Ex-Fed Economist Marvin Barth Blames Deficit, Not Yields, for Debt Risk

The Federal Open Market Committee is scheduled to vote on its next interest rate decision, with market consensus indicating a 25-basis-point hike. Against this backdrop of rising bond yields and persistent inflation, Marvin Barth, a former Federal Reserve economist, contends that current alarm over U.S. debt sustainability is based on flawed arithmetic. Barth asserts that the nation faces a primary deficit problem rather than an imminent default or currency crisis, a distinction he believes markets have misdiagnosed.

Barth argues that alarmists incorrectly focus on the nominal stock of debt rather than cash flows, which better determine repayment risk. He notes that a country's ability to service its obligations is tied more to its income stream than to the total amount of money it owes. He observes that the United States can continue refinancing its obligations indefinitely as long as it maintains the appearance of solvency. A nation does not need to pay off its entire balance at once; it simply needs the debt to expand at a slower pace than the economy itself.

Using 2025 figures, Barth calculates that U.S. net debt stands at 96.7% of GDP with a primary deficit of 3.17%. He assumes real growth of 2.25%, a conservative estimate compared to a recent four-year average of 2.84%, and a real rollover rate of 2.25%, which matches the five-year TIPS yield. Because growth and real rates offset each other in this model, the debt ratio climbs approximately 3.1 percentage points annually. "Despite the recent rise in interest rates," Barth wrote, "it is the U.S. primary deficit that is driving U.S. debt unsustainability."

The former Fed economist also dismisses the strategy of using inflation to reduce the real value of debt. While acknowledging that inflation erodes existing debt, Barth warned that it simultaneously raises refinancing costs and the cost of new borrowing. If the Fed were to lift its target rate to 5%, bond markets would demand higher nominal yields plus a fatter term premium to compensate for the risk of further target changes. "That worsens debt sustainability," he clarified, adding that if pushed far enough, the dynamic becomes dangerous. "As fast as the central bank raises inflation, bond markets run even faster," Barth observed. "Inflation just makes everyone run faster while leaving them in the same place." He concluded that inflating away the debt is actually the worst action the Fed can take.

Barth characterizes current yield levels as a signal of normalization rather than distress. He attributes the recent rise in yields to heavy artificial intelligence capital spending and reduced Gulf savings due to the Iran war, noting that these factors have returned real yields to their 2023 peak, a level considered normal before the financial crisis. Genuine crisis pricing, he contrasted, resembles the situation in Italy and Spain during 2011 and 2012, when yields spiked to almost double their pre-crisis level within weeks.

Regarding Treasury buybacks, Barth described them as standard debt management rather than emergency intervention. He noted that these operations retire bonds trading at as little as 60 cents on the dollar while adding liquidity to the market.

Barth identifies only three potential exits from the current fiscal trajectory: fiscal tightening, default, or hyperinflation. He argues that political economy favors fiscal tightening because default and hyperinflation would be unpopular with the median voter, who is over 50 and holds Treasuries through retirement plans. He expects fiscal consolidation to become a major issue after the midterm elections, though he added that whether Congress acts remains uncertain.