How rising US debt could compound into a crisis, according to 'bond king' Jeffrey Gundlach

• US debt problems will be felt in the coming years, Jeffrey Gundlach wrote for The Economist.
• Higher interest rates and a recession amplify US borrowing costs.
• By 2034, debt servicing could consume 45% of tax revenue, he estimates.

America must curb its borrowing binge before it "breaks the bank," Jeffrey Gundlach said.

"Under the next few presidential administrations, the national debt will mushroom beyond the government's ability service it, perhaps even beyond the credulity of the country's creditors," he wrote in The Economist. "In the coming years expect dollar debasement, debt restructuring or both."

The DoubleLine Capital founder is among a group of Wall Street heavy hitters raising alarm over a coming debt crisis. Anxiety is mounting amid Washington's widening federal deficit of $1.83 trillion, or 6% of GDP. Others sounding the alarm include hedge fund icon Ray Dalio.

Bearish forecasters note that the government is spiraling deeper into debt, and there's no sign the trend will reverse. Publicly held debt is projected to reach 122.4% of GDP by 2034, up from 97.3% last year.

Gundlach said that Washington has been plagued by large budget deficits since the 1980s, but these were easier to fund when interest rates were low. However, rates have jumped sharply to counteract COVID-era inflation, meaning the government must pay more interest on its debt.

In order to service its debt and meet obligations, the US needs to borrow even more, creating a cycle of borrowing, he explained.

"Higher interest expenses feed into deeper deficits, sparking more borrowing, driving heavier debt loads. This is how the debt spiral spirals—unless, that is, lower rates are engineered by the Federal Reserve, which would cause inflation. There will be no road left to kick the can down," Gundlach said.

A recession could exacerbate such a scenario, he said, given that the government would have less tax revenue to rely on. Gundlach suggested that this would trigger money-printing, pushing bond yields—or the amount owed to creditors by the government—to rise further.

Gundlach has consistently warned that the US is already in a recession, noting in September that rising layoffs hinted at a downturn.

All told, his debt-spiral outlook suggests that borrowing costs will eat up America's ability to afford much else.

"By 2034 debt service at 6% rates would consume 45% of all tax revenue; at 9% rates it would eat up 83%. The budget deficit would balloon from 6% of GDP to 11% or 18%, respectively," Gundlach calculated.

Before that happens, Washington's leadership may still have ways to address the issue.

Recent commentary from Pimco outlined three ways the Trump administration can stabilize the US deficit. Those methods include cutting down on government inefficiencies or dialing back tax cut ambitions.