Is the US Government Itself the Next Bubble?

Major US crisis follows the same four-phase cycle. This time, the overextended borrower may not be a bank or a homeowner — it may be the federal government itself.

Article 2 of 3 in the US Debt Series

Prepared by Richstorm.co

Key Takeaways

• US financial crises follow a remarkably consistent four-phase cycle driven by credit expansion, fading institutional memory, and regulatory loosening.

• The last crisis of any kind was 2020 (COVID) — an external shock, not a credit-cycle event — and the 2022–23 rate-hike episode was a real but partial tremor, not the full reset.

• By the strict economic definition of a Minsky 'Ponzi borrower' — one that cannot cover even interest from its own revenue — the federal government itself now fits that description.

• History (Mexico 1994, Russia 1998, and the Japan/UK cases covered in this series) shows the buildup to a sovereign debt crisis is gradual, but the actual repricing event is sharp and fast — not a slow decline.

• Current data shows healthy Treasury auction demand and a Fed leaning hawkish — meaning the warning signs exist, but the acute trigger has not yet occurred. 

The Pattern Most Investors Overlook

The United States has experienced a significant financial crisis approximately every 8 to 15 years throughout its entire history. Not always the same type, not always the same severity — but the underlying mechanism is strikingly consistent across centuries, asset classes, and political regimes.

This is not bad luck or coincidence. It is the predictable output of a specific cycle — driven not by economics alone but by human psychology, institutional memory, and the way credit expands and contracts over time. Understanding this cycle does not let you predict exactly when the next crisis arrives. But it tells you what phase you are in — and that changes how a rational investor should be positioned.

The Four Phases — And What Drives Each One

Every major US credit cycle follows the same four-phase arc. The surface story changes each time — railroads in 1873, stocks in 1929, housing in 2008 — but the psychological and credit dynamics are nearly identical.

The economist Hyman Minsky described the late-cycle transition most precisely. He identified three types of borrowers: those who can service both principal and interest from cash flows (conservative), those who can only service interest and must roll over principal (speculative), and those who cannot even service interest and depend entirely on asset appreciation (Ponzi). Every major crisis is the moment when the Ponzi borrowers are exposed — which only happens when asset prices stop rising.

The critical insight is that the Ponzi phase looks fine from the outside until the very last moment. Loans are performing. Asset prices are up. Confidence is high. The warning signs are visible in the data — but the narrative explains them away. It is always different this time, until it is not.

The Historical Map

The table below shows how the resolution of each crisis planted the seeds of the next one — a pattern that has repeated for nearly a century.

Which Crisis Resets the Clock?

A natural question is: when did this cycle last reset? The honest answer requires distinguishing between two different things people mean by "crisis."

If the question is "when did the economy last seize up and cause real downturn and pain," the answer is clearly 2020 — the COVID crash. That counts fully as a crisis by any reasonable definition, and the clock most people care about resets there: six years ago, not eighteen.

But 2020 was unusual in one specific way worth naming. It was not caused by years of internal credit excess collapsing under its own weight, the way 1929, 2000, and 2008 were. It was an external shock — a virus halting the economy from outside, while lending standards going in were actually reasonably disciplined. The policy response, however, was identical to a credit-cycle Phase 4 playbook: rates cut to zero, massive liquidity injected, emergency stimulus deployed. That response was so large and so fast that it compressed the normal multi-year Phase 1 recovery into about twelve months — asset prices were back at record highs by 2021, without the slow rebuilding of caution that usually follows a real reset.

Then 2022 to 2023 happened: the Fed hiked rates from near zero to over 5% in about eighteen months, several regional banks failed, and growth assets sold off sharply. By many definitions, that was a real tightening event — painful, consequential, and a genuine test of the system. But it was also, by design, contained. The Fed stopped well short of letting unemployment spike or a true credit contraction run its course, and pivoted back toward easier policy within about a year. That looks less like a full Phase 4 reset and more like a partial tremor — real pain, but not the complete unwind the cycle usually produces.

Which raises the more uncomfortable possibility: if 2022 to 2023 was only a partial tremor, the actual overextended position in this cycle may not have been fully exposed yet. And the borrower most plausibly still carrying that overextension is not a bank or a homeowner. It is the federal government itself.

The Government as the Ponzi Borrower

Hyman Minsky's framework, introduced earlier, defines three types of borrowers. Hedge borrowers can cover both principal and interest from their own cash flow. Speculative borrowers can cover interest but must continuously roll over principal. Ponzi borrowers cannot even cover interest from their own income — they depend entirely on continued borrowing and a growth story holding up, with no real cash flow underneath to fall back on if confidence breaks.

Apply that test to the federal government using the numbers from earlier in this series. Tax revenue does not cover the government's interest payments plus its spending — the deficit exists even before counting principal repayment, meaning new borrowing is required just to service what is already owed. The entire structure depends on a continued growth story: that GDP and productivity keep expanding fast enough, or that reserve currency status keeps attracting buyers, regardless of the underlying trajectory. And every fix attempted so far — discussed in detail in the first article of this series — has been refinancing, not repayment. Nothing has closed the actual gap between revenue and obligations.

By Minsky's own definition, that is Ponzi finance. Not as a loose insult, but as a precise technical description of a borrower whose only viable strategy is borrowing more and hoping the story holds.

What makes this version of the cycle genuinely different from 2008 is the exposure mechanism. A private Ponzi borrower — a bank, a homeowner — gets exposed through a discrete, visible event: a missed payment, a foreclosure, a forced liquidation. A sovereign borrower with its own currency and central bank does not get foreclosed on. Exposure shows up instead through rising term premiums on its debt, a weakening currency, and ultimately a central bank being pulled into financing the government directly because private demand alone cannot absorb the borrowing at sustainable rates — the "fiscal dominance" scenario discussed in the second article of this series.

Slow Build, Fast Break — What History Actually Shows

A natural assumption is that if the government is the overextended borrower, the resolution will be gradual — a slow erosion of the dollar's value and America's economic standing over many decades. That assumption deserves a closer look, because the historical record does not really support it.

Mexico's 1994 peso crisis is one of the sharpest examples on record. Mexico had been running current account deficits and accumulating short-term, dollar-linked debt for years — a slow, largely unremarked buildup. The actual unwind took days: a December 1994 devaluation announcement triggered a collapse in the peso and a full-blown capital flight within about two weeks, forcing a $50 billion emergency rescue led by the US Treasury and IMF. Years of buildup, a crisis measured in days.

Russia's 1998 default followed an almost identical shape. Fiscal deficits and short-term ruble debt built up for years against a backdrop of falling oil prices. The market gave little warning until it gave none at all — the government devalued the ruble and defaulted on domestic debt within the same week in August 1998, a move so abrupt it also helped sink the US hedge fund Long-Term Capital Management, which had to be bailed out by a consortium of Wall Street banks days later to avoid a broader financial spiral.

What connects Mexico, Russia, and the Japan and UK cases discussed in the first article of this series is the same mechanical pattern: years of quiet deterioration, then a transition compressed into days or weeks once a specific trigger breaks confidence. None of these were exceptions to a generally gradual rule. Across every documented case, the actual repricing event was sharp. The variable that differed was only how much warning the buildup gave beforehand — and how severe the aftermath turned out to be.

In both cases, and in nearly every historical sovereign debt episode, the pattern is the same: gradual buildup of fragility, followed by a sharp, discrete repricing event, followed by a long recovery. Not a smooth decline from start to finish. The reason is mechanical rather than emotional — confidence in government debt does not turn down like a dial. Buyers either show up at a bond auction or they do not. Demand either holds or it breaks at a specific point. That is a threshold dynamic, not a gradual slope, which is why the actual transition tends to be fast even when the buildup toward it is slow.

Why Government Debt Behaves Differently

It's worth being precise about what kind of overextension this is, because government debt does not behave like a typical credit bubble that simply needs to deflate. A private credit bubble — subprime mortgages in 2008, dot-com valuations in 2000 — eventually meets a hard constraint: the underlying borrower cannot pay, a lender forecloses, and the loss gets realized. The federal government has no equivalent hard stop. It can keep issuing new debt to service old debt indefinitely, as long as buyers keep showing up at auctions. That is precisely the structural Ponzi position described above — it does not correct itself the way a private bubble eventually must. It keeps growing until something external forces a repricing, which is exactly why the warning signs covered in this series — rating downgrades, rising real yields, persistent deficits — can persist for years without resolving into an obvious crisis, right up until they do.

The Signals That Would Confirm a Trigger Is Underway

Because the exposure mechanism here is different from a bank run, the warning signs are different too. Three indicators matter most. It is worth being upfront that the specific numbers below are not official thresholds published by the Treasury, the Fed, or any rating agency — no such redlines exist publicly. They are reasoned estimates, built by combining actual market data with established economic relationships, and they should be read as informed approximations of where conditions become genuinely concerning, not precise trip-wires.

• Treasury auction demand: Recent 10-year and 30-year auctions have cleared with bid-to-cover ratios of 2.4 to 2.6, with strong foreign participation — comfortably within the normal range these auctions have clustered in recently. A sustained decline meaningfully below that recent range, across multiple auctions rather than a single weak print, would indicate softening demand. There is no official number that marks a crisis line here; the useful signal is a clear, persistent move away from where auctions have actually been clearing, not a specific decimal point.

• The 10-year real (TIPS) yield: The current reading is approximately 2.15 to 2.20% — elevated relative to the roughly 0 to 1.5% range this yield mostly occupied through the 2010s, and trending upward. This is the better-supported of the two market-based estimates: Dallas Fed research has found that rising debt-to-GDP mechanically pushes long-term real yields higher over time, and standard valuation models show that growth-equity multiples compress meaningfully once the discount rate moves well above where it averaged through the prior decade. Putting those together, a sustained move into the high-2% range is a reasonable estimate of where that compression would intensify — but it is a synthesized judgment, not a published threshold, and the precise level at which the effect becomes severe could plausibly sit somewhat higher or lower.

• Concrete action against Fed independence: Political pressure and criticism of the Fed have been a constant backdrop for years and are largely priced in. The actual signal would be a concrete action — an attempted removal of a sitting governor, legislation rewriting the Fed's mandate, or an asset-purchase program explicitly framed as financing support rather than economic stimulus. None of these has occurred. If anything, the current Fed leadership has leaned toward tightening rather than accommodation, which is the opposite of what a fiscal-dominance trigger would look like.

The honest read of this data: the structural condition described above — a government behaving like a Ponzi borrower — is real and well-documented. But the acute trigger that would convert that structural condition into a sharp repricing event has not yet occurred. The historical pattern across these episodes is that a real trigger tends to show up as a sequence — a weak auction or devaluation signal, followed by a policy response that looks dismissive or chaotic, followed by a confirming second shock — rather than a single isolated headline. Watching for that sequence, and for a clear and sustained move away from the current healthy readings, is more useful than treating any single number as a hard line.

What This Does NOT Mean

This is the most important practical point in the entire article. None of the above means a crisis is imminent or that investors should exit markets.

The buildup phase of a sovereign debt overextension can last many years before the trigger arrives. Mexico's current account position deteriorated for years before the 1994 peso crisis. Russia's fiscal position weakened for years before the 1998 default arrived within a single week. Investors who exit early because the structural conditions look concerning have historically missed substantial additional gains in the years before the actual event — being right about the underlying fragility and wrong about the timing produces the same financial outcome as being wrong altogether.

The reasonable position is not to predict the exact trigger or its timing. It is to accept that the buildup is real, that the resolution — when it eventually arrives — is more likely to be sharp than gradual, and to build a portfolio that can stay invested through the long buildup phase without being destroyed by the short, sharp event that may eventually follow it.

The Bottom Line

The clock that matters most resets in 2020, not 2008 — and the 2022 to 2023 rate-hike episode, while genuinely painful, looks more like a partial tremor than the cycle's full reset. That leaves an uncomfortable open question: where did the real overextension of this cycle go, if it was not fully resolved in 2022?

The most defensible answer, based on the evidence in this article, is that it shifted from the private banking system — where it lived in 2008 — to the federal government's own balance sheet, which now exhibits the textbook characteristics of Minsky's Ponzi borrower. History suggests that when a sovereign borrower reaches that point, the resolution tends to arrive as a sharp, discrete repricing event rather than a slow, gentle decline — even though the buildup toward it can take years and feel uneventful the entire way.

Current data — healthy Treasury auction demand, a Fed leaning hawkish rather than accommodative — shows that the acute trigger has not yet arrived. That is genuinely reassuring. But it does not change the underlying structural picture, which every major institution covered in this series has independently confirmed.

America has recovered from every crisis in its history, including ones that looked existential at the time. The investors who built generational wealth across those cycles were not the ones who predicted each crash. They were the ones who stayed solvent, stayed unleveraged, and had the conviction and the capital to hold — and buy — when everyone else was selling.

That is the only edge that has ever consistently worked. It is available to any investor willing to think in cycles rather than quarters.

This is Part 2 of a three-part series on US debt and investor strategy. Part 1 — "The US Debt Crisis: Slow to Build, Fast to Break" — covers the debt trajectory and rating agency downgrades. Part 3 — "How to Invest Before the Debt Crisis Breaks" — covers the practical portfolio response.

Disclaimer: This article is for informational and educational purposes only and does not constitute financial, investment, or legal advice. All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. RichStorm LLC does not hold positions in any securities mentioned unless explicitly disclosed. Readers should conduct their own research or consult a qualified financial advisor before making any investment decisions.