In 2025 the IMF reported that companies, households and countries around the world had accumulated $251 trillion in debt. Looking ahead to the end of 2026, JP Morgan warned that interest rates on such loans will rise, largely due to population decline and weakening fiscal discipline.
In a note yesterday, Joyce Chang and her team at JPMorgan unpacked the “six D’s” that will shape the global economy: deficits, deregulation, decarbonization, depopulation, deglobalization and dedollarization.
JPM’s research team first turned to deficits, writing: “A global breakdown in fiscal discipline is occurring in all parts of the world, and fiscal dominance is dwarfing monetary policy. Global government debt has reached $100 trillion, reducing fiscal space, while increased deficits are driving up interest rates.”
Among economists There is some debate to what extent deficits influence interest rates. The theory is that rising national debt could cause fears that the government was less creditworthy, and that the Federal Reserve would then increase the money supply to reduce the value of the debt, leading to inflation.
Governments relied heavily on fiscal stimulus (through increased spending or tax cuts) during the Iran crisis, the IMF reported in its report current update of the World Economic Outlook.
This leads to deficits– or government revenue cuts – occurred without “clearly identified offsets, with few signs of restoring fiscal space,” JPM wrote. “Fiscal space” refers to a government’s ability to increase spending or reduce taxes without jeopardizing its financial stability.
“In the U.S., larger debt levels and higher interest rates, as well as a lack of political will to undertake fiscal consolidation soon, point to a higher term premium,” JPM adds, referring to the return that lenders expect for holding long-term bonds and, as a result, demand higher interest rates. “The unsustainable U.S. budget deficit has not yet caused much damage to the U.S. economy because the U.S. has much more fiscal space than other countries,” Chang’s team added.
In a time of geopolitical unrest, the United States remains the safest and strongest country, the statement continued. The risk to the debt outlook will come from “dramatic military, political, energy security or economic setbacks that result in the United States no longer being the safest and strongest country.”
The population problem
Advanced economies are also facing declining birth rates and aging populations. Put simply, there will be fewer workers in these economies to pay for the goods and services that an older, inactive population needs.
JPM notes that demand for pension and healthcare spending will increase in many countries, while demand for public investments – such as defense, renewable energy and infrastructure – also intensifies. “Without offsetting measures such as increased government revenues, other cuts in public spending, or changes in the interest-growth differential, these spending pressures imply a significant increase in public debt in all jurisdictions beyond 2031,” the study adds.
The Committee for a Responsible Federal Budget is currently active Countdown to Social Security– the point at which benefits must be cut – is seven years and 10 months, and “neither political party is expected to act” until that cliff is reached, America’s largest bank continues.
“Neither political party is expected to act until the Social Security cliff approaches in 2032,” the statement from America’s largest bank continued. It adds that about $600 billion in debt would need to be taken on to cover the deficit and that further spending cuts and higher taxes may be needed.
“We also highlight the demographic challenges that will lead to lower savings and highlight the risk that population aging and longevity could reduce equilibrium returns, with even funded schemes struggling,” the team adds. “The demographic dividend that has defined the last 40 years is coming to an end and we view migration as an underestimated risk that will reduce savings and contribute to higher interest rates.”