The United States faces unprecedented fiscal constraints as it approaches a potential economic downturn, according to Apollo chief economist Torsten Slok. In his recent analysis, Slok highlights that the nation’s $39 trillion national debt leaves policymakers with significantly fewer tools to mitigate a recession compared to past crises.
Debt Limits Federal Reserve Options
Slok explains that the Federal Reserve’s ability to cut interest rates—a key mechanism for stimulating the economy—is hamstrung by persistently high inflation. Driven by factors like rising oil prices, tariffs, and tightened labor supply due to immigration restrictions, inflation remains stubbornly elevated. This limits the Fed’s ability to aggressively lower rates without risking an inflation spiral, as seen during previous recessions in 2008 and 2020.
Federal Spending Complications
On the federal spending side, the $39 trillion debt poses an even greater challenge. Traditionally, during recessions, the government increases stimulus spending to boost economic activity. However, with debt already exceeding annual GDP and interest payments costing $3 billion daily, Washington’s capacity to borrow is severely constrained. Slok notes that the Treasury has been forced to rely heavily on short-term T-bills to fund deficits, essentially treating them like a government credit card. While this avoids immediate pressure on long-term interest rates, Slok warns it is unsustainable, as short-term debt must be constantly rolled over, leaving the government vulnerable to rising rates.
Rates are staying higher for longer across the curve, and the traditional path to value creation through monetary and fiscal stimulus is compromised.
Slok concludes that a recession under these conditions would be catastrophic, with deficits potentially widening to $1.1 trillion or more as tax revenue drops and unemployment claims rise. This would further strain the Treasury’s ability to attract investors, cementing higher borrowing costs for the foreseeable future.