Catenaa, Sunday, November 23, 2025- The United States faces a complex path out of its $38 trillion national debt, with JPMorgan Private Bank warning that policymakers may tolerate higher inflation and erode Federal Reserve independence to reduce the burden.
The bank’s 2026 outlook highlights three priorities for investors: adapting to AI-driven growth, adjusting to fragmentation over globalization, and preparing for a structural shift in inflation.
On the debt front, JPMorgan sees a scenario where the Treasury gradually reduces real interest rates through deliberate tolerance of stronger nominal growth, effectively shrinking the debt over time.
The approach, known as financial repression, could involve influencing the Federal Reserve to accept inflation above its 2% target. While this may ease debt pressures, it risks wider economic consequences, including impacts on housing and long-term interest-sensitive sectors.
Scaling back public spending or raising taxes could also address the debt-to-GDP ratio, now at roughly 120%, but political constraints make these measures unlikely.
Mandatory entitlement programs such as Social Security and Medicare could theoretically be curtailed, but such actions would face widespread opposition.
Alternative proposals, such as selling high-cost visas to wealthy foreign individuals or expanding tariffs, offer potential revenue but come with limitations and uncertainty regarding economic effects.
Despite the growing debt ratio, investor appetite for US Treasury bonds remains strong, with average demand 2.6 times supply and 30-year yields at 4.7%, suggesting markets currently trust the US to service its obligations.
JPMorgan cautions, however, that addressing the structural debt problem will require careful, possibly unpopular, policy decisions in the years ahead.
