The venerable American business magazine Fortune has examined a new analysis from David Kelly, chief strategist at J.P. Morgan Asset Management, about the rapidly growing U.S. national debt. In the report, Kelly outlines five possible development paths for the U.S. economy over the coming decade – from a slow decline to a full-scale financial crisis.

Common to almost all scenarios is that the debt burden continues to increase. Even in the most favorable outcome, the U.S. debt-to-GDP ratio is expected to rise sharply until 2036. At the same time, both the International Monetary Fund (IMF) and JPMorgan’s CEO Jamie Dimon warn that this development could eventually trigger serious disruptions in financial markets.

The Debt Has Tripled in Two Decades

When David Kelly last fall described the U.S. as a country that’s “going bankrupt slowly,” it drew widespread attention. Now he returns with a more detailed overview of how the situation could develop.

The background is dramatic. In 2001, the federal debt was about 31 percent of U.S. GDP. Today, the level is around 101 percent and is expected to keep rising. The budget deficit for 2026 is estimated at nearly $1.9 trillion, while interest costs alone are expected to exceed $1 trillion in that year.

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According to Kelly, the problem is not mainly weak economic growth, but rather years of unfunded tax cuts, large stimulus packages, and costly wars.

Scenario 1: Debt Keeps Growing – and Borrowing Gets More Expensive

The scenario Kelly considers most likely is that the debt continues to increase at roughly today’s pace. His main forecast is that the national debt will reach about 130 percent of GDP by 2036.

This would simultaneously push up long-term interest rates. Higher indebtedness leads to bigger risk premiums, making it more expensive for the government to borrow money. According to calculations cited by Kelly, the American ten-year interest rate could rise to around 5.5 percent within ten years.

The IMF generally agrees with this assessment and believes that the U.S. would need to carry out very substantial budget tightening to stabilize the trend – something judged to be politically difficult.

Scenario 2: A Slow Decline Without Market Panic

The most optimistic alternative is also far from problem-free. Here, Kelly assumes that artificial intelligence gives the economy a distinct productivity boost, that labor immigration increases, and that political gridlock in Washington prevents any new major unfunded reforms.

In such a situation, the debt ratio could stabilize around 115 percent of GDP through 2036.

But even this, in effect, means a continued deterioration of public finances – just at a slower pace. Moreover, the IMF warns that AI could also create new problems by changing the labor market and eroding the tax base.

Kelly therefore describes this as the best investors can realistically hope for: a gradual economic decline without an acute financial crisis.

Scenario 3: A Full-Scale Financial Crisis

The darkest scenario is also one that Kelly considers to have a relatively high probability.

Here, he points to several possible triggers. Repeated conflicts over the U.S. debt ceiling could create major uncertainty about the government’s ability to pay. Another threat is political attempts to influence the central bank, the Federal Reserve.

If investors begin to doubt the independence of the central bank, confidence in U.S. government bonds could be seriously damaged. The result might be a rapid rise in interest rates, a falling dollar, and sharp stock market crashes worldwide.

The IMF also warns that this problem is no longer isolated to the U.S. Many countries have built up large debts after the pandemic and are now sensitive to higher interest rates and financial instability.

Scenario 4: Sharp Cuts in Government Spending

Another path would be to try to slow the debt increase through large savings. But Kelly sees significant obstacles here as well.

Interest costs are difficult to influence without risking new inflation. Cuts to Social Security and the healthcare programs Medicare and Medicaid are politically very sensitive, especially as the American population ages.

Defense spending has also continued to grow strongly in recent years. And within the civilian public sector, the workforce has already been significantly reduced.

If extensive savings were nonetheless implemented, it could strengthen the bond market by reducing the need for borrowing – but at the same time risk slowing the economy and putting pressure on the stock market.

Scenario 5: Higher Taxes to Reduce Deficits

The final alternative is increased taxes. Kelly assesses that broad tax hikes are politically unlikely, but sees a somewhat larger chance for targeted increases on corporations, capital gains, inheritance, and high-income earners.

Such measures could slow the debt increase and ease the pressure on bond yields. At the same time, higher taxation of investments could affect the stock market by reducing after-tax returns.

Here, too, the IMF highlights the uncertainty surrounding AI and economic transformation. If the labor market changes rapidly, future tax revenues could become harder to predict than current models assume.

A Political System That Hinders Solutions

Perhaps Kelly’s most far-reaching conclusion concerns the U.S. political system. He argues that today’s electoral system and the constant campaign logic make it very difficult to push through long-term, responsible economic policy.

Polarization is reinforced by the primary system, while large private campaign donations lock in both tax cuts and spending programs. At the same time, substantive policy issues often get overshadowed by political maneuvering.

The conclusion is therefore bleak. Kelly does not believe that the U.S. will carry out any truly extensive reforms to reduce deficits over the coming decade.

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Instead, a continued slow deterioration is likely – where the debt gradually grows, periodically worsened by political conflicts and economic crises, but temporarily eased by technological development and growth.

As Kelly put it already last fall, this is a country that is “moving towards economic problems slowly.” The difference now is that the risks are much more clearly mapped out – and that even the most hopeful scenario looks less and less secure.