Every time the U.S. national debt — or, more specifically, every time it crosses another $1 trillion milestone — the same narrative resurfaces: the dollar is doomed, and the system is on the brink of collapse. Yet, if you glance at the DXY chart over these periods, the story often looks far less dramatic than the headlines suggest.
But in reality, it’s not that simple. As long as demand for U.S. Treasury bonds stays strong, the debt surge isn’t really a major issue. And that demand isn’t going anywhere anytime soon because, for global investors, there just isn’t a more reliable place to park large amounts of capital.
For comparison, China’s government bond market has relatively low liquidity, and access for foreign investors is still limited.
Therefore, even Federal Reserve Chair Jerome Powell has said that the $39 trillion national debt is “not unsustainable,” while also warning that the current trajectory “will not end well” if no action is taken fairly soon.
As for markets, the S&P 500, Nasdaq, and Dow Jones don’t seem too concerned for now. But the fact that long-term Treasury yields aren’t falling even as the Fed cuts rates suggests investors are starting to demand a higher risk premium.
Speaking of what could make investors pay more attention to U.S. debt, interest payments alone have already exceeded $1.2 trillion over the past 12 months (around 4.1% of GDP) and are still rising as new borrowing increases (+$2.8 trillion in a year). With current market rates at roughly 4–5%, interest costs could rise to 5.5% of GDP going forward, making debt service one of the biggest constraints on the federal budget.
But more importantly, this also limits the Federal Reserve’s room to maneuver and leaves the U.S. economy more exposed to new inflation shocks. So if inflation picks up again, the Fed may find it harder to raise rates, since that would quickly push up the government’s interest burden.
What can be done?
The solution comes down to a mix of measures: stronger economic growth to reduce debt relative to GDP, higher revenues through tax reform and possibly new taxes, and tighter control of government spending, especially on social programs. On top of that, structural measures such as raising the retirement age and encouraging immigration and entrepreneurship could help expand the tax base.
What should investors do?
Don’t panic every time U.S. debt crosses a new threshold. As long as demand for Treasuries remains strong, the absolute size of the debt isn’t the main issue. But ignoring the trend would also be a mistake. If risk premiums keep rising, markets will eventually start to care, which is why diversification matters.