As the U.S. national debt surges past $36 trillion, headlines are growing louder. Commentators warn of spiralling deficits, rising interest payments, and an impending fiscal crisis. Bond yields have surged, fiscal hawks are emboldened, and even presidential candidates are framing the debt as a threat to America’s future. With the Congressional Budget Office projecting a budget deficit of over 6% of GDP in 2025 – despite fairly strong employment and steady growth – many are asking: is this sustainable?
At first glance, the situation seems alarming. Debt servicing costs are already outpacing defence spending. Long-term fiscal projections look worse than they have in decades. Yet for all the noise, markets remain calm. Investors still flock to U.S. Treasuries in times of uncertainty. The dollar remains the backbone of the global financial system. So, what gives?
To understand the real implications of America’s rising debt, we must move past the headlines and explore how debt works in practice, not just in theory. The story is more nuanced – and less catastrophic – than many assume.
Why the U.S. Is Different
Debt alone does not determine a country’s economic fate. Japan has a debt-to-GDP ratio above 220%, yet its government borrows at near-zero rates. Italy, with a fraught fiscal history, hasn’t balanced its budget since 1925. France hasn’t done so since 1974. Yet these countries continue to function, markets continue to lend, and crises remain largely absent.
The United States enjoys even greater advantages. It issues debt in its own currency. It operates a fiat money system and it is home to the world’s deepest capital markets. These features offer a level of flexibility and resilience that countries without monetary sovereignty simply do not possess. Unlike emerging markets or eurozone members who borrow in a currency they do not control; the U.S. can always create dollars to meet its obligations.
Does that mean there is no risk at all? Not quite. The real concern isn’t that the U.S. will run out of money – it won’t. The real risk is inflation. If the government decides to print (too much) money to cover its debts, or if people start to lose faith in its ability to manage the economy responsibly, prices could rise sharply, and the value of the dollar could decline. But even this risk has historical guardrails: time and again, the U.S. has managed to navigate these challenges without triggering runaway inflation.
What do the Markets Think?
Long-term interest rates in the U.S. have generally declined over the past several decades, even as debt ballooned.
That suggests other forces – like central bank policy, global savings surpluses, and demographic shifts – have played a more significant role in determining borrowing costs than deficits alone. Crucially, central banks still have tremendous power over bond markets. When the COVID-19 panic sent financial markets into chaos in March 2020, the Federal Reserve stepped in with massive Treasury purchases – reassuring investors and anchoring yields.
The same pattern played out in Europe and the UK: when yields spiked or confidence wavered, central banks stepped in. The European Central Bank’s 2012 “whatever it takes” pledge, for instance, effectively ended the eurozone debt crisis overnight. In the U.S., there’s another layer of resilience. The demand for Treasuries isn’t just domestic. Around 60% of global foreign exchange reserves are held in dollars. Over 90% of global forex transactions involve the dollar. While some countries have talked of “de-dollarisation,” in practice, no other currency offers the same combination of liquidity, convertibility, legal protections, and institutional trust.
Ignoring the Fire Doesn’t Put It Out
Still, none of this means the U.S. can ignore its fiscal trajectory forever. While debt isn’t an immediate threat, rising interest costs could slowly crowd out productive government spending. Ageing populations and rising healthcare costs will put more pressure on entitlement programs. If inflation reaccelerates and bond markets become less forgiving, the room to manoeuvre could shrink quickly.
So far, the political system has shown little appetite for hard choices. Fiscal stimulus has become the norm in both good times and bad. Tax reform, spending control, and entitlement redesign remain politically toxic. And though the U.S. can technically print money to cover its bills, doing so without discipline would eventually undermine the very trust that makes Treasury debt so attractive. If markets do begin to question U.S. fiscal credibility, there are tools available. The FED could resume quantitative easing, capping yields through bond purchases. Policymakers could raise taxes or reduce spending. But none of these options are painless. The best path forward is one that restores confidence gradually – through clear fiscal planning, not abrupt austerity or reactive monetary policy.
What Should Investors Do?
For investors, the lesson is to stay informed – but not alarmed. U.S. debt is not on the verge of collapse, but neither is it trivial. In this environment, portfolio resilience matters more than prediction.
Some smart steps could be favouring shorter-duration bonds, particularly in periods of “low” or declining rates, to hedge against being impacted by possible future rate-rises, considering diversifying the portfolio with real assets – such as infrastructure, real estate, or commodities – that provide protection against inflation, holding gold or inflation-linked bonds as hedges in case confidence wavers or diversifying into foreign currencies and regions with strong institutions and manageable debt levels.
Diversification is not just a buzzword – it is a necessity in a world where geopolitical and fiscal shifts can be fast and unpredictable.
Final Thoughts
Government debt is not inherently dangerous. Like any tool, it depends on how it is used. When deployed to support the economy during crises or to invest in the future, debt can be productive. But if left unchecked, or used to paper over structural imbalances, it can gradually erode trust and reduce long-term flexibility.
The U.S. still holds a privileged position in the global system, backed by its currency, institutions, and markets. That position gives it time – but not a free pass. Rising debt should serve as a mirror: a reflection of policy choices, not an inevitable catastrophe. Voters, policymakers, and investors alike should treat this moment as an opportunity. The future is not set in stone. A smarter, more sustainable fiscal path is possible, but only if we stop viewing debt as a crisis to panic over and start treating it as a challenge to manage.
