Last week, the US national debt topped $US39 trillion ($55.6 trillion). Sometime later this year it will surpass $US40 trillion. It’s spiralling out of control.
The accelerating blowout in gross government debt – it went from $US38 trillion to $US39 trillion in 71 days – has occurred even before the cost of returning the $US175 billion of revenue from tariffs that the US Supreme Court deemed illegal, or the $US2 billion or so a day that the war in Iran is costing, are taken into account.
A US government deficit for this US financial year (the US financial year ends on September 30) that was supposed to come in around $US1.9 trillion appears near-certain to top $US2 trillion, while the interest bill on the national debt will comfortably exceed $US1 trillion.
The explosion in debt is occurring even as the Trump administration is facing a deluge of maturing debt.
The US Treasury secretary, Scott Bessent, has doubled down on the strategy of his predecessor in the Biden administration, Janet Yellen, who increasingly issued short-term debt to take advantage of the lower interest rates on Treasury bills (which mature within 12 months) and notes (two-year securities).
The loading up on Treasury bills has left the US confronting a $US10 trillion-plus wall of maturing debt this year, even as the yields on those short-term securities have been climbing.
Since the assaults on Iran began, for instance, the yield on T-bills has jumped from 3.48 per cent to 3.81 per cent and that on the two-year notes from 3.38 per cent to 3.9 per cent.
The average interest rate on US government debt is, according to the Congressional Budget Office, 3.4 per cent, so each dollar of maturing debt that is rolled over will raise the average rate paid and therefore the administration’s interest bill.
The government’s position, already disturbing, should worsen. A significant amount of the debt was raised during the pandemic years, when US interest rates were below one per cent. That debt, with five, seven and 10-year maturities, is progressively maturing and therefore its cost will increase sharply.
It’s not just existing debt that the government has to finance, of course.
With a budget deficit of $US2 trillion-plus this year and, according to the Congressional Budget office, rising towards a deficit of more than $US3 trillion by 2036 (on numbers that didn’t include tariff refunds or the war in Iran) there’s new debt to be issued and serviced. The CBO also hadn’t factored in the special appropriation of $US200 billion that the administration has sought from Congress to fund the war.
This deterioration in the US fiscal position matters, not just for the US government’s finances, but for the rest of the world because the US bond market influences global interest rates. The US 10-year bond yield (which has risen from 3.94 per cent to 4.38 per cent since the war erupted) is the benchmark for the global pricing of financial assets.
If the combination of the increase in US government debt and the amount of maturing debt that has to be rolled over continues to accelerate and push up US yields, it will flow through to global discount rates that are used to price both physical and financial assets – it will be reflected in share prices and the value of the underlying businesses and their cash flows and assets.
According to Donald Trump, it wasn’t supposed to be like this.
During his 2016 election campaign he promised to eliminate US government debt within eight years. At the time the debt was just under $US20 trillion.
Instead, by the end of his first term he had added $US8.2 trillion, lifting the total to $US28.4 trillion. Joe Biden then added $US7.1 trillion of his own, so Trump started his second term with $US35.5 trillion. (Both Trump, Mark I, and Biden, had to deal with the pandemic and its aftermath, so there’s an excuse for some of the increased spending that underlay the increase in debt).
Trump’s second term has, however – in only 14 months – seen the debt load expand by about $US250 billion a month (despite the inclusion of the tariff revenues that now have to be refunded).
At this rate, leaving aside the costs of the assault on Iran, and the tariff refunds, and the increased cost of the maturing debt, the government’s debt will break through $US40 trillion by September and be above $US41 trillion by the time Trump celebrates his second year in office.
At that halfway mark of his second term as president he would have added more than $US6 trillion to the national debt.
So much for Bessent’s much vaunted (by Bessent) 3-3-3 economic strategy.
Bessent was targeting 3 per cent growth in US GDP (it’s tracking at an annualised rate of between about 2.2 per cent and 2.4 per cent), a budget deficit of 3 per cent of GDP (it’s running at more than twice that rate) and an increase in energy production of the equivalent of 3 million barrels a day.
US oil production has been at record levels, about 400,000 barrels a day above 2024 levels, but gas production has fallen by the oil equivalent of about 2 million barrels a day.
More particularly, the energy target was supposed to deliver lower fuel costs for companies and consumers, lower inflation and interest rates and help drive higher economic growth.
Fuel prices had edged down marginally over the first 12 months of Trump’s return to the White House, but have soared since the attack on Iran, jumping almost $US1 a gallon for petrol and more than $US1.50 a gallon for diesel.
The long-term threat to US financial stability of its mounting government debt levels looks even darker when the $US80 trillion or so (and mounting) of unfunded liabilities in the US social security and Medicare systems are taken into account.
The $US120 trillion or so of liabilities that have to be funded and serviced limit US fiscal flexibility and its ability to respond to an economic downturn or another financial crisis.
In the past two recessions the gross government debt rose from about 60 per cent of GDP to 100 per cent (in response to the 2008 financial crisis) and from about 102 per cent to about 120 per cent (the pandemic).
According to Donald Trump, it wasn’t supposed to be like this.
That ratio is now about 124 per cent, without any crisis to justify it, which will constrain the options available to a future administration to respond to threats to economic or financial stability.
If the government debt held by the Federal Reserve Board and other agencies is excluded, the net debt in circulation is still about $US31.3 trillion, or roughly 100 per cent of US GDP.
The interest cost challenge facing the administration as a result of the blow-out in its spending, which largely relates to the One Big Beautiful Bill Act’s tax cuts and spending increases that passed last year, explains why Trump has been so adamant, and aggressive, in insisting the Fed cut US interest rates.
It also explains why the rest of the world is nervous about the administration gaining control, or undue influence, over the Fed’s monetary policies.
Overseas investors are wary of US interest rates and the value of their US investments being driven by America’s fiscal instability rather than by the Fed’s dual mandate of controlling inflation and maximising employment.
At the rates the debt and other liabilities are growing, however, at some point, unless there’s a significant change either in the trajectory of the debt or a sustainable surge in GDP growth, investors are going to regard America’s government finances as unsustainable and America uninvestable.
That would have implications, none of them pleasant, not just for America, but for the rest of the world, too.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
