While faster growth is the most appealing option, it’s not coming to the rescue because of the shrinking labor force, he said. AI will boost productivity, but not as much as would be needed to rein in U.S. debt.
Frankel also said the previous era of low rates was a historic anomaly that’s not coming back, and default isn’t plausible given already-growing doubts about Treasury bonds as a safe asset, especially after President Donald Trump’s “Liberation Day” tariff shocker.
Relying on inflation to shrink the real value of U.S. debt would be just as bad as a default, and financial repression would require the federal government to essentially force banks to buy bonds with artificially low yields, he explained.
“There is one possibility left: severe fiscal austerity,” Frankel added.
How severe? A sustainable U.S. debt trajectory would entail elimination of nearly all defense spending or almost all nondefense discretionary outlays, he estimated.