The next recession in the United States will not simply be a cycle of lower earnings and rising unemployment. It will be a fiscal shock of historic proportions, one that reshapes global markets and undermines the financial architecture investors have relied on for decades. The numbers already tell the story.
Every time the economy slows, federal spending rises automatically. It does not require new laws or debates. Unemployment benefits expand, Medicaid rolls grow, food assistance swells, and stabilizers built into the system begin transferring billions. In the dotcom crash of 2001, federal outlays jumped 13%. During the global financial crisis of 2009, they rose 9%, and once stimulus was added, the increase reached 18%. If history is a guide, the next recession will push spending at least 11% higher. From the Congressional Budget Office’s projected baseline of about seven trillion dollars in 2025, that means 7.8 trillion in spending, with the realistic risk of eight trillion or more once Congress inevitably passes additional stimulus.
At the same time, revenues collapse. This is the side of the ledger most analysts underestimate. When equity markets fall, capital gains receipts vanish. When wages stagnate or decline, income taxes shrink. In the 2000 dotcom downturn, federal revenues fell 24%. In the financial crisis, they fell 32%, with a one-year drop of 17% in 2009 alone. On average, the decline is 28%. Starting from the 2025 baseline of 5.1 trillion, a fall of that magnitude cuts revenues down to just 3.7 trillion.
Do the math. Eight trillion in spending against 3.7 trillion in revenue creates a deficit in excess of 4 trillion dollars. That is not a tail-risk scenario - it is the median outcome. And if the downturn is anything worse than moderate, if GDP actually contracts as it did in 2009 or 2020, the deficit easily climbs toward 6 trillion dollars in a single year. That would mean a shortfall equal to 14–20% of U.S. GDP. For comparison, the Second World War peak was 27%. America is moving back toward that zone, but without the justification of total war.
This is where the market consequences become unavoidable. A deficit of 4 to 6 trillion dollars means a flood of new Treasury issuance. But foreign demand for Treasuries is already weakening. China has been diversifying reserves, the Gulf states are experimenting with oil transactions outside the dollar, and Japan is struggling with its own fiscal problems. That leaves U.S. institutions and, ultimately, the Federal Reserve as the backstop buyers. If private demand does not cover the supply, the Fed will have little choice but to monetize the debt. That means balance sheet expansion on a scale not seen since the pandemic, with all the inflation risks that implies.
The bond market cannot escape this. Yields will rise until something breaks - either growth, credit markets, or political tolerance. If the Fed caps yields by buying Treasuries, inflation pressure rises. If the Fed refuses to step in, yields will rise high enough to choke private credit and push the economy into deeper contraction. Any way, bondholders carry the risk.
Equities will face their own reckoning. For thirty years, investors have counted on the so-called “Fed put” - the idea that every crash would be met with lower interest rates and fresh liquidity. But in a world of multi-trillion-dollar deficits, the Fed is cornered. Cut too far, and inflation surges again. Hike too high, and the cost of servicing the debt explodes. That leaves equities in a trap: earnings will fall in the recession, while valuations shrink as investors price in the absence of a reliable central bank backstop. Volatility will become the norm rather than the exception.
The dollar itself, long the anchor of the global system, cannot escape this fiscal logic. Its dominance rests on Treasuries being the ultimate “risk-free” asset. If deficits reach levels where that assumption no longer holds, confidence in the dollar erodes. Central banks will diversify more aggressively into gold, commodities, and potentially digital assets. The search for alternatives will no longer be theoretical; it will be forced by necessity.
In that environment, alternative assets stand to gain. Gold, already rising in recent years, would become the ultimate hedge against U.S. fiscal instability. Scarce digital assets such as Bitcoin could be repriced as fiscal insurance rather than speculative bets. Commodities, once dismissed as cyclical, would regain their place as hard collateral in a system that is losing faith in sovereign paper.
The uncomfortable truth is that none of this requires extreme assumptions. It is simply the arithmetic of recession layered on top of today’s fiscal baseline. Spending rises automatically. Revenues fall sharply. The gap becomes larger than the entire federal tax intake in a normal year. Deficits of four to six trillion dollars annually are not alarmist - they are the most probable scenario.
This is where history matters. The United States has been here before, but so have other powers, with outcomes that should serve as warnings.
Britain after World War II is the clearest example. London emerged victorious but with debts exceeding 200% of GDP. The pound, once the world’s reserve currency, slowly lost its dominance to the dollar. Not overnight, but steadily, as deficits and devaluations eroded trust. Investors who believed sterling’s role was eternal learned that no reserve currency lasts forever when fiscal reality contradicts confidence.
Japan in the 1990s offers another cautionary tale. A collapse in revenues after the asset bubble forced Tokyo into years of deficit spending. Debt piled up to over 250% of GDP. Yields stayed low only because domestic savers absorbed the issuance. But growth stagnated, and the fiscal burden remains a weight on Japan’s economy three decades later. The United States has more global leverage than Japan ever had, but it also lacks the captive savings base that protected Tokyo. Washington depends on foreign creditors.
The 1970s show the danger from another angle. When deficits met energy shocks and inflation, the dollar was forced off the gold standard. Confidence cracked, inflation soared into double digits, and U.S. Treasuries were no longer a safe haven. It took Paul Volcker’s brutal rate hikes to restore credibility. But that was at debt levels a fraction of today’s. A similar policy response now would collapse the government’s own balance sheet.
Each of these parallels underscores the same point: fiscal excess eventually collides with reality, and when it does, investors face regime change. Britain lost reserve currency status. Japan lost growth. The U.S. in the 1970s lost stability until it imposed severe austerity through monetary pain.
Today’s U.S. faces elements of all three: deficits on a British scale, demographic and entitlement pressures resembling Japan, and inflation risks like the 1970s. What makes it different is the scale of its role in global finance. Treasuries are not just national liabilities; they are the foundation of the world’s reserve system. If confidence in them cracks, the effects ripple across every market, every asset class, every economy.
For investors, this means the next recession will not look like the last. It will not just be about corporate earnings cycles or liquidity injections. It will be a fiscal event, one that tests the very foundations of the Treasury market and the credibility of the dollar. And because the dollar and Treasuries underpin global finance, the shock will be global. Emerging markets, commodities, European bonds, Asian equities - all will feel the ripple effects of America’s fiscal imbalance.
The next downturn will be remembered not only for what it does to the U.S. economy, but for what it forces investors everywhere to confront: that the age of endless U.S. deficits without consequence is ending, and the recalibration will not be gentle.
