There are two ways out of a debt hole. One is the dentist’s-chair route: higher taxes and lower spending, the trade-offs lawmakers have dodged for decades. The other sounds a lot more fun: grow faster than you borrow. Treasury Secretary Scott Bessent is betting on door number two. “With 3% growth, we grow our way out of this,” he said at Southern Methodist University last week.
Where the math gets hard
Publicly held debt has reached 100% of gross domestic product — the value of everything the economy produces in a year — and gross debt has topped $40 trillion. Forecasters say Bessent’s rough 3% math would work. The Penn Wharton Budget Model figures average growth of 3.5% to 4% over a decade would stabilize the debt-to-GDP ratio. The math isn’t the hard part. Hitting that pace, and holding it, is.
During President Trump’s second term, the economy has grown at a 1.9% annual rate, and it hasn’t sustained 3% since the 1990s. Back then, computers lifted productivity and baby boomers hit their peak working years. Now they’re retiring. The Congressional Budget Office sees the 25-to-64 population growing about 0.3% a year over the next decade, versus 1.1% a year in the 1990s.
Growth’s catch: higher rates
Here’s the twist. Faster growth can push interest rates up, and a government that owes this much feels it in debt-service costs — the interest it pays on what it borrows. Using CBO’s interactive tool, a 1990s-style productivity boost lifts growth to 2.4%, but higher rates eat more than one-third of the added revenue. After 10 years, debt sits at 109% of GDP instead of 120%, and it’s still climbing.
Goldman Sachs (GS) economists add a warning: if debt-service costs turn painful, the Federal Reserve could face pressure to set rates too low, fanning inflation. At Tuesday’s close, the 10-year Treasury yield was 4.996%, after touching 5.012% intraday Monday, the highest intraday level since 2007. The Fed decides Wednesday, and as of Tuesday, prediction markets put about 90% odds on a quarter-point increase.
Why a 10-year near 5% matters at home: mortgage rates tend to take their cue from it. Bond funds feel it through duration — how far a bond’s price moves when rates change — so longer funds swing harder. Savers see the bright side, since CDs, Treasury bills and floating-rate Treasuries — bonds whose interest resets as rates move — pay more when rates run high. Illustration only: at a 4.996% yield, $100,000 earns about $4,996 a year.