America’s Debt Addiction: The Fatal Flaw That Could Burst the U.S. Bubble

The United States has long been the envy of the world—home to the most powerful economy, global reserve currency, and a stock market that outshines its peers. But according to Ruchir Sharma, chair of Rockefeller International and author of What Went Wrong With Capitalism, America’s “fatal flaw” is threatening to bring it all crashing down.

In a stark warning published in the Financial Times, Sharma doubled down on his earlier prediction of the “mother of all bubbles” set to burst. His thesis? The U.S. economy’s outperformance is a bubble inflated by unprecedented levels of government debt. And when that bubble pops, the fallout could be catastrophic.

The Debt-Driven Illusion of Growth

“Every hero has a fatal flaw,” Sharma writes, and America’s is its ever-growing addiction to debt. The numbers are staggering: public debt is already at 100% of GDP and climbing, a level last seen in the aftermath of World War II. But unlike then, there’s no global catastrophe to justify this spending spree.

Government borrowing has become the lifeblood of U.S. economic growth. Sharma’s calculations reveal a troubling trend: it now takes $2 of new government debt to generate just $1 of GDP growth—up 50% from five years ago.

While Wall Street bulls cheer strong corporate earnings, Sharma argues the reality is far less rosy. “Growth and profits are also getting an artificial lift from the heaviest deficit spending ever recorded at this stage of an economic cycle,” he explains. And those “supernormal profits” driven by a handful of tech giants are unlikely to last as competition levels the playing field.

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The Looming Cost of Debt

The cost of servicing this debt is becoming a monster in its own right. Interest payments on the national debt have ballooned to $1 trillion annually, now exceeding defense spending. This creates a dangerous feedback loop: rising interest expenses worsen deficits, requiring even more borrowing.

For now, U.S. households and businesses remain resilient, with strong balance sheets and robust consumer spending. Third-quarter GDP growth was revised up to 3.1%, thanks in part to increased consumer activity. But Sharma warns this is only masking deeper structural problems.

The Breaking Point

What could finally burst this bubble? Sharma points to several potential catalysts:

1. Investor Fatigue: Markets may grow weary of endless debt issuance and demand higher interest rates or fiscal discipline.
2. Global Competition: A rebound in Europe or China could erode America’s relative outperformance.
3. Unforeseen Shocks: As Sharma notes, “It doesn’t take much to stall the engines” when prices and valuations are stretched to extremes.

Already, bond market players like Pimco are reducing their exposure to long-term U.S. debt, signaling growing concern over the country’s fiscal trajectory.

Betting Against American Exceptionalism

“In the late stages of a bubble, prices typically go parabolic,” Sharma observes. Over the past six months, U.S. stocks have outpaced global peers by the widest margin in 25 years. But history shows that such euphoria rarely ends well.

Sharma’s conclusion is as sobering as it is provocative: “It’s time to bet against ‘American exceptionalism.’”

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What Comes Next?

As the U.S. hurtles toward a fiscal reckoning, the stakes couldn’t be higher. Policymakers face a daunting challenge: how to rein in the country’s debt addiction without derailing economic growth. For investors, it’s a wake-up call to reassess their faith in the American growth story.

The question isn’t if the bubble will pop—it’s when. And when it does, the fallout will test America’s resilience like never before.