The U.S. Debt Spiral

The Problem Nobody in Government Wants to Touch

June 13, 2025

In early 2025, the U.S. government hit a staggering milestone: it spent more on interest payments than on national defense.

As the leading global economy since World War II, the United States has been a safe haven for global investors for decades. By investing in the United States, through building projects, buying stocks, or storing wealth in treasuries, investors elevated the U.S. dollar to the most widely held and transacted currency in the world.

However, ballooning deficits and growing debt are threatening the U.S.’s reputation as a safe haven for investment. Prices for assets like gold and Bitcoin have surged in recent months, while treasury yields remain elevated, a sign of growing questions about U.S. fiscal health.

The Big Picture: Where We Stand Today

In the 2024 fiscal year, the U.S. government ran a $1.8 trillion deficit — spending $1.8 trillion more than it collected in taxes and other revenues.

When the government runs a deficit, it needs to borrow to fund the additional spending. As deficits pile up, government debt follows. The United States has run increasing deficits since the early 2000s:

Larger deficits are increasing the U.S. Federal Debt
Source: U.S. Treasury

Unchecked deficit spending has pushed the U.S. debt level to all-time highs. The federal government finished the 2024 fiscal year with $36 trillion of debt. This equates to a record 123% of GDP, up from 107% in 2019 and 63% before the global financial crisis. Although GDP has grown steadily since the Great Recession, federal borrowing has far outpaced it.

U.S. Debt has doubled as a percent of GDP since 2000
Source: U.S. Treasury

Why the U.S. Can’t Stop Spending

Why does Washington keep spending at such unsustainable levels?

According to the Committee for a Responsible Federal Budget, ~80% of projected federal spending through 2035 will be driven by three items: Social Security, healthcare programs (mostly Medicare and Medicaid), and interest on the federal debt.1

Social Security, Medicare and Medicaid: These entitlement programs account for the largest share of federal spending. Social Security provides retirement and disability benefits, while Medicare, Medicaid, and other federal health programs provide healthcare benefits to eligible U.S. citizens. As the population continues to age, these programs will further grow in cost. Social Security and Medicare are projected to become insolvent, unable to meet obligations without new revenue, by the mid-2030s.2

The most challenging aspect of addressing entitlements is the political element. It is widely recognized that these programs are unsustainable, but efforts to address them, like cutting benefits or increasing taxes, are politically unpopular. Politicians on both sides continue to kick the can down the road to avoid political backlash.

Rising Interest Costs: One of the most immediate consequences of ballooning debt is growing interest payments. Interest expense is a function of i) total debt and ii) interest rates. Both have surged in recent years, sending interest costs soaring. In 2024, the federal government spent a record $1.1 trillion on interest, double the $551 billion spent in 2020. With rates likely to remain high and deficits expected to grow, interest expense will keep increasing.

Long-Term Consequences

The U.S.'s borrow-and-spend strategy is fueling fears of a debt spiral: as spending grows, the government must borrow to fund the higher deficit. As debt then grows, interest increases, which requires more spending and more borrowing. This creates an unsustainable cycle, where debt service consumes a constantly increasing share of the federal budget.

There are several solutions that could be used to reverse the growing debt, none of which are easy or popular with the public. These include tax increases, significant spending cuts or means-tested entitlement programs.

At the most significant end, no action taken could result in a restructuring, a default which would be the first in U.S. history, or printing money solely to repay the debt, which would massively inflate the currency. Both outcomes have significant negative ramifications for the value of U.S. dollars and treasuries.

Market Signs

Markets are flashing warning signs. Gold has surged, with Bitcoin rising alongside it. This suggests investors are turning away from the historical asset of safety, U.S. treasuries, for non-U.S. alternatives:

Another red flag is stubbornly high treasury yields. Yields reflect the return investors demand for holding U.S. debt. Despite a slowing economy, which would normally push rates down, treasury yields remain elevated.

The 30-Year U.S. treasury is currently trading at a 4.9% yield, the most since 2007. While this is not high relative to historical levels, an increase in yield during a slowing economy is noteworthy. Higher returns are being required for U.S. debt, suggesting that the fiscal situation is weighing on investors.

The Big Debt Question

While the U.S. fiscal situation is stable in the short term, markets are clearly growing uneasy in the form of higher yields and alternative investments.

For investors, the big questions are:

  1. Can the U.S. address its growing debt pile?

  2. What are the consequences if they don’t?

The answers remain unclear. Countries like Japan carry even higher debt loads and remain afloat. However, for the U.S., interest expense is now one of the largest expenditures of the federal government and is likely to keep growing.

It’s difficult to envision a positive outcome if spending and borrowing remain unchecked. If the U.S. doesn’t act soon, markets may force its hand through even higher yields and reduced investment in the U.S.

Ultimately, the question is not if the U.S. debt will need to be addressed, but when.

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