Over the past several decades, the USA has relied heavily on debt to sustain its economic and political power, navigating wars, recessions, financial crises and even pandemics by borrowing at unprecedented levels. While this borrowing strategy was once underpinned by ultralow interest rates and the global dominance of the dollar, the situation has changed dramatically in recent years. Today, the USA faces rising interest rates, growing skepticism from investors and diminishing tolerance for its ballooning public debt, creating fears of a looming debt crisis that could undermine not only its economy but also its geopolitical standing.
For much of the 21st century, the USA has financed deficits with relative ease because investors considered Treasury bonds safe assets. This perception kept interest rates low, even as the national debt climbed to nearly 100 percent of GDP. However, since 2022, global markets have shifted. Long term rates on Treasury bonds have risen sharply and the gross US debt has reached almost $37 trillion— equal to that of all other advanced economies combined. With every one-percent increase in interest rates costing the government an additional $370 billion annually, servicing debt has become more expensive than defence spending. In fiscal year 2024, interest payments alone consumed $880 billion. As a result, credit rating agencies have downgraded U.S. debt and global investors have grown increasingly cautious.
The rising debt burden is also testing the dollar’s privileged role as the world’s reserve currency. Historically, this status reduced US borrowing costs by up to one percent, as global investors flocked to dollar denominated assets during crises. But with mounting fiscal instability, some central banks and investors are exploring alternatives such as the Chinese yuan, the euro and even cryptocurrency. If demand for US debt weakens, interest rates could rise further, making it even harder to sustain the debt.
A critical driver of the US debt crisis is political dysfunction. Successive administrations from both parties have normalized deficit spending. Reagan in the 1980s popularized the view that “deficits don’t matter,” and both Democrats and Republicans have since embraced large fiscal deficits. For instance, the Biden Administration’s 2024 deficit reached 6.4 percent of GDP, while Trump, despite criticizing Biden’s spending, is projected to run even larger deficits six to seven percent of GDP throughout his second term. By 2054, the debt to GDP ratio is expected to reach between 172 percent and 190 percent, according to the Congressional Budget Office.
Both parties justify deficits differently: Democrats frame them as necessary for social investment, while Republicans often defend tax cuts as growth stimulants. Trump’s economic team argues that high growth, potentially fueled by artificial intelligence (AI), will generate sufficient tax revenue to offset rising debt. The administration assumes a long term growth rate of 2.8 percent, compared to the CBO’s 1.8 percent.
Unchecked debt growth poses grave risks to US global power. Historically, dominant currencies were sustained by dominant powers: Spain in the 16th century, the Netherlands in the 17th and Britain in the 19th. If US debt erodes confidence in the dollar, the USA could lose its privileged position in global finance, constraining military power, diplomatic leverage and economic influence. Rising debt service costs already compete with defence spending, raising concerns about the sustainability of US global commitments.
Yet such optimism may be misplaced given structural bottlenecks, including energy needs, regulatory barriers, labour market disruptions and trade wars that could dampen productivity. Debt vulnerability is amplified by the likelihood of new shocks. Past crises, such as the 2008 financial meltdown and the covid-19 pandemic, added debt worth 15–30 percent of GDP.
Looking ahead, potential triggers include cyberwarfare, geopolitical conflicts, climate catastrophes, or another pandemic. Combined with already high debt, such shocks could tip the USA into an outright debt crisis or prolonged stagnation. Part of Washington’s complacency stems from economic theories that dominated the 2010s, particularly the belief in “secular stagnation.”
Figures like Lawrence Summers argued that low interest rates were permanent due to aging populations, weak demand and sluggish productivity, while others such as Paul Krugman and Olivier Blanchard suggested that low borrowing costs justified expansive fiscal policy. Modern Monetary Theory (MMT) went further, claiming governments could safely run large deficits as long as inflation remained under control. These ideas encouraged both left wing social spending and right wing tax cuts, deepening deficits. However, the resurgence of higher interest rates has exposed the flaws in these assumptions.
If investor confidence in US Treasuries cracks, the country could face soaring interest rates, collapsing asset prices and stagnating growth. Policymakers would then be forced to adopt one or more of the following responses: While unlikely, history shows it is possible. In 1933, Roosevelt abrogated the gold clause in US. debt, effectively defaulting on obligations. Today, selective defaults on foreign held debt have been discussed, though such moves would devastate US credibility. A more probable path is using inflation to erode the real value of debt. However, this risks damaging growth and confidence, as seen in the 1970s or in hyperinflationary cases like Venezuela.
Forcing domestic institutions like banks and pension funds to hold government debt at below market rates. This strategy, used after World War II and by Japan in recent decades, reduces borrowing costs but stifles private sector investment and growth. Drastic spending cuts or tax hikes could stabilize finances but would likely trigger recession and public backlash. Recently, US legislation has sought to regulate dollar pegged stable coins, which could create a captive market for Treasuries. While this may ease financing, risks of instability and capital flight remain.
Unchecked debt growth poses grave risks to US global power. Historically, dominant currencies were sustained by dominant powers: Spain in the 16th century, the Netherlands in the 17th and Britain in the 19th. If US debt erodes confidence in the dollar, the USA could lose its privileged position in global finance, constraining military power, diplomatic leverage and economic influence. Rising debt service costs already compete with defence spending, raising concerns about the sustainability of US global commitments.
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