The Ferguson Law and the US Fight for a Small Government

In this insightful analysis, Stephen Jen and Joana Freire assess the Trump Administration’s attempts to address the US’s twin deficits, with a particular focus on the more pressing fiscal deficit. Despite initial optimism, the authors express growing concern that fiscal consolidation remains more rhetoric than reality.

At the heart of the issue is the “Ferguson Law”, the principle that any great power spending more on interest payments than on defence is at a tipping point of decline. For the first time in history, the US has crossed this threshold, with debt servicing costs reaching 3.1% of GDP in 2024, surpassing defence spending. The outlook is poor, as debt service is projected to reach 4.1% by 2035, while defence spending declines.

Jen and Freire also draw a parallel between Trump’s fiscal stance and Reagan’s first term: both administrations aimed to reduce government size but faced political resistance to spending cuts. Without meaningful progress on expenditure reduction, the authors warn that the US could face a “Truss moment”, a market revolt similar to the UK’s 2022 fiscal crisis.


Key Quote

“The Trump Administration has been fighting to alter the trajectories of the US’ twin deficits... We confess that we are losing confidence.”


Table of Contents

  • Summary

  • The Ferguson Law

  • The case for fiscal consolidation

  • Our thoughts

  • The (r-g) gap

  • Recession risks

  • China may also be about to breach the Ferguson Law

  • R&D spending

  • A ‘Truss Moment’?

  • Bottom line

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