Summary of Key Points
U.S. national debt has for the first time exceeded $40 trillion, doubling in less than a decade at an astonishing rate (an increase of $1 trillion every five months), and is just one step away from the $41.1 trillion debt ceiling. Long-term Treasury bond interest rates have soared to their highest level in 19 years. The Treasury Department has tried to lower these rates by doubling its purchases of long-term bonds, but this has created complications for the Federal Reserve's policy-making. The root cause of the debt surge is the government's tendency to spend more than it earns: revenue has decreased due to tariff refunds and corporate tax cuts, while expenditures on social security, healthcare, and interest payments (which have already surpassed military spending) have continued to rise, leading to a vicious cycle of borrowing new debt to repay old debt. Global investor demand for U.S. bonds has weakened, with gold surpassing them as the central banks' primary reserve asset for the first time.
Detailed Analysis
1. National Debt Exceeds $40 Trillion: Doubling in Less Than a Decade
To us ordinary people, $40 trillion sounds like an astronomical figure, but for the U.S. government, it represents a substantial debt burden. The debt increased from $19.95 trillion when Trump took office in 2017 to over $40 trillion in just under a decade. The recent growth rate is even more alarming: it was $38 trillion in December last year, $39 trillion in March this year, and now $40 trillion—an increase of $1 trillion every five months. Even more concerning is the fact that we are only 1.1 trillion away from the $41.1 trillion debt ceiling set by Congress, which means the government's "credit limit" is nearly exhausted.
Both parties are responsible for this situation: Trump's first term added $7.8 trillion to the debt (half of which was due to COVID-19 relief measures), Biden's administration added another $8.4 trillion through infrastructure projects and clean energy subsidies, and now that Trump has returned to the White House, another $3.8 trillion has been accumulated, totaling $11.6 trillion. In essence, every government has preferred to spend more than it could afford, leading to continuous borrowing.
2. Why is the Debt Rising So Rapidly? A Vicious Cycle of Deficits
The core issue is that the government is taking in less money than it spends:
- Revenue Decline: Although federal revenue increased by 3% this year, the Supreme Court ruled Trump's tariff policies illegal, forcing the Treasury to refund $160 billion to importers. Additionally, the "Big Deal Act" allows companies to deduct the full cost of equipment investments from their taxes, resulting in an additional $100 billion in revenue losses.
- Expenditure Increase: Annual spending amounts to $7 trillion, with 60% going towards essential expenses such as social security and healthcare. With the retirement of the baby boomers and rising living costs, these expenditures are growing steadily. Even more problematic is the interest burden: in the first ten months of this fiscal year, interest payments amounted to $931 billion, exceeding military spending and becoming the second-largest expense after social security. This creates a cycle where new debt is used to pay off existing debt, leading to an ever-increasing debt load.
3. Soaring Long-Term Bond Interest Rates: The Treasury Department's Efforts to Cool Things Down
Long-term bond interest rates (e.g., for 30-year bonds) have risen to 5.311%, the highest level in 19 years, meaning the government has to pay more in interest to borrow money. To address this, the Treasury Department has doubled its purchases of 10-20-year and 20-30-year bonds, buying at least $4 billion worth of its own debt each time. This strategy aims to increase demand and lower interest rates; more buyers in the market drive up prices, which in turn lowers interest rates. The effect was immediate, with the 30-year bond yield falling to 5.185%.
However, this intervention has unintended consequences: it distorts market signals that the Federal Reserve relies on to assess economic conditions. The Treasury Department's actions have made it harder for the Fed to formulate appropriate policies.
4. The Federal Reserve's Dilemma: Raise Interest Rates or Not?
The Fed is in a difficult position:
- No Need to Raise Rates Immediately: Recent economic data has been weak (employment and inflation levels are within expectations), and rising long-term interest rates have already increased the cost of borrowing for businesses and consumers, effectively implementing a portion of the Fed's tightening policy.
- Conflict of Interests: The Treasury Department wants to lower interest rates to reduce borrowing costs, while the Fed needs high interest rates to combat inflation.
Looking ahead, interest rates are expected to remain high in the coming quarters before gradually declining next year. The Fed may choose not to raise rates for now, waiting until inflation drops to its target of 2%.
5. Declining Global Interest in U.S. Bonds: Gold Becomes the New Favorite
In the past, global investors flocked to buy U.S. bonds, but this has changed:
- Weakening Foreign Demand: Overseas demand for U.S. bonds has declined, and domestic private investors are also buying less.
- Gold Surpasses Bonds: Data from European central banks shows that by the end of 2025, gold will account for 27% of global central bank reserves, surpassing U.S. bonds at 22% for the first time since 1996. This indicates a loss of confidence in U.S. bonds as a safe investment, with investors preferring gold as a hedge.
- Market Concerns: Whether the massive amount of U.S. debt can be absorbed remains uncertain. Moreover, companies have borrowed heavily this year due to AI development (setting record levels of bond issuance), leading investors to demand higher interest rates as a form of risk compensation.
In summary, the U.S. debt problem is like a snowball that keeps growing larger and larger. It is not only a domestic issue but also affects global investors, who are beginning to show their disapproval through market reactions. Whether the actions of the Federal Reserve and the Treasury Department can stabilize the situation remains to be seen in the coming months.