US Debt Dynamics Shift Amid Rising Global Interest Rates

The US government's debt dynamics have changed over the years. From World War Two until the late 2010s, the economy grew faster than federal debt, keeping borrowing contained relative to the nation's output of goods and services. However, this relationship began to shift due to the spending used to counter the 2007-2009 financial crisis and the COVID-19 pandemic roughly a decade later.

The sweeping tax cuts pushed by President Donald Trump and passed by the Republican-controlled Congress in his first and second terms exacerbated the deficits, adding to the total debt pile. Deficits are now at recession levels, even as the economy grows. This is partly due to Trump's tax cuts but also tied to the hard-wired growth in spending on an aging population.

The US crossed the $40 trillion debt milestone last week, with about $8 trillion of that owed to itself, representing money borrowed from various trust funds, including Social Security and the disabled. The remaining $32 trillion is owed to public creditors, including individuals, foreign governments, and the Federal Reserve. Those public debts now amount to roughly 100% of annual GDP.

While other nations have lived with far higher debt-to-GDP ratios, the US has certain advantages as the issuer of the world's main reserve currency. However, no one can know for certain where the tipping point is in terms of market perceptions of what's sustainable.