The escalating debt crisis in the United States represents a significant challenge to its status as the leading global superpower. The combination of rapidly increasing deficits and the need to refinance a colossal amount of existing debt is leading to a situation where the interest payments on this debt are becoming unsustainable. This financial quagmire is set to compel the Federal Reserve into a position where it must continuously purchase U.S. Treasury bonds, effectively becoming the buyer of both first and last resort.
To fully comprehend the severity of this issue, it is crucial to look at the numbers. At the turn of the millennium, the gross national debt of the United States was under $6 trillion. Fast forward to 2025, and this figure has ballooned to over $37 trillion, which is a staggering increase of 520% in just a quarter-century. Moreover, the national debt now eclipses federal revenue by 740%, a situation that portends insolvency barring sweeping reforms.
Predictions suggest that, barring significant economic growth or fiscal changes, the national debt will surpass $67 trillion by 2035. This marks an unprecedented rate of debt accumulation in the history of modern economies; where it took the U.S. 250 years to amass the first $37 trillion of debt, an additional $30 trillion could be added in a mere decade.
As of fiscal year 2025, the budget deficit already stands at $1.36 trillion, a 14% increase on the previous year, with several months still to go. Deficits are now equivalent to 6.4% of the GDP, with projections from the Congressional Budget Office indicating a rise to 9% of GDP, or $2.7 trillion, by 2035.
Moreover, Treasury data reveals that in 2025 alone, $9.2 trillion of U.S. debt is due to mature, which is roughly 31% of the national GDP. This situation implies that even if federal spending was halted immediately, the government would need to refinance a third of the nation’s economic output at markedly higher interest rates, spiraling further into debt.
Interest payments have now surpassed national defense spending to become the second-largest expense in the federal budget. Each year, the U.S. directs $1.11 trillion towards interest payments – an amount slightly above the entire budget for national defense. This annual cost is anticipated to reach $2 trillion within the decade.
This mounting debt should be limiting private sector spending and causing borrowing costs to skyrocket; however, extensive money printing by the Federal Reserve has circumvented this, albeit at the cost of high inflation rates. This occurs as international appetite for U.S. Treasuries wanes, painting a grim picture similar to those of economically unstable nations.
The option of outgrowing this debt seems increasingly unfeasible, particularly because even if yearly deficits (excluding interest payments) were eradicated, the debt-to-GDP ratio could only decrease with sustained annual economic growth surpassing 3%. This target appears unattainable for several reasons, such as the diminishing workforce and a 1.5% decline in productivity in the first quarter. Immigration restrictions and border closures have slashed labor participation, significantly damping GDP growth potential. In the backdrop of inflation depleting the middle class’s financial resilience – with 60% of Americans holding less than $1,000 in savings – the foundation for a robust economic recovery looks increasingly shaky.
In addition, consumer credit defaults are increasing – highlighted by the 10% delinquency rate on FHA loans and the 9 million borrowers delinquent or in default on student loans post-forbearance. Legislation designed to stimulate the economy, such as the extension of the Tax Cuts and Jobs Act or allowances for capital expensing, offers some temporary relief but does not alter the fundamental economic trajectory.
The critical question then remains: With diminishing foreign and Federal Reserve support, who will absorb the burgeoning new issuances of U.S. Treasury bonds? The retreat of traditional buyers in the face of quantitative tightening and geopolitical tensions further exacerbates the dilemma.
The U.S. financial landscape is now characterized by enormous non-financial debt, towering at 257% of GDP, eclipsing the peak seen during the Global Financial Crisis. This debt, coupled with inflated credit, real estate, and equity markets – a trifecta of illusory prosperity fueled by two decades of negative real interest rates – is under threat as this era draws to a close.
Visible signs of strain are emerging: a weakening dollar, rising yields, and precariously perched credit markets. A tipping point in the bond market could trigger a cascading collapse across real estate, business credit, and equity markets. Traditional investment strategies are poised to falter under these volatile conditions, suggesting a shift towards more nimble and inflation-sensitive asset management techniques may be prudent.
In navigating the turbulent waters ahead, discerning investors will need to be vigilant, ready to adapt to the evolving economic landscape. The limited upside potential in specific sectors, such as defense, technology, and precious metals in selected economies, indicates a cautious approach to investment may be wise in these uncertain times. Amidst the widespread complacency in the market, the astute investor remains alert, recognizing the delicate balance between riding the waves of current market bubbles and preparing for the inevitable adjustment of asset prices.
