The Rising Risk of Fiscal Doom Loops in the U.S. and Global Markets

The U.S. fiscal landscape in 2025 is a ticking time bomb. With national debt projected to reach 118% of GDP by 2035 and deficits climbing to $2.5 trillion under current law, the country is on an unsustainable trajectory according to the CBO. This fiscal imbalance is not an isolated issue-it is part of a self-reinforcing feedback loop that intertwines political gridlock, inflationary pressures, and global debt crises. For investors, the implications are dire: a system where rising debt fuels higher interest costs, which in turn drive inflation and political instability, all while global markets face cascading risks from U.S. policy spillovers.

The U.S. Fiscal Time Bomb

The Congressional Budget Office (CBO) paints a grim picture: by 2035, U.S. debt will surpass historic levels, and by 2099 it could hit 535% of GDP if no reforms are enacted. The drivers are clear-mandatory spending for Social Security, Medicare, and Medicaid, coupled with surging interest costs, which are projected to grow by 6.5% annually from 2025 to 2035. Even with the One Big Beautiful Bill Act (OBBBA) adding $4.6 trillion to deficits over a decade, new tariffs have only partially offset this with $3.4 trillion in revenue through 2035. The result? A fiscal gap where spending averages 24% of GDP, while revenue lags at 18%.

Political gridlock has only worsened the crisis. The 2025 government shutdown, the longest in U.S. history, reduced GDP by 1.5 percentage points and disrupted critical programs like SNAP. Partisan battles over tax cuts for the wealthy-such as extending the Tax Cuts and Jobs Act (TCJA)- threaten to widen the fiscal gap further, pushing it from 2.1% to 3.3% of GDP. These policies, while politically expedient, deepen the fiscal hole and delay necessary reforms.

Inflationary Pressures and Tariff Feedback Loops

The inflationary consequences of U.S. fiscal policy are already materializing. Tariffs, now at 22.5%-the highest since 1909-have raised consumer prices by 2.3% in 2025 and added 0.3 percentage points to core PCE inflation. These measures, framed as protectionist tools, disproportionately harm low-income households and exacerbate inflationary pressures. Meanwhile, the Federal Reserve's response has been constrained: despite rising debt servicing costs, projected to hit $2.3 trillion by 2035, the Fed cut rates in December 2025 to prioritize employment over inflation. This creates a dangerous dynamic where fiscal profligacy is monetized, further eroding confidence in the dollar.

The feedback loop is clear: higher deficits → higher interest rates → higher inflation → more fiscal profligacy. This cycle is not hypothetical-it is already playing out. The CBO's updated 2025-2028 outlook shows PCE inflation at 3.1%, up from 2.2% previously, while the Federal Reserve's rate cuts signal a prioritization of short-term stability over long-term fiscal health.

Global Spillovers and the Fiscal Doom Loop

The U.S. fiscal crisis is no longer contained within its borders. Emerging markets (EMs) are bearing the brunt of U.S. policy spillovers. As U.S. debt servicing costs rise, global capital flows are shifting toward the dollar, tightening financial conditions for EMs. In Q3 2025, renewed tariff disputes and policy uncertainty triggered $1.6–1.9% of GDP in capital outflows from EMs. With 8 trillion in bond and loan redemptions expected in 2026, EMs face a refinancing crisis exacerbated by U.S. fiscal expansion and trade tensions.

The feedback loop here is equally perilous: U.S. fiscal expansion → higher global interest rates → EM debt crises → global economic slowdown → U.S. fiscal deterioration. This dynamic is already evident in countries like India and Brazil, which faced targeted tariffs in 2025. While some EMs have shown resilience, through stronger institutions and local currency markets, the risk of a cascading debt crisis remains high.

Investor Implications and the Path Forward

For investors, the risks are multifaceted. U.S. Treasuries, long considered a safe haven, face declining credibility as debt servicing costs rise and inflation erodes real returns. EM bonds, meanwhile, are caught in a liquidity trap-volatile capital flows and currency depreciation make them increasingly risky. The solution? Diversification into assets uncorrelated with U.S. fiscal policy, such as gold, real assets, or EM equities in resilient sectors.

However, the broader lesson is clear: the U.S. fiscal doom loop is a systemic risk. Without structural reforms-spending cuts, revenue increases, or a combination-the U.S. will continue to export instability. As former White House economic adviser Jeffrey Frankel warns, the most likely resolution is "severe austerity triggered by a fiscal calamity". For investors, the priority is not just to hedge but to anticipate the next phase of this unfolding crisis.