The Federal Open Market Committee votes on the next interest rate decision today, and the consensus points to a 25-basis-point hike. Bond yields have raced past multi-decade highs, Washington keeps applying political pressure, and inflation refuses to cooperate. The central bank, in other words, is wedged between a rock and a hard place.
But the former Fed economist Marvin Barth thinks the panic rests on faulty arithmetic. Bond yields, in his view, “reflect strong U.S. growth and increasing global competition for savings from wars and the AI boom,” while the dollar “remains around its average for the last decade, just off multi-decade highs.”
The U.S., he contends, faces neither imminent default nor a run on its currency. It faces a primary-deficit problem that markets have misdiagnosed.
Why Nominal Debt Numbers Mislead Wall Street
Barth’s central complaint is that alarmists fixate on the stock of debt, especially its nominal dollar value, when flows determine repayment risk. Repayment ability, he says, tracks income far more closely than loan size.
“A 250-year-old nation like America can roll over its debts indefinitely so long as it appears able to repay them,” Barth notes. A country never needs to retire its debt outright; it merely needs debt to grow more slowly than GDP.
Using 2025 figures, U.S. net debt stands at 96.7% of GDP with a primary deficit of 3.17%. Barth assumes real growth of 2.25% (conservative against a recent four-year average of 2.84%) and a real rollover rate of 2.25%, matching the 5-year TIPS yield. Because growth and real rates cancel out, the debt ratio climbs about 3.1 percentage points a year.
“Despite the recent rise in interest rates,” he writes, “it is the U.S. primary deficit that is driving U.S. debt unsustainability.”
The Inflation Trap
Barth is equally dismissive of the notion that the Fed can inflate the burden away. Inflation erodes existing debt, he concedes, “but it raises its refinancing costs and the cost of any new borrowing.”
Were the Fed to lift its target to 5%, bond markets would demand the same real rate plus higher nominal yields, and likely a fatter term premium to compensate for the risk of further target changes.
“That worsens debt sustainability,” he clarifies, noting that if pushed far enough the dynamic turns dangerous.
“As fast as the central bank raises inflation, bond markets run even faster. Inflation just makes everyone run faster while leaving them in the same place.”
Inflating away the debt, he concludes, “is actually the worst thing the Fed can do.”
What the Treasury Market Is Actually Pricing
Current yields, Barth argues, signal normalization rather than distress. The recent rise, coinciding with heavy AI capital spending and reduced Gulf savings due to the Iran war, has merely returned real yields to their 2023 peak. These levels were considered normal before the financial crisis.
Genuine crisis pricing looks like Italy and Spain in 2011-12, when yields “spiked to almost double their pre-crisis level in a matter of weeks.”
Treasury buybacks, meanwhile, are “just good debt management,” retiring bonds trading “at as little as 60¢ on the dollar” while adding liquidity, not emergency intervention.
Barth sees only three exits: fiscal tightening, default, or hyperinflation. Political economy favors the first. With the median voter over 50 and most Americans holding Treasuries through retirement plans, “default will not be popular. Nor will hyperinflation.”
He expects fiscal consolidation “to become a major issue after the midterms,” though whether Congress acts, he adds, “time will tell.”
