The U.S. economy is running hot and stuck on a hamster wheel as GDP growth must outpace borrowing costs—or else get sucked into a debt spiral

The U.S. economy is currently thriving, with growth outpacing borrowing costs, but this could lead to a dangerous debt spiral if it continues. High gas prices and low consumer confidence have masked the strength of the economy, which has been resilient despite challenges like President Trump's tariffs and Iran's war. The Federal Reserve has raised interest rates to combat inflation, but this has also increased Treasury yields, making it more expensive for the government to service its $40 trillion debt.

Currently, nominal GDP growth is above 6%, while the 10-year yield is around 5.16%. However, this may not last, as the AI boom is projected to reach $1.3 trillion by 2027 and could surpass the railroad mania as the largest economic boom in U.S. history. While capital expenditures from major tech companies are driving this growth, the federal government's $2 trillion annual deficit and the potential for slower economic growth to fall behind borrowing costs could create a debt spiral.

Analysts warn that the AI bubble could pop if the 10-year yield exceeds 5%, making AI mega projects harder to fund and causing a fiscal crisis. The Committee for a Responsible Federal Budget has been warning about the trajectory of U.S. debt, and the risk of a slowdown in economic growth due to inflation remains a concern.