U.S. National Debt Surpasses $40 Trillion: An Analysis of Treasury Market Instability and Fiscal Sustainability Risks

Executive Summary

On August 20, the U.S. federal government's debt surpassed $40 trillion. The core issue is not the absolute size of the debt, but the narrowing gap between the real interest rate (r) and the nominal growth rate (g). With g at approximately 5.6% and r at about 4.6%, the spread has shrunk to just one percentage point, eroding a safety margin that has been in place for nearly 60 years. Although the Treasury Department doubled the scale of its long-term bond buybacks starting September 9, this is merely a market management measure that does not reduce the fiscal deficit itself. Over the next 6 to 12 months, the most likely scenario is a managed phase where the spike in interest rates subsides but structural upward pressure persists. In response, the South Korean government and corporations should focus not on crisis preparation, but on reviewing the maturity structure of foreign exchange reserves, factoring in rising dollar funding costs, and conducting quarterly monitoring of the r-g gap.

I. Analysis of the Current Situation

U.S. National Debt Surpasses $40 Trillion: Analysis of the Current Situation

1. Background and Developments

According to U.S. Treasury Department data, the total federal government debt reached $40.047 trillion as of the close of business on August 19 [9]. Of this total, debt held by the public amounted to $32.266 trillion, while intragovernmental holdings were $7.782 trillion [9]. When President Trump took office for his first term in January 2017, the debt stood at $19.95 trillion [9]. This means the debt has doubled in less than a decade [9].

About one-third of the increase occurred during the emergency borrowing phase to combat the COVID-19 pandemic [9]. Since then, the debt has continued to grow due to a combination of tax cuts, increased defense spending, and expanded social security and healthcare expenditures [16]. The Swiss newspaper Le Temps points out that although President Trump pledged to reduce the debt at the beginning of his term, his administration's finances actually worsened due to increased defense spending, tax cuts, and the added burden of tariff refunds, which the Supreme Court invalidated in February [14]. Thailand's Bangkok Post also highlighted that the unconstitutional ruling on the Trump administration's tariff policies led to faster-than-expected borrowing [13].

An EAI Special Commentary diagnoses the issue not in terms of the absolute size of U.S. debt, but through the relationship between the real interest rate (r) and the nominal growth rate (g). It assesses that "the United States has been in a safety zone where g exceeded r for nearly the past 60 years," but analyzes that "the gap has now narrowed to one percentage point, with g at about 5.6% and r at about 4.6%" [2]. The commentary argues that this buffer is being rapidly depleted as interest rates on newly issued Treasury securities rise [2].

2. Current Situation

A sharp rise in long-term Treasury yields was the direct trigger for the current situation. According to the Atlantic Council, the 30-year Treasury yield has risen by more than 40 basis points since the beginning of the year, hovering around 5.2%, its highest level since 2007 [3]. Spain's Expansión reported that the United States is paying the highest interest on its 30-year bonds since 2001 [15]. The newspaper attributes the spike in rates to inflation concerns and an increase in debt issuance related to artificial intelligence (AI) [15]. Le Monde also assesses that massive capital demand from the AI and defense sectors was the starting point for the current debt crisis, and it evaluates the Treasury's intervention as a measure that, while not an official market intervention, is effectively equivalent to one [4].

Under this pressure, the Treasury Department announced on August 19 that it would double the size of its buybacks for Treasury securities with maturities of 10 to 30 years, starting in September [4][6]. In a press release, the Treasury officially confirmed it would expand the scale of its liquidity support buybacks for nominal long-term securities beginning September 9 [6]. The JoongAng Ilbo reported that immediately after this announcement, long-term interest rates stabilized, temporarily reviving investor sentiment for risk assets such as stocks and cryptocurrencies [1]. However, the same article expressed skepticism about whether this effect would last [1]. Indeed, the fact that U.S. debt crossed the $40 trillion threshold on August 20, immediately after the announcement, has led to assessments that the buyback measure failed to resolve underlying concerns [16].

The BBC noted that the recent debt increase is the result of long-term spending expansion and accumulated interest costs spanning both the Trump and Biden administrations [7]. The Associated Press (AP) reported that this record debt level comes as defense, Social Security, and Medicare are accounting for an ever-larger share of federal spending [16]. Reporting from Washington, The Times of India described $40 trillion as a figure so large it is difficult to comprehend even with commas, and conveyed that while market confidence in "Uncle Sam" remains, questions about its sustainability are growing [11].

3. Key Actors and Positions

Treasury Secretary Besant is the primary actor responding to the current situation. He has responded to the surge in long-term interest rates by announcing an expansion of Treasury buybacks [4][6]. Le Temps describes his actions as being "forced into the role of a firefighter" [14]. From the Treasury Department's perspective, the top priority is to maintain confidence in the market's ability to absorb government debt. At the same time, in its own press release, the Treasury has framed this measure as liquidity support, emphasizing that it is a step to normalize market functioning rather than an intervention in monetary policy [6].

President Trump faces conflicting interests. Although he pledged to reduce the debt during his presidential campaign [14], his actual policies—increasing defense spending and cutting taxes—have accelerated its growth [14][16]. The White House's stance of prioritizing AI infrastructure investment as a national strategic priority also contributes to upward pressure on Treasury yields by increasing capital demand [4][15]. This represents a point of conflict within the Trump administration between the priorities of fiscal sustainability and those of growth and security.

Bond market investors are another key group in this situation. According to Expansión, investors have sold off large amounts of Treasury securities in recent weeks, concerned about a resurgence of inflation and increased debt issuance related to AI, which has led to a sharp rise in borrowing costs [15]. Le Temps points out that investors were already showing anxiety about America's fiscal trajectory long before the symbolic $40 trillion threshold was reached [14].

Although not directly mentioned, the Federal Reserve's monetary policy stance acts as a background variable in the debate on fiscal sustainability, intertwined with the issue of the narrowing gap between real interest rates and growth rates highlighted in the EAI analysis [2]. Foreign holders of U.S. Treasury securities are also implicit stakeholders. The EAI Special Commentary points out that "the United States cannot sustain its debt system without inflows of foreign capital," and analyzes that the U.S. and China are in a relationship of mutual constraint, unable to completely replace or decouple from each other in terms of financial infrastructure [2][5].

4. Key Issues

The first issue is the effectiveness of the buyback program. While the announcement was followed by a stabilization of interest rates and a rebound in risk assets [1], skepticism about its lasting impact prevails among local media outlets [1][14]. The limitation is that buybacks are a liquidity provision measure, not a tool for reducing the fundamental volume of debt issuance.

The second issue is that the narrowing r-g gap is approaching a critical point. As the EAI analysis suggests, if the buffer zone where the growth rate exceeds the interest rate shrinks, the country could enter a phase where debt grows on its own, regardless of the government's fiscal efforts [2]. This implies that if interest rates on new debt issuance rise further, interest costs could increase exponentially.

The third issue is the policy tension between spending on AI and defense and maintaining fiscal sustainability. As long as the White House prioritizes competition for AI supremacy and strengthening national defense, the upward pressure on Treasury yields from increased capital demand is likely to persist structurally [4][15]. This is an area where tensions between the White House, the Treasury Department, and the bond market are likely to recur.

II. In-Depth Analysis

U.S. National Debt Surpasses $40 Trillion: In-Depth Analysis

1. Analysis of Root Causes

The superficial cause of the rapid debt increase is the mismatch between spending and revenue. However, a more fundamental change defining the current situation is the breakdown of the interest rate-growth rate structure that has long supported the debt. An EAI Special Commentary clearly identifies this: "The key is the comparison between the real interest rate (r) and the nominal growth rate (g)" [2]. If g is greater than r, growth naturally absorbs the debt, but if r exceeds g, the debt grows on its own even if the government takes no action [2]. The United States has remained in this safety zone for nearly 60 years [2]. However, the gap has now narrowed to one percentage point, with g at about 5.6% and r at about 4.6% [2]. This buffer is being rapidly depleted as interest rates on newly issued Treasury securities rise [2].

Two policy factors have compounded this structural pressure. The first is a failure of fiscal discipline. Le Temps points out that although President Trump pledged to reduce the debt at the beginning of his term, his administration's finances actually worsened due to increased defense spending, tax cuts, and the added burden of tariff refunds, which the Supreme Court invalidated [14]. The Bangkok Post also reports that borrowing increased faster than expected after the Trump administration's tariff policies were ruled unconstitutional [13]. In effect, the White House's plan to use tariff revenue as a fiscal buffer was dismantled by a judicial ruling.

The second factor is the explosion in capital demand. Le Monde assesses that massive capital demand from the AI and defense sectors was the starting point for the current debt crisis [4]. Spain's Expansión also points to increased debt issuance related to AI, along with inflation concerns, as a reason for the spike in Treasury yields [15]. As investment in AI data centers and defense procurement simultaneously absorb funds from the bond market, a dynamic has emerged where the federal government's Treasury issuance and the private sector's corporate bond issuance are competing for the same pool of capital.

2. Structural Context

From a political-structural perspective, this situation is a bipartisan phenomenon. The BBC summarizes the debt increase as the result of long-term spending expansion across both the Trump and Biden administrations [7]. The AP also points to the core of the problem being the structure of federal spending itself, in which defense, Social Security, and Medicare account for an overwhelming share [16]. In the U.S. political system, Social Security and Medicare are classified as mandatory spending and are effectively excluded from annual budget negotiations. Defense spending is also an area where cuts are politically difficult for both parties. Consequently, there is structurally little room to reduce the fiscal deficit by cutting discretionary spending alone.

From an economic-structural perspective, the key is the U.S. debt system's reliance on foreign capital. An EAI Special Commentary assesses that "the United States cannot sustain its debt system without inflows of foreign capital, and China cannot even grow its own payment system without the infrastructure established by the U.S. and Europe" [2][5]. This relationship of mutual constraint not only prevents a complete decoupling between the U.S. and China but also makes the U.S. Treasury market vulnerable to external shocks. If foreign investors' appetite for Treasury securities falters, upward pressure on interest rates immediately translates into higher fiscal costs.

From a security-structural perspective, the tension between demands for increased defense spending and fiscal sustainability is intensifying. The rise in military spending noted by Le Temps is linked to pressure on NATO members to increase their defense budgets following the war in Ukraine and calls to strengthen deterrence against China in the Indo-Pacific region [14]. Defense spending acts as a dual factor exacerbating the fiscal burden: it is a politically difficult area to cut, and it is also subject to growing demand for AI-related defense procurement.

3. Comparison with Historical Precedents and Similar Cases

The EAI Special Commentary assesses the current debt-to-GDP ratio as "the highest in history, except for the period immediately following World War II" [2]. The figure, which is projected to reach 99.8% of GDP for debt held by the public by the end of fiscal year 2025, is unusual because it has occurred during peacetime, not under a wartime mobilization economy [2]. The commentary notes, "The fact that the debt ratio has approached wartime levels during a period of peace, without a war, is what has ignited the debate" [2].

After World War II, despite a high debt ratio, the United States naturally lowered it over the subsequent decades amid an environment of high growth and relatively low interest rates. This was the result of a long-lasting safety zone where g significantly exceeded r [2]. The current situation is fundamentally different from that period in that this combination is not being replicated. The narrowing of the g-r gap to just one percentage point [2] suggests that the debt-absorbing mechanism of the post-war high-growth era may no longer be functioning.

A comparison with the period just before the 2007 financial crisis also offers insights. The Atlantic Council assesses that the 30-year Treasury yield has reached its highest level since 2007 at around 5.2%, and points out that increased leverage across the financial markets has heightened the potential for a rate hike shock to be amplified [3]. There is concern that, as was the case then, rising interest rates could trigger the exposure of vulnerabilities in a highly leveraged financial system [3]. However, the structure is different: whereas the 2007 crisis originated from private-sector mortgage leverage, the current situation is centered on the borrowing burden of the federal government itself.

4. Key Variables Shaping Future Developments

The first variable is the lasting effect of the Treasury's buyback program. The Treasury officially announced it would double the scale of its buybacks for securities with 10- to 30-year maturities starting September 9 [4][6]. Although the JoongAng Ilbo reported that long-term rates stabilized and risk asset sentiment temporarily revived immediately after the announcement [1], the fact that total debt crossed the $40 trillion threshold the very next day, on August 20 [16], shows that the measure failed to resolve underlying concerns. The market appears to have already recognized the limitation that buybacks are merely a tool for providing liquidity, not a policy to reduce the fiscal deficit itself.

The second variable is the future direction of the r-g gap. As the EAI analysis suggests, if this gap narrows further below one percentage point or inverts [2], the country will enter a phase of self-perpetuating debt growth, regardless of the government's fiscal efforts. This will depend on the future path of the Federal Reserve's interest rate policy and the extent to which capital demand from the AI and defense sectors continues to absorb funds from the bond market [4][15].

The third variable is the stance of foreign investors toward holding U.S. Treasury securities. The structure noted by EAI, where the "debt system cannot be sustained without inflows of foreign capital" [2], means that upward pressure on interest rates could intensify rapidly if the incentives for major creditor nations to purchase U.S. debt weaken. This is the same context in which The Times of India raised the question, "Everyone still trusts the U.S., but for how long?" [11].

The fourth variable is judicial and legislative risk. As seen in the case where tariff refund burdens were added to the fiscal load [14], the fiscal outlook could worsen beyond current scenarios if the Trump administration's tariff policies face further unconstitutional rulings or if the extension of tax cuts is blocked in Congress [13].