At this year’s Jackson Hole Economic Symposium—the annual gathering of central bankers and leading economists—a single academic paper stole the spotlight. In The Race Between Asset Supply and Asset Demand, researchers Adrien Auclert (Stanford), Hannes Malmberg (Minnesota), Matthew Rognlie (Northwestern), and Ludwig Straub (Harvard) made a headline-grabbing claim: the United States could, in principle, sustain a government debt level of 250% of GDP without driving up interest rates.
The notion that the world’s largest economy could double its debt load without a market backlash seemed, to some, like a green light for more borrowing. But a closer reading reveals a more fragile, conditional argument—and one that may already rest on assumptions the real world has started to overtur
A World Awash in Savings — For Now
The authors’ central idea is elegant. Interest rates, they argue, reflect not just how much governments borrow (the supply of safe assets) but also how much investors want to hold them (the demand for safe assets). In a world with aging populations, rising inequality, and vast precautionary savings—especially from surplus economies like China and Germany—global demand for safe government bonds has outstripped supply for decades.
That imbalance has kept real interest rates extraordinarily low, even as public debt has climbed. In this environment, the authors suggest, the U.S. could plausibly sustain a debt ratio as high as 250% of GDP by the year 2100 without higher interest rates—provided policymakers undertake a “large fiscal adjustment” equivalent to about 10% of GDP by then.
In other words: yes, the U.S. might carry far more debt—but only if it also stabilizes its long-term budget and the world keeps clamoring for Treasuries.
The Fragile Assumption: Will Global Demand for U.S. Debt Stay Strong?
Here’s the problem: global demand for U.S. debt may already be waning. China—the single largest foreign holder of Treasuries in the early 2010s—stopped buying on net in 2014 and has since been steadily reducing its holdings. Other central banks have quietly followed, diversifying their reserves into gold and non-dollar assets.
The share of U.S. federal debt held by foreign official institutions has fallen from roughly 50% in 2010 to below 30% today, while global central banks are buying gold at record levels. This trend reflects not only portfolio diversification but also geopolitical fragmentation. The Jackson Hole paper’s assumption of perpetually rising demand for U.S. debt looks increasingly outdated in a multipolar world.
Why Japan Isn’t a Blueprint
The authors and some commentators have pointed to Japan’s experience—where debt exceeds 250% of GDP but borrowing costs remain near zero—as evidence that high debt can be sustainable indefinitely. But Japan’s case is unique: its debt is held domestically by banks, insurers, and the Bank of Japan.
The U.S., by contrast, depends heavily on foreign financing. Roughly one-third of Treasuries are held abroad, leaving Washington vulnerable to changes in global sentiment or currency risk. Japan’s high debt rests on domestic savings; America’s depends on international trust.
The Missing Link: Fiscal Dominance and Inflation Risk
Even if the long-run equilibrium imagined in the paper holds, the journey there would likely be turbulent. Sustained deficits would require the Federal Reserve to absorb growing volumes of new debt—effectively subordinating monetary policy to fiscal needs. Economists call this fiscal dominance.
Once fiscal dominance takes hold, financial repression follows: the state uses regulation, captive domestic investors, or outright yield curve control (YCC) to keep borrowing costs low. But these measures almost inevitably raise inflation expectations. Investors price in future monetization risk, pushing up real yields and undermining central bank credibility.
In other words, the feedback loop between deficits, monetary accommodation, and inflation would likely emerge long before debt ever reached 250% of GDP. The Jackson Hole model’s serene equilibrium could dissolve into a regime of higher inflation, higher nominal yields, and financial repression—the opposite of what its long-run equations assume.
The Catch: Fiscal Discipline Still Matters
Even within the authors’ framework, the 250% figure comes with a major caveat. Their model assumes a fiscal adjustment of roughly 10% of GDP—an enormous, politically implausible shift. Without it, debt supply eventually outpaces demand, rates rise, and sustainability breaks down.
At present, U.S. deficits are widening, not shrinking. Entitlement costs and interest payments are rising faster than revenues, while political incentives all point toward more borrowing, not less. The fiscal conditions required for 250% debt to remain benign simply don’t exist.
A World That May No Longer Fit the Model
The global environment that allowed ultra-low rates and abundant savings from 2000–2020 may be ending. De-globalization, climate transition investments, and aging societies that spend rather than save are all pushing the world toward a new equilibrium—one with higher structural rates and scarcer capital.
If that shift continues, fiscal dominance and higher inflation could appear long before the debt ratio hits 250%. In that case, sustainability would be enforced not through smooth adjustment, but through market stress and policy coercion.
The Real Takeaway: Conditional Optimism, Not Fiscal Complacency
The Jackson Hole paper offers an intellectually rich framework but an economically fragile conclusion. Debt sustainability is not just a matter of mathematics—it’s a question of politics, credibility, and global trust.
The U.S. can likely borrow more than alarmists fear, but not without limits. The further Washington pushes those limits, the more it risks crossing from a world of safe assets to one of fiscal dominance.
For now, investors still trust America’s IOUs. The real question is how long that trust can last when the printing press, not productivity, becomes the anchor of debt sustainability.