Why a US debt binge is start­ing to mat­ter

Financial Times Europe 7 Sep 2026 Ruchir Sharma The writer is chair of Rock e fe ler Interna- tional. His latest book is ‘What Went Wrong With Cap it al ism’ 

Dooms day warn ings about Amer ica’s rising debt date to the 1970s, when the US gov ern ment began run ning per sist ent budget defi cits. Late in the next dec ade, a wor ried New York real estate developer placed the “national debt clock” in Times Square. None of the warn ings mater i al ised, so like the boy who cried wolf, they became back ground noise, easy to ignore. Now, as in the fable, the wolf is approach ing the door. Run away debt is start ing to mat ter, trig ger ing a global sell-off in gov ern ment bonds last month. And the first mater ial impact could be that higher interest rates on US bonds short-cir cuit the AI boom. Going back 300 years, every major bubble ended only when bor row ing costs rose sig ni fic antly for the com pan ies at its core, includ ing the serial rail road busts of the 1800s. In the last cen tury, the era of mod ern cent ral bank ing, all big bubbles popped after cent ral banks sharply raised their short-term lend ing rates. 

This time is dif fer ent in a key respect. Nor mally in a mar ket mania, firms begin bor row ing heav ily to double down on the hot invest ment theme, and boomy con di tions fuel infla tion and drive up interest rates and that even tu ally pops the bubble. Gov ern ments then arrive, tak ing over the debt of the affected com pan ies and bor row ing to stim u late the weakened eco nomy. In recent dec ades, the gov ern ment role shif ted to provid ing con stant stim u lus, even in good times. Long after 2008, it con tin ued to rap idly run up debts. This dec ade, the US has con sist ently run budget defi cits of around 6 per cent of GDP — more than twice the aver age of earlier dec ades. For much of this period, house holds and cor por a tions avoided tak ing on too much new debt. It was only in the last year that tech hyper scalers began rack ing it up to fin ance the massive AI infra struc ture build-out as their cash sur pluses dwindled. Their debt levels, though, are still man age able for such large com pan ies. 

The sub stan tial bor row ing excesses in this cycle have so far piled up on gov ern ment books. And prob lems begin where excesses run deep est. A crit ical warn ing comes from interest pay ments on pub lic debt, which in the last five years have more than doubled to over 3 per cent of GDP. That is a new US record, and the sharpest increase to the highest level for any major developed eco nomy. Grow ing unease about gov ern ment fin ances, along with other factors includ ing sur ging energy prices, has driven yields higher on gov ern ment bonds glob ally. The elev ated rate back drop is also adding to bor row ing costs for AI groups, which account for the largest slice of new cor por ate debt issu ance. I have argued the AI boom has many of the hall marks of a bubble but will keep inflat ing until interest rates get to pro hib it ive levels. My research now sug gests the marker to watch is the yield on 10-year US Treas ury bonds, the global bench mark for long-term bor row ing costs, which is now at 4.8 per cent. When it decis ively breaches 5 per cent, the upper end of its range since the dot com period, the AI bubble could pop.

 This breach would sig nal the start of a new era of tighter money, in which AI mega projects will be harder to fund. When Big Tech must com pete for cap ital with a gov ern ment pay ing a yield of more than 5 per cent on bonds — which matches an infla tion expect a tions adjus ted return of over 2.5 per cent— many will find them selves crowded out of the debt mar kets. Estim ated annual rev enue from AI use is about $200bn this year, a frac tion of the more than $1tn com pan ies are spend ing on data centres and other infra struc ture. AI groups rely on new bond and equity issues to fund the gap, and a 10-year bond yield of more than 5 per cent will slow both chan nels. A yield that high will top the earn ings yield of the US stock mar ket, which his tor ic ally has been a head wind for stocks. Fur ther, if the 10-year yield stays above 5 per cent, the rate the US pays on its debt will soon exceed the expec ted rate of nom inal growth in its eco nomy, mak ing the debt far less sus tain able. The pace of the rise mat ters as well. If it passes the 5 per cent level by Novem ber, the 10-year yield will have increased more than 75 basis points within six months. 

His tor ic ally, spikes that sharp have ended bull mar kets. Some ana lysts say this mile stone would merely mark a return to an era like the 1990s, which saw strong US growth and stock mar ket returns, with the 10-year yield above 5 per cent throughout. But Amer ica was much less addicted to debt then. The dec ade ended with a US gov ern ment sur plus, and since then the defi cit has exploded. Pub lic debt has nearly tripled to 100 per cent of GDP. As a res ult, debt-ser vi cing costs are much higher now. Rising pub- lic bor row ing costs will squeeze other bor row ers sooner, and hit the bub bly AI mar kets harder. Oth ers are rais ing alarms about how the US debt bur den could under mine its super power status and dethrone the dol lar as the world’s reserve cur rency. This doom-loop think ing is pre ma ture, since Amer ica’s major rivals are grap- pling with sim ilar prob lems on the debt front. For now, what bears close watch ing is how quickly the 10-year Treas ury yield breaks 5 per cent and the threat that poses to the AI boom.