US Debt Tops $40 Trillion, Public Holdings $32 Trillion, Deficit Near 6%
The United States' total debt has surpassed $40 trillion, with public holdings reaching $32 trillion, yet markets show no significant panic. The deficit stands near 6% of GDP, above the 3% level economists deem sustainable. Interest payments now consume about 3% of GDP, while potential growth is estimated at 2% or slightly less, complicating debt reduction.
After US debt exceeded $40 trillion, markets have not shown obvious panic. So far, the US debt rating has not been further downgraded, the breakeven inflation rate on inflation-protected bonds has not risen sharply, and the cost of insuring against a federal default has not spiked. Although investors demand higher interest rates, most still regard US Treasuries as essentially risk-free assets.
Of the $40 trillion in outstanding US debt, about $8 trillion is intragovernmental debt, or money the government owes itself, such as funds borrowed from trust funds including Social Security. The remaining roughly $32 trillion is debt owed to public creditors, including individual investors, foreign governments, and the Federal Reserve. Markets typically focus on publicly held debt because it must be financed through financial markets. Currently, publicly held federal debt is equivalent to about 100% of annual GDP.
The US annual fiscal deficit is now close to 6% of GDP, while economists generally consider a level of about 3% more sustainable over the long term. Fiscal deficits typically widen during recessions to support the economy and citizens. But the economy is still growing, and the deficit remains near recessionary levels. The high deficit partly stems from tax cuts and also from rising spending due to an ageing population. Additionally, after tariff policy adjustments, the government's refunds to importers have added fiscal pressure.
From the end of World War II to the late 2010s, overall US economic growth usually outpaced the growth of federal debt, keeping the debt-to-GDP ratio relatively low. But that relationship then changed. Spending in response to the 2007-2009 financial crisis, and the massive fiscal outlays about a decade later to combat the COVID-19 pandemic, both drove rapid growth in US debt. A former chief economist of the International Monetary Fund once argued that as long as the government's borrowing rate is lower than the economic growth rate, debt can be rolled over sustainably. But now, US borrowing costs are no longer consistently below economic growth.
With high deficits, high debt, and high interest rates combined, US interest payments as a share of GDP have risen significantly over the past two decades, reaching about 3%. Currently, the US economy's growth rate in a non-inflationary environment is estimated at about 2% or slightly less, below the level needed to meaningfully reduce debt pressure.