The United States has crossed a striking financial milestone, with its national debt exceeding $40 trillion. The figure is large enough to trigger concern, but it does not mean the world’s largest economy is running out of money or is on the verge of bankruptcy.
In fact, the United States has deliberately used borrowing for generations to finance government operations, respond to economic crises, invest in the economy and maintain its position as a global financial power.
The real question is not simply why America has debt despite being wealthy, but whether the country is borrowing at a pace it can continue to sustain.
Why does the US borrow?
The US government spends more money than it collects in taxes and other revenues in many years. To cover the difference, the Treasury sells government securities such as Treasury bills, notes and bonds to investors.
That borrowing allows Washington to finance programmes and obligations without having to collect all the money upfront. The US Treasury itself notes that national borrowing enables the federal government to fund programmes and services even when sufficient revenue is not immediately available.
Government borrowing can therefore be useful.
During recessions, for example, borrowing can help the government maintain spending when businesses and households are cutting back. It can also finance infrastructure, defence, healthcare, education and other programmes.
Borrowing has also allowed the US to respond aggressively to extraordinary events, including wars, financial crises and economic emergencies.
America gains something from its debt
One of the biggest advantages of US borrowing is the enormous demand for Treasury securities.
US government bonds are regarded as among the world’s most important and liquid financial assets. They provide investors, banks, pension funds and governments with a relatively secure place to hold money.
This gives Washington a major financial advantage: it can borrow on a scale that most countries cannot easily match.
The Treasury market also plays a central role in the global financial system. Treasury yields influence borrowing costs throughout the American economy, including mortgage, automobile and business loans.
In other words, America’s debt is not simply money that has disappeared. Much of it represents financial assets owned by investors.
So why shouldn’t Americans panic?
The $40 trillion figure sounds frightening because it is difficult to comprehend. But the size of the debt alone does not determine whether it is sustainable.
A better question is how the debt compares with the size and strength of the US economy, the government’s revenues and the country’s enormous stock of private wealth.
America has a huge economy, a sophisticated financial system and substantial household and corporate wealth. It also issues the dollar, the world’s dominant reserve currency.
That gives the US greater borrowing capacity than an ordinary household or a country that borrows heavily in another nation’s currency.
This is why comparing the federal government to a family with a $40 trillion credit-card bill is misleading.
A household cannot issue the world’s principal reserve currency, collect taxes from hundreds of millions of people or sell Treasury securities to investors around the world.
But the debt is not harmless
Not panicking does not mean ignoring the problem.
The biggest danger is that debt continues rising while interest rates remain high.
When the government borrows more money, it must eventually pay interest to investors. As interest costs increase, more federal revenue goes towards servicing existing debt rather than funding new programmes or investments.
Higher Treasury yields can also raise borrowing costs for ordinary Americans because mortgage, auto and other interest rates are influenced by Treasury yields.
That means Americans can feel the consequences of government borrowing without receiving a bill labelled “national debt”.
Wealth gives America room—but not an unlimited licence to borrow
America’s enormous private wealth is an important reason why the $40 trillion figure should not automatically produce panic.
The country owns vast amounts of property, businesses and financial assets. The argument advanced by some economists is that judging America’s financial position solely by comparing debt with one year’s GDP ignores a substantial part of the country’s balance sheet.
But wealth cannot be treated as a blank cheque.
The government cannot simply seize Americans’ houses, retirement accounts or businesses to pay the national debt. What matters is whether policymakers can generate sufficient revenue and economic growth to service the debt without damaging the economy.
The real warning sign
The most important issue is therefore not that the US has reached $40 trillion in debt.
It is how quickly the debt is growing and how much it costs to service it.
Recent reporting has highlighted growing concern about persistent federal deficits, rising interest costs and higher Treasury yields.
If investors eventually demand substantially higher interest rates to lend to Washington, the consequences could spread throughout the economy.
The government would face larger interest bills. Businesses could face higher borrowing costs. Mortgage rates could rise. Investment could slow. And future taxpayers could face difficult choices involving higher taxes, spending reductions or both.
A debt crisis is not inevitable
For now, the $40 trillion milestone should be viewed as a warning rather than a reason for immediate panic.
America has enormous economic and financial advantages that make its debt fundamentally different from the debt of a struggling household or heavily indebted developing country.
But those advantages should not be abused.
The United States can afford to borrow. The bigger question is whether Washington can eventually bring spending, taxation and economic growth into a more sustainable balance.
The lesson for Americans is therefore simple: don’t panic over the $40 trillion headline—but don’t ignore what is happening behind the number either.
Debt can be a powerful economic tool when used to finance productive investment or protect the economy during difficult periods. It becomes dangerous when governments borrow simply to postpone difficult decisions and allow interest costs to consume an increasing share of public resources.
America’s wealth gives it considerable room to manage its debt yet wealth is not the same thing as unlimited borrowing capacity.
