Summary of Key Points
For the first time, the U.S. federal debt has exceeded $40 trillion, and the yield on 30-year Treasury bonds has reached its highest level since 2007, indicating that America's previous advantage of being able to borrow money at low costs is disappearing. The rapid doubling of debt over the past decade is due to both parties' laxity in fiscal discipline (the Republicans with tax cuts and defense spending, the Democrats with welfare subsidies), pandemic-related expenditures, and the pressures of an aging population. Rising financing costs are squeezing essential budgets such as healthcare and defense. Investors are demanding higher returns due to concerns about future inflation and fiscal uncertainty. Overseas investors are beginning to reduce their holdings of U.S. debt in favor of corporate assets, and the AI boom in Silicon Valley is also competing with the government for funds. While the U.S. can still borrow money, it will have to pay higher interest rates and ultimately face political challenges such as increased taxation or reduced spending.
Detailed Analysis
1. Debt Doubling in Ten Years: Neither Party Is Willing to Cut Back
U.S. debt has more than doubled from just under $20 trillion in 2017 to over $40 trillion in less than a decade. The reason is simple: there are more areas for spending, and the speed at which revenue is generated cannot keep up.
- Emergency expenditures during the pandemic played a role, but the main factor is that both parties prefer to spend money: Republicans favor tax cuts and increased defense spending, while Democrats advocate for expanding welfare programs (social security, healthcare), industrial subsidies (such as renewable energy), and infrastructure investments. Neither party dares to touch on cutting social security and healthcare, as these are sensitive issues for voters.
- The aging population is exacerbating the problem: as the number of retirees increases, spending on social security and healthcare rises, but tax revenues (such as personal income taxes and corporate taxes) fail to keep up with the promised growth in spending. Trump claimed he could eliminate the debt within eight years, but during his tenure, the debt increased by $6 trillion; Biden's infrastructure and renewable energy plans have also added to the debt.
- The Congressional Budget Office predicts a deficit of nearly $1.9 trillion in 2026, and by 2036, the proportion of debt held by the public relative to GDP will rise from the current 101% to 120%, meaning for every $100 in GDP generated, the country will owe $120 in debt.
2. The Growing Interest Bill: Nearly $3 Billion Per Day, Pressuring Defense Spending
In the past, borrowing was cheap, and interest was not a significant issue; now, with rising financing costs, interest has become a major burden.
- Interest expenditures are expected to exceed $1 trillion in 2026, amounting to nearly $3 billion per day (equivalent to the annual revenue of a medium-sized city). Interest has already surpassed healthcare spending and has become the second-largest expense, second only to social security. It is ironic for a country that emphasizes its military strength to have higher interest costs than its military budget.
- Interest is a fixed expense: it must be paid regardless of the economic situation. This puts pressure on other budgets, such as education, research, and infrastructure, which may see cuts, or the government may have to borrow more money to cover the gap, creating a vicious cycle of "borrowing new debt to pay off old debt → higher interest rates → borrowing even more."
3. Investors No Longer Have Unconditional Trust: Higher Returns Are Required for Longer Borrowings
In the past, investors viewed buying U.S. bonds as a safe investment with low returns; now they are asking, "If I borrow for 30 years and inflation rises or debt increases, how much interest do I need to earn to compensate for the risks?"
- This is known as the "duration premium": there is more risk associated with borrowing for 30 years compared to shorter terms. Inflation could fluctuate, deficits could increase, and the supply of bonds could rise, so investors demand additional returns to offset these uncertainties.
- The concern is not about the U.S. defaulting on its debts (the U.S. has the power to print money and is unlikely to default directly), but rather about the devaluation of currency: for example, $100 in U.S. bonds bought now might be worth less in 30 years due to inflation, or bond prices could fluctuate significantly, resulting in losses if sold.
- Even with poor economic data, long-term interest rates remain high, indicating that investors are no longer solely focused on the Federal Reserve's interest rate cuts but are more concerned about the country's long-term fiscal health.
4. Competing for Funds with Silicon Valley: Overseas Investors Are Changing Their Priorities
In the past, the U.S. could easily borrow money thanks to overseas investors (such as Japan, China, and the UK) who were willing to buy U.S. bonds. However, this situation is changing:
- Overseas investors are reducing their holdings of U.S. debt: in June this year, Japan, China, and the UK all reduced their purchases of U.S. bonds. Although the total amount is still increasing, the direction of capital flow has shifted—only $6.8 billion flowed into U.S. bonds in June, compared to $35.6 billion into corporate bonds and $181.4 billion into stocks. Investors prefer to invest in U.S. companies (such as tech firms) rather than the government.
- The AI boom in Silicon Valley is competing for funds: Tech companies need to build data centers and purchase chips, requiring large amounts of long-term financing. The competition between government bonds and corporate bonds for the same investors is driving up overall financing costs.
- Overseas markets have more options: Long-term bond yields in Japan and Europe are also rising, so institutions that used to rely on U.S. bonds for high returns can now obtain good returns domestically without needing to invest in U.S. bonds.
5. Future Options: Either Raise More Revenue or Spend Less, but Both Are Difficult
The U.S. Treasury has recently implemented a bond repurchase program to lower long-term interest rates temporarily, but this is only a temporary solution. The country ultimately faces four options:
- Increase taxes: For example, raising taxes on the wealthy and corporations, but both parties are wary of offending voters, making this difficult to pass.
- Control spending: Such as cutting social security, healthcare, or defense, but these are politically sensitive areas.
- Adjust the welfare system: For example, delaying retirement ages or reducing healthcare reimbursement rates, which would face opposition from voters.
- Rely on AI to boost productivity: The government hopes that AI can drive faster economic growth and expand the tax base, thereby reducing debt pressure, but this will take time and may not show immediate results.
The U.S.'s advantages (the status of the dollar, a deep capital market, and technological strength) allow it to delay the issue for a while, but it cannot indefinitely keep borrowing costs low. The bond market has already begun to "reprice" U.S. fiscal conditions—instead of relying on credit in the past, the country now has to pay higher interest rates for the time it has "borrowed."
In One Sentence
America's days of being able to borrow money at low costs are over. The increasing pressure of debt and interest rates will ultimately require difficult political decisions (such as increased taxation or reduced spending) to address. Otherwise, borrowing will become more expensive in the future, potentially affecting the entire economy.