Crossing the Rubicon: Has America’s Debt Spiral Gone Too Far?

In 49 BC, Julius Caesar crossed the Rubicon River, sparking a civil war that ended the Roman Republic – a moment now synonymous for decisions from which there is no turning back. Today, the United States (US) shows signs of financial strain, suggesting it may be nearing its own Rubicon—not with soldiers, but with an escalating burden of debt that threatens global economic stability.

Recent policies have accelerated this trajectory. From 2021 to 2025, President Biden’s administration pursued significant spending, often criticised as reckless. Despite a robust post-COVID economy with unemployment under 4% and steady GDP growth—Biden enacted the $1.9 trillion American Rescue Plan, the $375-$550 billion Infrastructure Act, and the $700 billion Inflation Reduction Act. These measures drove annual deficits to 5–6% of GDP, unusually high for periods outside recessions. The spending spree contributed to inflation peaking at 9.1% in 2022, exacerbating a cost-of-living crisis that may have influenced Biden’s re-election defeat. This fiscal excess also sparked a speculation frenzy, creating a COVID stock market bubble reminiscent of the Dot-com boom and bust in the early 2000s.

Speculative booms and busts | Nasdaq/S&P500 ratio

Source: Iress

This mounting debt has deepened fiscal challenges. Federal debt now exceeds $36 trillion, with a debt-to-GDP ratio of 122%, rivalling post-World War II highs. Unlike the postwar era, when growth and austerity eased the burden, today’s deficits approach $1.9 trillion annually, or about 6.2% of GDP. Interest payments reaching $892 billion in 2024 are the fastest-growing budget item and are projected to climb to $1.5 trillion by 2030, according to the Congressional Budget Office. This creates a vicious cycle, as borrowing to cover interest payments further inflates the deficit.

In 2025, President Trump inherited this fiscal challenge from Biden’s spending spree, prompting urgent action. His response to reigning in bloated budget deficits focuses on two strategies: cutting spending and raising new revenues. The newly created Department of Government Efficiency (DOGE), led by Elon Musk, has reportedly trimmed $150 billion and aims to save $1 trillion annually by streamlining agencies and programs. On the revenue side, Trump has avoided traditional tax hikes, instead proposing unconventional measures like a $5 million Gold Card for foreign citizenship and aggressive tariffs. Under the guise of protecting American industries, these tariffs are unequivocally intended to raise revenues. The “Liberation Day” tariff announcement on April 2, 2025, potentially generating $400 billion yearly at 20% rates, has intensified market volatility. Investors, including those in Australia, are bracing for uncertainty in global trade and growth.

Trump’s bold tariff strategy risks appearing more reckless than strategic and requires careful execution to avoid unintended consequences. It echoes the 1930s Smoot-Hawley Act, which deepened the Great Depression by choking global trade. A similar misstep today could trigger a recession, slashing tax revenues and necessitating more government spending to stabilize the economy—further ballooning the debt.

US import-weighted average tariffs applied (since 1990)

Here lies the Rubicon’s edge. Excessive debt could upend economic norms, especially during a downturn. If markets lose confidence in US fiscal management, they might demand higher yields on Treasuries, even in a recession. Rising rates would spike borrowing costs, crowding out funds for Social Security, defence or infrastructure.

Businesses would face costlier loans and slowing hiring, while consumers would struggle with pricier mortgages, dampening demand. Once markets demand permanently higher yields, reversing course requires painful decisions - steep tax increases and drastic spending cuts – that are politically toxic and could deepen a recession to reset the economic landscape.

Signs suggest the US is nearing this critical threshold. Stock markets are faltering amid threats of a global slowdown, while bonds, traditionally a haven, are showing cracks, failing to provide capital preservation as yields rise unexpectedly. The US dollar, typically correlated with interest rates, has also faltered despite rising yields since the tariff announcement on “Liberation Day”. These market dynamics resemble those of an emerging market economy, as investors grapple with uncertainty over debt and policy shifts. 

Have the US dollar and interest rates decoupled?

Source: Iress

The market environment today differs starkly from a decade ago. Low valuations and robust economic growth once fuelled exceptional stock market returns. The S&P 500 delivered an annualised return of 10% over the past decade, a significant premium over the long-term average of 8% in the post-World War II era.

S&P500 annualised 10-year return

Source: Iress

Now, conditions have shifted. Fiscal austerity due to spiralling debt, the risk of an economic slowdown from a tariff war, and elevated valuations create a backdrop for lower returns and heightened market volatility. This precarious outlook extends beyond the U.S., with Australia’s stock market vulnerable to any correction triggered by America’s fiscal challenges, given the two economies are closely tied to global risk sentiment.

Caesar’s Rubicon ushered in an empire; America’s could usher in limits. Biden’s reckless spending and Trump’s hard-hitting reforms have brought the debt crisis into sharp focus. A misstep—whether a recession or market revolt—could constrain America’s future, with ripple effects felt across the globe, including Australia. The decade of high stock returns is likely over, and the coming years will probably be marked by lower returns and elevated market volatility.