Photo: Alexis Bienvenu © LDFDE

By Alexis Bienvenu, Portfolio Manager, La Financière de l’Échiquier (LFDE)

On 3 November, Americans go to the polls for the midterm elections, which will decide every seat in the House of Representatives and a third of the Senate. Poll aggregators such as RealClearPolling currently give the Democrats a clear lead in the race for the House, which the Republicans now control. Prediction markets, meanwhile, give them a slight edge in their bid to retake the Senate. Nothing is settled, however. A split Congress, with a Democratic House and a Republican Senate, remains a plausible outcome. Continued Republican control of both chambers, by contrast, now looks unlikely.

Among other things, these elections will set the direction of public spending. Democrats would seek to channel more money into healthcare, public infrastructure and the energy transition. Republicans, who have come under growing pressure over the cost of living since Donald Trump returned to the White House, would put more emphasis on tax cuts, deregulation and a bigger defence budget.

Behind these diverging priorities, however, lies a consensus that is rarely challenged: heavy reliance on public borrowing. As former Republican House Speaker Paul Ryan, a long-standing advocate of fiscal discipline, has put it, “the two parties have become populist parties”.

That dependence on debt will soon face two major tests.

The first is the debt ceiling, the maximum amount of borrowing authorised by Congress. It currently stands at $41.1 trillion, while federal debt has already passed $40 trillion. On the broader IMF measure, gross debt across all levels of government amounts to 126% of GDP. With the federal deficit running close to 6% of GDP, the Bipartisan Policy Center estimates that the ceiling could be hit between late winter and mid-2027. That would not trigger an immediate default: the Treasury would then have several months of extraordinary measures before the real deadline. But unless outgoing lawmakers resolve the issue before the new Congress takes office on 3 January 2027, the coming year looks set for another particularly tense political showdown. Even if a deal is struck before the final deadline, the run-up could be fraught, fuelling volatility in financial markets already unsettled by the fiscal fog in Washington.

Once the debt ceiling is raised, a second challenge will await US debt, whatever the election outcome: at what cost will the Treasury be able to keep financing itself?

According to the Congressional Budget Office (CBO), net interest costs already amount to 3.3% of GDP, more than the defence budget. Part of this debt, however, was financed at the very low rates typical of the period before 2022. The burden is therefore set to grow as both debt levels and interest rates rise. In February 2026, the CBO was already projecting net interest costs of 4.6% of GDP by 2036, and rates have risen since then, which should gradually push the bill higher still. On top of this, the government’s refinancing needs are competing with the vast sums the AI industry must raise to fund its colossal investments. As a result, as BlackRock chief executive Larry Fink has pointed out, the race for capital in the United States has rarely been so fierce[1].

In this tense environment, it is essential that investment in artificial intelligence delivers meaningful productivity gains. Otherwise, competition for savings will simply drive up the cost of capital. The fate of US debt is therefore partly tied to that of AI.

For now, admittedly, AI companies (apart from the most fragile) are still finding it relatively easy to raise capital, and so is the US government. Voters can therefore put the debt question on the back burner. But it will inevitably come back. The country’s real political moment of truth may therefore come not on the evening of 3 November 2026, but in the course of 2027, when the newly elected lawmakers will have to persuade American and international investors to keep financing the country at a manageable cost, in a world where the competition for capital, and not just for votes, is intensifying.

Disclaimer: These data and views, as well as the sectors mentioned, are provided for information purposes only and do not constitute an offer to buy or sell any security, investment advice or financial analysis. The opinions expressed are those of the author and do not engage LFDE’s liability in any way. Past performance is not a reliable indicator of future results.

[1] America Needs More Capital, The Wall Street Journal, 14.10.2026

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