A Leap Toward the Tipping Point – FY2026 Update

The Treasury Statement for the fiscal year ended 30 September 2026 provides an opportunity to compare actual results against the two scenarios presented in my article, Get Ready for Another US Government Default. The government’s insolvency is approaching more rapidly than I projected. The Tipping Point I’ve written about is near. The exact timing cannot be predicted, but the federal government is running out of road.

Federal revenue came in at $5.403 trillion, below both the gradual interest rate normalization of Scenario A ($5.550T) and the stagflation shock of Scenario B ($5.496T), reflecting annual growth in tax take of just 3.2%. Even with an 11.9% rise in gross interest incurred, total outlays were below both projections at $7.396 trillion, but that offers little comfort. While expenses came in lighter than forecast, borrowing still ran ahead of both my projected scenarios.

The officially reported deficit was $1.992 trillion. Measured by the actual increase in total Treasury securities outstanding but excluding contingent liabilities – the method used throughout this article – the federal government’s True Deficit was $2.534 trillion. It exceeded my projections and the previous fiscal year’s True Deficit. The $542 billion gap between these two figures reflects items not captured by the headline deficit reported by the Treasury, the largest component of which is the $245 billion of net borrowing from government trust funds.

Total debt outstanding reached $40.172 trillion at 30 September 2026, above both my projections ($39.938T under Scenario A and $40.097T under Scenario B).

Interest: A Critical Variable

Gross interest incurred on the federal debt, as reported directly in the Treasury Statement (Table 3), was $1.360 trillion for FY2026, up from $1.216 trillion in FY2025, an increase of $144 billion in a single year. The implied average interest rate on outstanding debt rose to 3.50% from 3.33% in FY2025.

With debt now being refinanced above last year’s average rate and standing at $40.2 trillion, every one percentage point increase in the funding cost adds approximately $400 billion to the annual interest expense once the existing debt has been refinanced. With an average maturity near six years, that refinancing happens over time rather than all at once. Nevertheless, it happens, and each year’s maturing tranche is rolled over at today’s higher interest rates rather than the lower rates of years past.

The Insolvency Ratio: Gross Interest as a Percentage of Total Revenue

The Tipping Point is crossed when the Insolvency Ratio reaches 30% because that level is where the required adjustment to the federal government’s budget is beyond reach. This past year the Insolvency Ratio rose from 23.2% to 25.2%.

To put this result in historical context, the ratio stood at 14–20% in the early 1980s, when alarms were already being raised by the federal government’s deteriorating financial position. Today’s level is not, however, a record. The ratio reached 27.1% in FY1991 and remained above 25% from FY1990 through FY1993. What distinguishes the present is not that the ratio is high – it has been higher – but that it is climbing toward the 30% Tipping Point with nothing capable of reversing it short of political will, which is absent.

After peaking at 27.1% in FY1991, the Insolvency Ratio fell for the rest of the decade on lower interest rates, a peace dividend from the end of the Cold War, and a capital-gains revenue boom. That combination was a one-off, and it turned the federal government’s budget around completely. By FY2000 the federal government was running a primary surplus – revenue above all spending other than interest expense – of 29.6% of revenue.

Interest rates now are rising from a historic low rather than falling as they were back then from the historic high of the 1980s, and the outstanding debt is more than eleven times its FY1991 size. In FY2026 the federal government ran a primary deficit, not a surplus. Expenditures before interest were 11.7% greater than revenue, and nothing is closing this gap. Last time it was growth rather than spending restraint that righted the budget, but with last year’s revenue increase of only 3.2%, growth cannot do it again. Whatever reduces the deficit now must come out of spending.

Debt stops growing relative to revenue only when the government runs a primary surplus. Interest owed is excluded because it is a non-discretionary expense the debt itself imposes, and the test is whether the rest of the budget the government still controls can cover it. The threshold from solvency to insolvency is not a fixed law of arithmetic. It depends on the gap between what the debt costs and how fast revenue grows, and on how much spending can be cut. In FY1991 the ratio reached 27.1% without a crisis because the average coupon was falling, and that did the work that revenue growth or a decline in expenditures would otherwise have to do.

Today the coupon is rising, which is why 30% is the level that matters now. Borrowing to pay interest is a doom-loop, and the federal government is already in it. What 30% marks is the point at which the way out of the doom-loop closes, and at least in the near term, a decline in the Insolvency Ratio is unlikely.

Revenue of $5.403 trillion in FY2026 did not cover the $6.036 trillion of spending that comes before interest. So every dollar of interest expense was borrowed, and each year’s borrowing enlarges the debt on which the next year’s interest is owed.

Merely to stop the debt growing faster than revenue would have taken a swing of some $739 billion in FY2026, and would need repeating every year thereafter. To hold the debt steady against FY2026 revenue needed a primary surplus of 1.96% of revenue, against the 11.71% primary deficit actually incurred, which together create a gap equal to 13.67% of revenue. Once the ratio reaches 30%, the swing is about $1 trillion. Beyond 30% the adjustment needed passes out of the range of what is politically viable, at which point the choice is no longer between default and solvency, but rather which form the default takes.

Sources: Monthly Treasury Statement (Sep 2026), Table 3 (gross interest), Table 6 (debt outstanding). Scenarios as published in the original article.

What FY2026 Means for the Projected Scenarios

The FY2026 result does not alter the direction of the two projected scenarios; it sharpens it. The shortfall in revenue implies that the stagflation shock of Scenario B is emerging as the more likely outcome. Revenue disappointed, which is a warning sign of a slowing economy and the first of the two conditions Scenario B assumes. Whether the second – rising interest rates from accelerating inflation as last month’s CPI and PPI data indicate – follows is the question that decides how fast the Insolvency Ratio rises from here. Consumer prices rose 0.6% in September for an annual rate of 3.7%, while producer prices rose 1.3% in the month alone, the steepest monthly rise since March 2022, taking their annual rate to 6.3%. The Insolvency Ratio jumped by nearly two full percentage points in a year and is now tracking the Scenario B projection, even though it took a different route from the one Scenario B supposed, through weaker revenue rather than higher interest rates.

Focusing on the Scenario B projection because it is emerging as the more likely outcome, the 30% Tipping Point is crossed as soon as FY2027, with the ratio projected to reach 35.3% in FY2028 on a debt load of $47.3 trillion.

This chart sets the Scenario B projection against the full record since 1980, and illustrates three things at once:

1. The blue line is the Insolvency Ratio, read against the right-hand scale. It climbs through the 1980s to its 27.1% peak in FY1991, falls back to a low of 11.6% in FY2012, drifts between roughly 13% and 16% for a decade, and then turns sharply upward from FY2022.
2. The red line is total debt outstanding, read against the left-hand scale in trillions. Note the abrupt change in its upward slope after 2008, when the Federal Reserve reached its “Havenstein Moment”. It chose the same path taken by the hapless president of the Reichsbank who unleashed that country’s 1920s hyperinflation by turning government debt into currency to facilitate government spending well beyond its revenue.
3. The dashed red segment is the Scenario B projection, which begins at the FY2026 actual of 25.2% and carries the ratio to 30.5% in FY2027 and 35.3% in FY2028, well into the danger zone. That is when arithmetic takes control and accelerates the doom-loop in which a widening deficit compels more borrowing, and more borrowing compels a greater interest expense burden.

The chart also makes plain the comparison established above: the FY2026 level is not a record. What is unprecedented is the combination after 2020, with the debt rising at the steepest rate anywhere in the series while the Insolvency Ratio rises alongside it.

When the ratio declined following the 1991 peak and in every previous descent, it fell because falling interest rates caused the debt’s average coupon rate to fall. Those previous circumstances are not repeating, nor are they available now without crashing the dollar, which is an outcome the US government and Federal Reserve will try to avoid, so the projection shown by the dashed line continues upward instead of rolling over as it did in the 1990s.

Given that the ratio is already tracking the stagflation scenario, the two critical variables to watch are whether federal revenue remains weak and the upward trend in interest rates continues. Without a dramatic decline in US government expenditures, the 30% Tipping Point may be crossed in the current fiscal year.

A revenue shock acts on the Insolvency Ratio in a way an interest rate shock does not. Interest expense is contractual and moves slowly, constrained by the debt’s maturity schedule. Revenue is cyclical and can begin falling within a single quarter, and the full decline can be severe. Federal receipts dropped by roughly a sixth in the Great Financial Crisis, some $419 billion from FY2008 to FY2009, driven by collapsing capital-gains realizations and a shrinking payroll base. They are the two most cyclical elements of the individual income tax, and the two that a stagflationary recession would strike first.

The arithmetic is unforgiving. A 10% decline in receipts from the FY2026 level, some $540 billion, which is well within historical experience, would by itself have lifted the Insolvency Ratio from 25.2% to 28.0%, with no change whatever in interest rates. This is why the denominator warrants closer watch; a rate shock is visible in advance in the auction calendar and arrives in instalments, whereas a revenue shock arrives at once, is not announced, and cannot be offset because the numerator cannot be reduced in response. The government cannot decline to pay interest. It can only fail to pay.

Locked in a Doom-Loop

Higher interest rates increase the interest expense burden, so unless the government cuts spending in other areas, or economic activity expands fast enough to generate the additional tax revenue, the deficit widens. A wider deficit must be financed, which means more borrowing, which adds to the debt on which interest must be paid, which widens the deficit again. Each turn of the cycle begins from a larger debt than the turn before, and nothing within the government’s control stops it turning, which describes the doom-loop. That is the inevitable path when the wrong decision is made at the Havenstein Moment, and consequently the federal government is heading toward the Tipping Point.

Forcing interest rates lower appears to be an easy escape, and that is the course governments reach for, but it is not an answer. Rates can be held below the level lenders require only by denying those lenders a return that compensates them for the risk they carry, and that risk grows with every turn of the cycle. Lenders of purchasing power who cannot earn an adequate return in dollars do not go on lending, so capital flees, weakening the currency. Forcing rates down therefore does not break the cycle. It moves the damage from the budget to the currency, imperiling the dollar.

That is the lock. Let interest rates find their own level and the deficit compounds. Hold them below it, and the dollar pays instead. This doom-loop is locked because the door to escape is arithmetically open but politically closed unless the will emerges to cut spending deeply enough to reduce both the deficit and the debt burden it feeds. FY2026 shows the lock engaged. Revenue grew $169 billion over the year while gross interest grew $144 billion, so almost 86 cents of every additional dollar collected went to interest before any other claim on the budget was met.

Conclusions

First, the gap between the reported deficit and the True Deficit continues to widen. At $542 billion in FY2026, this discrepancy is not a rounding error. It is the difference between a deficit that looks alarming and one that is structurally destabilizing, with the public not informed of the accounting gimmicks that make the deficit look smaller than it is.

Second, the Insolvency Ratio is accelerating as the more adverse of the two scenarios projected it would. The nearly two-percentage-point increase in a single year reflects the compounding effect of debt and borrowing costs rising simultaneously, and in roughly equal measure: the average debt outstanding grew 6.4% while the average interest rate it carries rose 5.1%, and the two compound to the 11.9% rise in gross interest incurred. Neither variable is moving in a favorable direction, and there is no credible fiscal policy now in place that would reverse either trend.

Third, the trajectory established by FY2026 actuals is consistent with default in the broad sense used throughout this article, whether by explicit non-payment, by inflation, or by financial repression, each of which shifts the loss from the borrower to the holder of the debt. That default is arriving sooner than the original scenarios suggested. The more adverse of the two scenarios is becoming the likely outcome, so the US government’s deteriorating financial position is not a distant risk. It is a present and growing constraint on its fiscal freedom that is already reshaping the outlook for every other category of federal expenditure, and ultimately for the purchasing power of the dollar.

The three forms of potential default need to be stated plainly. A default is a failure to deliver the purchasing power that was promised, and it can be brought about in three ways: 1) explicit non-payment, done openly – the coupon is missed, principal is not repaid, and the loss is recognized; 2) inflation, done quietly – the coupon is paid in full in nominal dollars, each of which buys less than the dollar that was lent, and the loss passes to the holder without ever appearing in any government budget; and 3) financial repression, done by compulsion – the yield is held below the rate of inflation while regulation, capital requirements, captive institutional demand, or other measures ensure the debt continues to be bought at that artificially low yield.

The three differ in method, visibility, and political cost. They do not differ in effect. In each case the holder receives less real purchasing power than was contracted for, and the government is relieved of an obligation it could not otherwise have met.

The distinction matters now that the US government is carrying an Insolvency Ratio of 25% with no mechanism available to reduce it, given the absence of political will to reduce expenditures drastically. Reaching the Tipping Point will force a choice among the three forms of default, and only the first of them requires an announcement.

The original article’s recommendation stands. The prudent response to the prevailing trajectory is to hold monetary assets outside the reach of government. Hold physical gold and silver in your own possession or in a professionally operated bullion vault in a jurisdiction with a legal structure that insulates your assets from the fiscal pressures bearing down on dollar-denominated assets. As Ludwig von Mises observed in ‘The Gold Problem’ in 1965: “The gold standard did not fail. The governments sabotaged it and still go on sabotaging it.”

The FY2026 numbers confirm the trend of previous years, and it is not heading in the right direction.