Why the next US recession could trigger a debt crisis

A standard recession today could spiral into a historic U.S. debt crisis, making it far worse than anything seen before.

For decades, tax revenue has stayed steady at about 16–17% of GDP, while federal spending has nearly doubled as a share of the economy, climbing to 22–23% of GDP. This imbalance already leaves the U.S. with a 7% budget deficit even without a downturn. The problem becomes explosive once recession dynamics kick in.

When the economy contracts, government revenue typically drops around 20%. That would cut today’s $5 trillion revenue base down to roughly $3.9 trillion. At the same time, automatic programs like unemployment benefits and discretionary stimulus push spending higher—potentially from $7.1 trillion to over $9 trillion. Combined, this means a deficit of $5+ trillion, or nearly 18% of GDP, a level unseen in U.S. history.

The real danger is how debt interacts with growth. In the 1980s, each new dollar of debt produced $3 of GDP. Now, it generates just $0.37, and the return keeps falling. Piling trillions in new debt during a recession could choke growth further, while rising borrowing needs might drive bond yields and interest costs sharply higher. Every 1% rise in yields would add another $370 billion in annual interest, pushing deficits closer to $7 trillion.

This creates a vicious cycle: falling GDP, collapsing tax revenue, soaring spending, and rising borrowing costs. If markets lose faith in U.S. debt, the dollar could weaken and the Federal Reserve may be forced to step in with massive money-printing—risking inflation and financial instability on a global scale.