The result is the 2020s are fast becoming the era of big permanent deficits. While the pandemic was a clear emergency, it’s harder to justify how large the deficit has remained after the United States experienced a rapid recovery.

The deficit is projected to remain around 6 percent for years to come, according to the Congressional Budget Office (CBO),⁵ even though unemployment is low (and expected to remain low). It’s startling how much of an outlier this is compared to U.S. history. In the past, when the unemployment rate was around 4 percent, the nation had a balanced budget — or close to it.

Low unemployment is a sign of a strong economy when federal leaders would typically bring in more tax revenue, lower expenses and make a noticeable effort to balance the budget or, at least, get close to that goal. It happened in the 1960s, the late 1990s and to a certain extent in 2014–15 as the nation bounced back from the Great Recession and managed to shrink the deficit to 2.4 percent of GDP by 2015.

But starting in 2016, good economic times no longer assured a decrease in the deficit. The unemployment rate kept falling in the late 2010s, but the deficit kept growing. After the pandemic, a new normal is setting in. Fiscal year 2025 is wrapping up with a 4.3 percent unemployment rate and a 6.0 percent deficit. The CBO projects similar figures for the rest of the decade.

The Bond Market is King

What this means in practice is the bond market is now one of the most powerful forces in the world. Since the U.S. government is borrowing close to $2 trillion⁶ a year to help fund almost $7 trillion in expenses, those loans are critical. And that gives lenders a lot of power.

The world saw a preview of this in the spring. After the Liberation Day tariffs, investors were concerned about the U.S. economy and the reliability of government actions. There was a “sell America” trade where some investors dumped U.S. assets, including U.S. Treasurys. This sent the cost of borrowing up and triggered a downgrade of U.S. debt by Moody’s from the top rating to a notch below.⁷ (Moody’s was the last of the big three ratings agencies to downgrade). Many say it was the bond market “freak out” that spooked the administration to back off on the most severe tariffs.

This didn’t just raise the cost of U.S. government borrowing; it also impacts the American middle class. The loan rates that banks and credit unions charge for mortgages, auto loans, small business loans and more are based largely off the 5 to 10-year Treasury bond interest rates. As government bond yields rise, so do costs for many key American purchases of homes and cars and equipment. The 30-year mortgage rate jumped back toward 7 percent in mid-April and stayed elevated until mid-August.

Thankfully, bond yields have come back down to more manageable levels. Mortgage rates even briefly ticked down to their lowest levels in about a year in September, triggering a mini-boom in refinancing as people with 7 percent mortgage rates rushed to take advantage of a 6.3 percent or lower rate, saving $100 or more a month for many homeowners.

But this is not a full return to business as usual. Bond investors can strike again at any time when they are unhappy with U.S. government actions. The effects will be swift and painful for many Americans.

Those lending money to the U.S. government are aware of the existing high debt levels and the projections of hefty deficits for years to come.⁸ By 2029, the nation is on track to exceed the post-World War II record for debt held by the public (as a percent of GDP).⁹ By 2034, the annual deficit is on track to swell to nearly $4 trillion.¹⁰ In this new era, it may not take much to trigger another strong reaction where yields surge.

Europe offers clear warnings of how powerful bond market displeasure can be. In 2022, British Prime Minister Liz Truss was basically ousted from her post by the bond market reacting negatively to her budget plan that called for large tax cuts and borrowing.¹¹ Truss became the shortest serving prime minister in United Kingdom history.

This year, French Prime Minister Francois Bayrou had to submit his resignation after he was unable to get a budget passed that would satisfy both the French public and bond investors who are growing increasingly alarmed at France’s high debt and lack of a plan to address it. (France’s debt-to-GDP ratio is about 117 percent¹² — similar to America’s).

For now, investors would rather own U.S. bonds than many other nations’ debts, because the U.S. economy is still growing at a solid pace, while the British economy and French economy flatline. That might not always be the case. As Time Magazine put it, “the global economy has a Boomer problem.”¹³ Costs are high and increasing for aging societies. Budget cuts and tax increases seem inevitable, but no one is eager to give anything up to get back to a more sustainable fiscal path, as the recent drama in France showed.

Lessons from Argentina

It’s hard to identify tipping points in real time. But when it comes to government debt and bond market vigilante-style reactions to it, the turning point is usually when a nation doesn’t just have a bleak financial picture, but it loses credibility.

For Argentine economists, there is starting to be a sense of déjà vu as they watch what is happening in the United States and Europe. Argentina has long been the “bad boy” of global finance. It has been mired in crises and sluggish growth for decades and defaulted on its loans nine times.¹⁴

A key moment for Argentina occurred in 2007 when the government ousted Graciela Bevacqua, the head of inflation statistics at the time, among other officials at the National Statistics Institute (INDEC). Inflation was around 9 percent a year. Bevacqua calculated that inflation in Argentina had risen 1.9 percent in January 2007 alone. After she was pushed out, the report that was released publicly said 1.1 percent.¹⁵

Until that moment, the economic and fiscal situation in Argentina was dicey, but the world trusted Argentine data. Investors knew what they were getting into if they loaned the government money. Then the Kirchner government began to meddle with the data, starting with inflation, and ultimately, impacting poverty and GDP.

The data tampering that began in 2007 ultimately resulted in a formal censuring from the International Monetary Fund in 2013.¹⁶ By then, it was almost impossible for Argentina to access the global bond market. The trust was gone.

“Once confidence is lost in national statistics, it’s very hard to recover from that. It takes years,” said Martin Gonzalez-Rozada, an econometrics professor at the Universidad Torcuato Di Tella in Buenos Aires.

Private sector metrics routinely showed inflation at least double the rate the government was claiming.¹⁷ It took reinstating Bevacqua in 2016 to manage the inflation data again to regain credibility in the data.¹⁸

Argentine history shows there are a set of stages that typically occur to erode trust, says Alberto Cavallo, a Harvard Business School professor and co-director of the HBS Pricing Lab.

Stage one is trying to discredit institutions such as the national statistical agency by claiming it’s not trustworthy.

Stage two is an attempt to discredit certain data by saying it’s false or telling a misleading story.

Stage three is firing people.

Stage four is manipulating the data.

Attempts to alter data often backfire. Initially, a government looks good for having lower inflation, but it doesn’t take long before the public — and bond holders — stop believing the data.

“People assume the worst when they don’t have a good measure of what’s happening with the economy,” says Cavallo.

Cavallo created a well-known private sector inflation gauge during the Argentine crisis. He used online prices to track inflation.¹⁹ Today he uses his methods to track how tariffs are impacting prices in the United States, among other nations.

He never expected stage three to happen in the United States with the firing of the head of the Bureau of Labor Statistics (BLS) in early August. Still, he thinks the United States is in a better position than Argentina with more checks and balances to prevent manipulation of data — stage four — from occurring.

The head of the BLS must be confirmed by the U.S. Senate, for example, and there are many more economists, investors and policymakers who rely on and scrutinize U.S. government data. Recent events support that optimism. The White House quietly withdrew a controversial nominee to be the next BLS leader, and a bipartisan coalition successfully pushed Congress to increase BLS funding.²⁰ Public outcry during the government shutdown that economic data was unavailable was yet another reminder of how many investors, businesses, government agencies and workers rely on this data.

A key lesson from Argentina is not to erode trust in data and institutions, especially when bond investors hold so much power.

In the United States, warnings about high debt and unsustainable deficits have often come across as “boy who cried wolf” situations. After all, Admiral Mullen made his alarming comments 15 years ago, yet there has not yet been much panic in the bond markets.

But history shows there is almost always a moment when the bond market finally speaks decisively. By then, the tough choices to fix the situation are harsh. Just ask Liz Truss.