Interest payments on the U.S. national debt are set to surpass $1 trillion in 2026, some $88 billion a month—equal to spending on defense and education combined.
The economy has tripped past this point before: that is, there have been brief periods in history when service payments on the debt have outweighed military spending, for example, in the post-war 1920s.
These stints have either been relatively short-lived or have not occurred in an established, advanced economy. But in 2024, under the Biden administration, the U.S. Treasury passed that threshold again, the first sustained period in recent memory where debt interest payments have outweighed military spending. Both the Republicans and Democrats have added trillions to the debt burden, though with President Trump now back in the Oval Office, pressure falls on him to address the issue.
An excess of debt over defense is a violation of Ferguson’s Law, as described by Hoover economic historian Sir Niall Ferguson in a working paper published earlier this year. Ferguson’s Law states that “any great power that spends more on debt servicing than on defense risks ceasing to be a great power.”
“This is because the debt burden draws scarce resources towards itself, reducing the amount available for national security, and leaving the power increasingly vulnerable to military challenge,” Ferguson explains.
Ferguson’s Law is named after the famed 18th Century philosopher rather than the paper’s author, who even centuries ago warned of the link between a nation’s debt and its decline.
In the working paper, the Milbank Family Senior Fellow at Stanford University explores historical cases where the Ferguson limit has been triggered. The Spanish Empire in the 16th Century provides one example, with the academic writing that the country’s leaders exhibited “over-reliance on a complex and costly system of debt financing ultimately undermined the position of their successors.”
Bourbon France in the late 18th Century provides another example, as Ferguson writes it is perhaps the most familiar example of “a great power succumbing to fiscal constraints”—with the nation declining from a global power to overthrowing its monarchy in a revolution.
These examples, whether front of mind for today’s economists and CEOs or not, echo a growing chorus of concern in the U.S. at the time of writing. Bridgewater founder Ray Dalio has warned of an “economic heart attack” in the making, in which debt-service payments crowd out public investments.
The good news
The chorus of concern is growing: The likes of J.P. Morgan Chase CEO Jamie Dimon have warned of a market “reckoning” and urged policymakers to act before a crisis takes hold. Even Federal Reserve chairman Jerome Powell, who has overseen the central bank dutifully buying vast swathes of treasury debt—has warned it’s time for an “adult conversation” about deficit levels.
But Ferguson does have some reprieve for those concerned: Even the somber warning of violating the Ferguson Law doesn’t guarantee decline. Indeed, the author points to Great Britain as an example of a nation triggering the limit at various points in time without weakening its geopolitical standing. One reason for this, Ferguson says, is that Britain had access to lower borrowing costs.
This is a factor being eyed closely in the contemporary United States, the Committee for a Responsible Federal Budget highlighted only yesterday that if interest rates were to be 1 percentage point above projections – bringing the 10-year Treasury note from an average 4.3% over the decade to 5.3%—it would add an additional $3.5 trillion to the debt above current projections.
Examples of Ferguson’s Law being violated, but without proving fatal, shows the U.S. economy still has options. He writes: “History suggests that any sustained period when a great power spends more on interest payments than on military capabilities is likely to see its strategic rivals challenge its position.
“In the absence of radical reforms of its principal entitlement programs—which successive administrations have ruled out—the only plausible way that the United States can come back within the Ferguson limit is therefore through a productivity miracle.”
Conveniently, the U.S. economy reportedly has one on its doorstep in the form of AI—a potential which both Wall Street and Fed chairman nominee Kevin Warsh are betting heavily on.
As such, “the real contest of the second quarter of the 21st century may be between artificial intelligence—and history,” concludes Ferguson.
