Wharton Finance Professor Believes US Debt Could Send Interest Rates Skyrocketing Past 7% In 2025

If you are a prospective homebuyer or real estate investor concerned about high interest rates and you're sick of bad news, you may want to stop reading right now. That's because Joao Gomes, a finance professor at the Wharton School of the University of Pennsylvania, believes America's $34 trillion in debt could spark a crisis that sends interest rates spiraling past 7% if the government doesn't act soon.

Gomes does not see much evidence that either party possesses the political will, or even the right formula, to manage what he sees as a real crisis on the horizon. He's not alone in that assessment, as JPMorgan Chase & Co, CEO Jamie Dimon and Federal Reserve Chairman Jerome Powell have both recently expressed deep concern about the amount of debt America is carrying and the potential threat it poses to the economy.

Gomes Sees Immediate And Long-Term Danger To The Economy

Although many of his colleagues see America's debt load as a threat far off in the future, Gomes believes it has the potential to roil the American economy as early as 2025. Gomes believes there is a possibility of a debt crisis if the next administration adopts the wrong policies. He also believes the government must act before the problem is allowed to mushroom out of control. 

In speaking to Fortune magazine about U.S. debt, he said, "It could derail the next administration, frankly. If they come up with plans for large tax cuts or another big fiscal stimulus, the markets could rebel, interest rates could just spike right there, and we would have a crisis in 2025. It could very well happen. I’m very confident by the end of the decade one way or another, we will be there.”

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The Effect On The Real Estate Market Could Be Devastating

A lack of inventory and high prices have already put a basketball-sized dent in most Americans' buying power when it comes to housing. If interest rates climb above 7% and remain there, the American housing market could be devastated beyond the point of recovery. That's a possibility if the nations holding U.S. bonds lose confidence in America's ability to pay those debts and begin demanding higher interest rates on future bond purchases.

The end of the decade may seem far off, but six years is not a long time when it comes to something as large as the U.S. economy altering its course. Plans to avoid disaster must be laid now because there is precedent for things spinning out of control much quicker than expected. Gomes points to the recent mortgage meltdown in the U.K. that took place under former Prime Minister Liz Truss as an example. 

In that situation, the British government announced a controversial economic package that was deeply unpopular, and the resulting fallout sent mortgage rates spiraling almost out of control. The British pound suffered severe losses, and Truss stepped down in short order. Gomes sees the potential for a repeat in the U.S. if the next administration doesn't walk a careful line between spending cuts and stimulating the economy.

Gomes Wants Immediate Action But Doubts That Will Happen

It's worth noting that Gomes's fear of impending doom is not universally shared, even among people who agree that U.S. debt is a concern. In a recent post on X, Gomes said, "I probably worry about U.S. debt more than most of my colleagues. But in this election year, I believe voters should ask much tougher questions of politicians that don't take this threat seriously."

He probably has a point. However, he also acknowledges that averting a debt crisis will invariably force America's elected officials to make a lot of difficult and unpopular decisions about a complex issue. The scary part about that is politicians who make unpopular decisions tend to lose their next election, and winning their next election is every politician's main job. That means it's up to the American people to demand action on U.S. debt. 

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