Ruchir Sharma, in an article originally for the Financial Times, highlights that while warnings about America's rising debt have long been ignored, the situation is now becoming critical. Persistent budget deficits, particularly around 6% of GDP this decade, have led to a substantial increase in government debt. This elevated debt, unlike previous cycles where corporate borrowing fueled bubbles, is largely concentrated on government books.
A key indicator of this growing concern is the significant increase in interest payments on public debt, which have more than doubled in the last five years to over 3% of GDP—a new US record. This surge in debt servicing costs, combined with other factors like rising energy prices, has pushed government bond yields higher globally. This environment is also increasing borrowing costs for AI companies, which are now issuing more corporate debt to fund their massive infrastructure build-out.
Sharma suggests that the AI boom, which he believes has many bubble-like characteristics, will continue only until interest rates reach prohibitive levels. The critical threshold to watch is the 10-year US Treasury bond yield. If it decisively breaches 5%, an upper bound seen since the dot-com era, the AI bubble could pop. This would signal a new era of tighter money, making it much harder for AI mega-projects to secure funding. Big Tech would struggle to compete for capital with a government offering over 5% yield on bonds.
The financial implications are substantial: estimated annual revenue from AI use is about $200 billion this year, a fraction of the over $1 trillion companies are spending on data centers and infrastructure. AI groups increasingly rely on new bond and equity issues to bridge this gap, and a 10-year bond yield above 5% would significantly impede both funding channels. Such a high yield would also surpass the earnings yield of the US stock market, historically a headwind for stocks. Furthermore, if the 10-year yield remains above 5%, the US debt servicing rate will soon exceed its nominal economic growth rate, making the debt unsustainable.
