Can the US grow its way out of the “debt disease” if politics slow AI development?

Happy Tuesday out there, Team 42. It's your skipper here, Darius Dell, to present our Macro Minute for Tuesday, September 15th, 2026. Hope everyone's having a great week. So as always, we'll start with the executive summary from today's lead-off warning note, so let's dive right in. Today's key macro question is, can the U.S. grow its way out of the debt disease if politics slow AI development? Emphasis on politics. I know folks don't like talking politics and talking about markets, but if you're not paying attention to this week's developments regarding AI regulation, you're probably not going to achieve the investment outcomes you're looking for. So sometimes you got to roll your sleeves up and get messy, or you can pay me to get messy for you in terms of crunching all the numbers you need to stand above the politicking of it all and to see where this is all going to wind up. So let's get into the short answer. Hard no either way in terms of can the U.S. As we've proven in our research, the U.S. is not on a credible path towards any fiscal retrenchment, let alone any meaningful retrenchment at all. For example, the federal budget balance has widened 90 basis points to 6.6% of GDP on an annualized fiscal year-to-date basis in a booming paradigm C economy in which nominal GDP ex-government and exports is currently tracking north of 8%, which is double its pre-COVID trend. Borrowing a metric from our friend Luke Groman at Forest for the Trees, true interest expense, which is Medicare, national defense net interest, and the U.S. government's net interest plus Social Security. And when you layer on Medicaid and veteran affairs benefits, which is a metric that is designed to approximate the interest and interest-like obligations of the federal government after factoring in the political will or lack thereof to cut the various programs, this metric is currently tracking at $6.2 trillion on an annualized fiscal year-to-date basis in fiscal 2026, dated through August. The metric is currently tracking at 118% of annualized fiscal year-to-date tax receipts of $5.3 trillion. Far worse are the medium-term trajectories of these two metrics. True interest expense plus Medicaid and VA is currently compounding 50% faster than tax receipts on a trailing three-year CAGR basis, 9% versus 6%. So let me repeat that. Something that is 118% of revenues, which has no political will to be reduced in any meaningful way, is currently compounding at 50% faster than tax receipts. 9% versus 6% on a trailing three-year CAGR basis. All told, U.S. fiscal dynamics are on a runaway freight train that will likely catalyze a bond market crisis on a far more acute timeline than anyone on traditional Wall Street is allowed to say out loud. Our independence from conflicts of interest and data-driven conviction are likely key reasons why so many of the top institutions across global Wall Street have partnered with 42Macro. Our sparsely rivaled research on this subject matter is likely to be the reason why so many of the top institutions across global Wall Street have partnered with 42Macro. Our sparsely rivaled research on this subject matter is likely to be the reason why so many of the top institutions across global Wall Street have views a full-blown U.S. fiscal crisis as having a high probability of occurring by 2030. It may commence in the second half of 2028 once it becomes obvious to our foreign creditors that credible fiscal reforms are not on the ballot box during the 2028 general election. So as always, we'll wrap up with a question from our community. This one's titled, Are High Bond Yields Going to Create Suckers? It says, I am not in or will I be in bonds, but I am curious if the higher yields are going to be a sucker's bet considering the likely future. For example, let's say yields at some level that cannot be ignored by people and people entities and pile in, and the future plays out as most probable in a debasement probably more than yields. Is this set up for suckers? Who and in what volume will get lured in at even 7% or even 10%? And how stuck will they be if things play out like they always have? Even a controlled debasement like the British pound will be around 10% to 15% for 10 to 20 years. To be clear, Micah, this question is not about the investment thesis. It's about who or what entity in theory would pile into bonds in such a big way and potentially get stuck in them or even forced to be stuck in them assuming things play out as they always have. I love this question. Phenomenal question. And the reason it's a phenomenal question is because it's asking the question from the appropriate vantage point, which is through the lens of fixed income technicals, the supply and demand. They call it flows in the equity market. When you talk about the U.S.'s fiscal dynamics, fiscal dynamics in general, I think the lay person, the lay investor, the novice investor focuses on things like debt to GDP and deficit GDP. And I'm telling you right now, none of that stuff matters at all. I've never been in a meeting on Global Wall Street. We have some of the world's largest fixed income funds and some of the most important fixed income fund managers on earth are paying for 42 Maca research. And I meet with them on a regular basis. I'm telling you right now, we do not say that the debt to GDP ratio is too high. What we're talking about is, okay, the debt to GDP ratio is here. How can we plug the demand hole that's going to be created by the incremental securities that we need to capitalize that debt? And so that's what we're thinking about. It's all about the supply and demand for these securities. And supply is greatly exceeding the demand for these securities. And according to our research, supply is accelerating and demand is decelerating. That's obviously a big problem long-term. And so as long as that imbalance, that disequilibrium continues to persist, then you're going to have a natural upward drift on bond yields. I refreshed our five 10-year nominal treasury yield models this morning. We got a yield curve model. We have a term premium model. We have a nominal GDP model. We have an inflation expectation model. We have a real yield model. The average of those five models is currently pegging the 10-year nominal treasury yield at fair value at 6.02%. And so there's just going to be a natural upward bias on the long end of the curve until we get to a more equilibrium fair value level of pricing absent policy intervention. Obviously, we think there's going to be policy intervention. There already is policy intervention. We think there's going to be more policy intervention. In our view, the policy intervention started in a material way in March of 2020. We saw it accelerate in the summer of 2023. We saw it accelerate in the fall of 2024 when the Fed started cutting interest rates during a nationwide affordability crisis. We saw it again in 2025 when the Fed cut interest rates again during a nationwide affordability crisis. We saw it starting in December of 2025 all the way through June of 2026 when the Fed was monetizing U.S. sovereign debt on calling it reserve management purposes in the middle of a nationwide affordability crisis. We saw it again in the fall of 2025 when the Fed started cutting interest rates during a nationwide affordability crisis and a booming nominal GDP and stock market environment. And so ultimately, we're going to continue to see. And now we got Besson, former Treasury Secretary Scott Besson, former client of mine. He is now trying to buy back debt at an accelerating rate. Again, all this policy intervention is not happening in isolation. It's not just coming out of nowhere. It's coming because we are very right on our core research thesis, our North Star, that there is a geopolitically driven supply-demand imbalance in the Treasury bond market. And it's our expectation that we're going to accelerate the policy intervention and wind up in paradigm B, a.k.a. default via debasement. So just answering the question specifically, who's going to get sucked into bonds in a big way? In our view, we think the next batch of this game of hot potato in terms of capitalizing the U.S. sovereign debt and deficit situation is going to come from the form of via bank deregulation and the U.S. commercial banking sector. When you think of the four large cohorts of investors in this market, you start with the Fed. The Fed currently owns about 15 percent of marketable treasury securities. That's down from a high of 25 percent in 2021. We're going to have to wait and see. There's questions at the current juncture whether or not the Fed is going to ever allow it to get back up to that ratio again in the context of Kevin Warsh's long-held beliefs on the balance sheet, which I think are probably not true anymore. But that's neither here nor there. Assuming that the Fed is going to stay at or near 15 percent, you have the foreign central banks, the official reserve sector, their share peaked at 40 percent in 2008. They're now down at 12 percent. It's just been a straight line down or a 45-degree angle down since 2008. So there's no reason to believe that they're going to continue to. They're going to arrest that decline and start buying at an accelerating rate in a way that will allow them to keep pace with the growth of the treasury market. And then you have the private non-bank sector as cohort number three. Our share went from 36 percent of the marketable treasury securities market in the end of 2021 to it's now just shy of 60 percent currently. And so, you know, obviously, we can see just turn on the Bloomberg or turn on whatever you get your bond pricing sourcing from. You can see that it's very clear the private non-bank sector is going to be the one that's going to sector doesn't want any more of these bonds, just in terms of the price reactions and the yield reactions we've seen in recent months. And so ultimately, that leaves the U.S. commercial banking sector as the fourth and final kind of large cohort of demand for these securities. The U.S. commercial banking sectors, they're currently around 15-ish percent of total marketable securities. That's down from a high of 33 percent back in 2003. So it's our belief, just based on the time series history, that their share can go much higher. And there's a lot of deregulation bank deregulation that can occur in the next few years to push their share higher. Number one, you could see treasuries relax, further relax from the SLR, the enhanced supplementary leverage ratio calculation. We could see treasuries relaxed out of the GSIB surcharge calculation as well. We could see treasuries kind of upgraded to kind of a haven status alongside bank reserves in the liquidity coverage ratio and internal liquidity stress test. So those are four big things you can do to create trillions of dollars of demand on commercial bank balance sheets to allow them to further capitalize the treasury market to levels that are consistent with what we saw back in 2003. Or according to our model, roughly around 50 percent of bank balance sheets was treasury and aid securities, which agency securities then because back then. So it's basically half their balance sheet back in the last four turning were treasury securities. So in our view, we think that this is the most likely destination for the next round of hot potato in terms of capitalizing this market. So in our belief, we won't see yields that are seven to 10 percent. That seems very unlikely in the context of a Fed that will probably step in and use its own balance sheet to the extent that we saw bank deregulation take long to implement or or not be effective uh in addition to banking regulation uh borrowing this from our friend lou grohman he was suggested that uh private credit uh uh because insurers have such issues with private credit and the liquidity associated with that asset class they're not able to step in and buy you know long-term debt securities uh sovereign debt securities treasuries in particular uh at levels that have historically they've stepped in that because they ultimately just don't have the balance sheet capacity to do that and so you could see the the regulators um kind of relax uh their ability to to uh you know much like what we can see with the banking regulation we can see the the insurance regulator to sort of relax uh their ability to um to capitalize the treasury market without you know kind of taxing other incremental uh and what may be a dwindling source of capital uh to be clear i'm not i don't share luke's views on private credit uh based on our analysis it's highly unlikely we have a significant amount of capital misallocation or adverse selection in this uh booming paradigm c economy so we don't think there's a massive default cycle uh coming in the context of private credit but there is an illiquidity cycle in the context of you know some of these loans are just mated levels that don't make a lot of economic sense and in order for them to be um you know for the for the for for these balance sheets to create liquidity uh they would have to you know reprice the loans down that's this is just a supply demand technical pricing issue rather than a big broad macro uh issue in terms of the economy at least according to our business cycle model and other metrics that we look at to track whether or not the us economy is on a path towards recession the answer on that question is resoundingly no so we're wrapping up there i know i went through a lot of stuff today but that's neither here nor there if you like learning keep tuning in if you don't like learning this is not the platform for you peace out cheers if you enjoyed this content please remember to like and subscribe thank you this content is for informational purposes only and does not constitute an offer or a solicitation reliance upon the information in this material is at the sole discretion of the viewer or listener investing involves risks any reference to a company issuer or investment strategy is for instructive purposes only and does not constitute investment advice for full disclosures visit 42macro.com backslash disclaimer