deficits.
The nonpartisan Congressional Budget Office projects that these deficits will drive overall federal debt to record shattering levels relative to national income over the coming decade, and reach a staggering 155pc of GDP in 30 years if nothing is done to change course.
As things stand, there is no sign of such action. Rather the reverse. Donald Trump has promised big subsidies to farmers, and – outrageously – an additional $5,000 payment or tax rebate to all Americans, should he succeed in defending Republican majorities in Congress in the coming midterms.
In other words, the deficits are going to get even worse if voters back Trump. The situation scarcely looks any better if the Democrats triumph, committed as they are to reversing Trump’s welfare cuts. This is the only serious bit of fiscal consolidation the White House proposes. If it’s abandoned without the offset of big tax increases, the public finances will be in an even bigger mess.
From a fiscal perspective, the choice is between the devil and the deep blue sea. What’s more, if the Democrats win big, the chances of a government shutdown after the current debt ceiling deal expires on Dec 11 increase dramatically. There is every possibility of the US falling fowl of the same political paralysis as has crippled France.
It is an article of faith in Trump’s White House that superior levels of growth, and in particular American leadership in artificial intelligence – as big as the industrial revolution, according to Trump – will in time make the debt problem go away.
Maybe the champions of AI are right about its potential, but the fact is that any plan for debt reduction which rests entirely on make-believe levels of AI-driven growth is not worth the paper it is written on. It’s wing-and-a-prayer stuff, and simply not credible.
Recent developments, moreover, do not support the idea that AI is about to come riding to the rescue. AI-related stock prices have come seriously off the boil over the past several weeks, and there are growing signs of stress in AI-associated debt markets, with the cost of buying insurance against default soaring in many cases.
Only last week, Jensen Huang, the leather-jacketed boss of Nvidia, warned of a funding crunch, with many companies struggling to raise the capital needed to sustain the current breakneck level of investment.
“The demand for capital is much greater than the availability of capital,” Jensen said, adding: “That’s going to get solved.” You’ve got to admire his optimism, because there is a good reason why capital is drying up. And it’s not got much to do with the inability of the capital markets to cope with AI’s insatiable appetite for funds.
If they can fund the US deficit to the humongous degree currently required, they can certainly accommodate the AI boom. Rather, it’s about growing doubts over likely rates of return.
There are of course lots of starry-eyed projections out there, my all-time favourite being the one endorsed by Elon Musk to the effect that AI might eventually allow GDP to double every year.
Even the more considered Dario Amodei, the chief executive of Anthropic, talks in terms of 10 to 15pc overall economic growth. He might not be aware of it, but this would be far higher than occurred during the industrial revolution, and is therefore deeply unlikely.
In any case, if these forecasts are anywhere near correct, you would by now expect to be seeing some sign of it. And although there has indeed been explosive growth in AI investment spending, this may simply have been at the expense of other forms of growth. Crowding out has become a real problem for other parts of the economy.
Monetisation of AI is meanwhile struggling, certainly on the scale needed to justify the amount of money being spent on it. Fast looming into view is a further, hitherto largely unanticipated negative – that AI frontier labs could be held liable for any damage they inflict.
Just imagine the tsunami of lawsuits that would follow if, say, Anthropic’s Claude was used to breach banking cybersecurity to steal depositors’ money or otherwise disable it.
Admittedly, you would be hard-pressed to sue the makers of a gun used to hold up a bank, but AI is virgin territory, and not only is there no telling what mischief it might enable, but unlike gun manufacturers, it enjoys no blanket immunity from prosecution. People will be coming after Silicon Valley, no doubt about it.
Already, it’s virtually impossible for AI frontier labs to get liability insurance, for the obvious reason that they are seen as simply too high risk to insure. It’s a bit like insuring a house built on a flood plain. Insurers would be out of their minds to provide cover.
For the moment, the US government is able to rely on the dollar’s exorbitant privilege to help fund itself, but it is becoming ever trickier, and investors are demanding a lot more for the privilege.
Never mind the continued deficits, around a quarter of the national debt – or $10tn – matures in the next 12 months and has to be refinanced.
Many of the traditional buyers of US Treasuries, in particular foreign governments and central banks, are in retreat, leaving the market increasingly dependent on domestic retail investors and heavily leveraged international hedge funds.
Bottom line; there is massive competition for debt which is driving up interest rates more or less everywhere. This in turn threatens to bring the AI boom to an end and provoke fiscal crises in multiple jurisdictions.
Apres La France, Les Rosbifs? That’s been the call, but it seems to me that the coming storm will be at its fiercest in Trump’s America.