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The debt wall: why big debts melt savings away

The world’s largest economies are hitting a debt wall at the same time. Bond yields are at levels not seen in years, and history is fairly clear about how debts like these are usually worked off.

In Brief

• The US 30-year Treasury yield hit 5.7% on October 7, a 24-year high.
• Central banks have stepped back as the biggest buyers of government bonds; price-sensitive buyers have taken their place.
• Large debts in history were mostly melted away by inflation and financial repression rather than repaid.

The debt wall: four big economies, one mechanism

The picture is not limited to one country. France’s 10-year yield reached 5% for the first time since 2022; public debt stands at 119% of national income, the highest since the war.

The UK 30-year yield crossed 6% for the first time since 1998. Japan’s 10-year yield is above 3% for the first time since 1996 and has tripled in two years.

Official US debt has passed $40 trillion, roughly double the 2017 level. Annual interest payments alone exceed $1 trillion.

Why now? The biggest buyer left the table

For fifteen years, central banks bought their own governments’ bonds without looking at price. Now they are shrinking their balance sheets, or at least not growing them.

At the same time, the energy shock and inflation have returned, and spending on defence, ageing populations and interest is lifting borrowing needs. What remains are price-sensitive buyers such as funds, banks and insurers.

A price-sensitive buyer demands a higher yield. Since every country borrows from the same pool of buyers, none can stop this pressure on its own.

How debt melted away in history: five paths

• Growth: If the economy grows faster than the debt, the ratio falls by itself. It has rarely been enough alone.
• Austerity: Spending cuts and tax rises. Britain worked off debt of twice its national income over decades after the Napoleonic Wars; in the 2010s Greece’s economy shrank by a quarter.
• Restructuring: Open default. This path is closed to a country borrowing in its own currency.
• Inflation: Debt is written in nominal terms, so rising prices shrink its real burden. In the 1970s US inflation reached 14% and bondholders lost about a third of their wealth in real terms.
• Financial repression: Rates are held below inflation, banks and funds are pushed to hold bonds, and capital outflows are limited.

US debt fell from 106% of national income in 1945 to 32% in the 1980s. The decline came not from repaying the debt but from real interest rates that were negative on average.

Turkey’s lived lesson

Turkey experienced this mechanism first-hand in 2021-2023. A policy rate far below inflation, bond-holding requirements for banks, FX-protected deposits and frictions on buying foreign currency were all part of this toolkit.

The outcome matched the textbooks: the burden on the state and borrowers eased, while the real wealth of savers holding lira deposits shrank. Those who moved into real assets and foreign currency were relatively protected.

Today, buybacks in the US, efforts to hold down long-term rates and rules requiring stablecoins to hold Treasuries are the first steps down the same road. According to a Treasury estimate, stablecoins could create $2 trillion of extra demand for Treasuries.

Key Assets

What to Watch

• If austerity plans collapse under voter backlash, central banks may be forced back into buying bonds.
• A shift to a period of rates held below inflation works against savers sitting in nominal assets.
• The length of this process is uncertain; history has examples ranging from two years to several decades.

This note was compiled from open-source data and content available online; it does not constitute investment advice.

This article is for general information only and is not investment advice.