Let the red ink flow. The Congressional Budget Office (CBO) recently forecast annual budget deficits approaching $2 trillion in the coming years. By 2034, the CBO projects the national debt will exceed $50 trillion, or 122 percent of GDP.

Economic history shouldn’t make one sanguine about America’s current fiscal situation. Far from it. Examine the great powers of the past—the Roman Empire, Spain, France, China’s Qing Dynasty, and Great Britain—and you’ll see a recurring pattern of unsustainable borrowing and spending leading to economic instability and loss of global influence. Each case demonstrates how even dominant nations can fall victim to debt-induced crises, resulting in currency devaluation, multiple defaults, or political upheaval. 

Those are among the insights from J.H. Cullum Clark, an expert on the historical relationship between debt and geopolitical power, quoted in the Wall Street Journal’s weekend essay, “Will Debt Sink the American Empire?” by Gerald F. Seib. “Even if a country issues the leading reserve currency, even if a country is the dominant geopolitical power, that just doesn’t bail countries out,” says Clark, director of the Bush Institute-Southern Methodist University Economic Growth Initiative. “They do lose that status.” Yet history also suggests there will be plenty of warning before the United States joins that list of the late, great powers who lost control of their finances. 

A timely reminder of that via a new research note from Capital Economics (CE) that explains how in the early 1990s, the US experienced a significant increase in bond yields, which put pressure on the government’s fiscal policy. Back then, the term premia on US government bonds—the extra yield investors demand for holding longer-term bonds compared to a series of short-term bonds—rose to as much as 380 basis points in May 1992. It was this upward move, according to CE, that prompted “James Carville to make his now-famous quip about wanting to be reincarnated as the bond market (‘You can intimidate everybody.’) and the Clinton administration to focus on fiscal consolidation through the mid-1990s.”

Would we have the same prudent reaction today? I would like to think so—if markets were sending the same message. And if we didn’t, it would be a strong sign that our national dysfunction went far deeper than fiscal profligacy. CE: “If the US elections end in both a president and a Congress that are happy to keep on the current fiscal path, then the bond market could remind them sharply that they still do.”

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