How can the US function with enormous debt, and is this sustainable?
"Local time March 20 – US Treasuries experienced another massive sell-off. The yield on the 10-year US Treasury note suddenly spiked, approaching 4.39% at the time of reporting, an increase of over 3%.
US 10-year Treasury yield spikes
As US Treasuries fell, bond traders increased their bets, with the probability of a Fed rate hike by October now estimated at 50%, driven by concerns that a prolonged war in the Middle East could push up global inflation. Additionally, short-term interest rate futures are pricing in expectations of a potential rate hike by the Federal Reserve in December.
Analysts pointed out that the added uncertainty from the Middle East conflict has heightened traders' concerns, as a surge in energy prices could exacerbate inflation while also putting downward pressure on the economy.
Gennadiy Goldberg, Head of US Rates Strategy at TD Securities, stated: "With the escalating and prolonged conflict involving Iran, the Treasury market is clearly concerned about further inflationary pressures. The market is no longer pricing in rate cuts for 2026 but is beginning to price in a certain probability of rate hikes, which is driving yields sharply higher."
US national debt surpasses $39 trillion, monthly interest payments reach $90 billion
Data released by the US Treasury Department on March 18 showed that as of March 17, the total federal debt had exceeded $39 trillion. Analysts project that before the midterm elections this fall, the US national debt will surpass $40 trillion.
Budget watchdog groups and economists agree that the pace of US debt accumulation is "unsustainable" and that the country is "clearly moving in the wrong direction."
In recent years, the US debt has grown rapidly. In July 2024, the debt surpassed $35 trillion, then exceeded $36 trillion in November of the same year, crossed $37 trillion in August 2025, and topped $38 trillion just two months later. Currently, the total debt has exceeded $39 trillion, just about five months after first reaching $38 trillion in late October 2025.
Michael Peterson, CEO of the Peter G. Peterson Foundation, estimated that at the current pace, the national debt will hit a "staggering" $40 trillion by the time of the midterm elections this fall. The foundation noted that the latest $1 trillion increase occurred in less than five months—a pace of fiscal expansion unprecedented in modern US history outside of wartime or major financial crises.
US national debt grows by $4.8 million per minute
According to an infographic on the Peter G. Peterson Foundation's website, the US national debt increases by $4.8 million per minute, $288 million per hour, and $6.9 billion per day. (Source: CCTV News)
The Peter G. Peterson Foundation stated that the US fiscal situation has deteriorated to "the worst among its peers." Meanwhile, Fortune magazine pointed out that the most concerning aspect is the enormous cost of simply servicing this debt. It is estimated that in fiscal year 2026 (October 1, 2025, to September 30, 2026), net interest payments on the national debt will exceed $1 trillion. In the first three months of fiscal 2026 alone, net interest payments reached $270 billion, surpassing defense spending for the same period. On average, monthly interest payments amount to $90 billion—enough to build eight of the most advanced Ford-class nuclear-powered aircraft carriers (each costing approximately $11 billion) or 900 F-35 fighter jets (each costing about $100 million).
This sustained fiscal burden will be exceptionally heavy: over the next 30 years, the US government is expected to pay nearly $100 trillion in interest alone—a figure exceeding any major federal program. Michael Peterson remarked: "Interest payments are the fastest-growing 'item' in the federal budget."
For the average American, interest costs over the next decade will amount to at least $47,000 per person. A survey found that 90% of Americans believe the rising debt is driving up the cost of living and leading to higher borrowing costs."
1. The US Debt Situation
Based on the news report shared at the start of the conversation, the US national debt has surpassed $39 trillion, with interest payments reaching $90 billion per month—more than the defense budget. The 10-year Treasury yield jumped to 4.39%, and traders priced in a 50% chance of a Federal Reserve rate hike by October 2026, driven by inflation concerns linked to Middle East tensions.
The central question explored was: How can the US function with such enormous debt, and is this sustainable?
2. Why the US Can Function Despite High Debt
Several structural advantages allow the US to sustain high debt levels:
The dollar's "exorbitant privilege": As the world's reserve currency, there is constant global demand for US Treasuries. Foreign central banks, sovereign wealth funds, and private investors hold dollars because the US financial system is the deepest and most liquid in the world.
Debt composition: The US borrows in its own currency. Unlike a country such as Argentina or Turkey, which borrow in foreign currencies (like US dollars) and face default risk when their currency depreciates, the US can always create dollars to meet its obligations.
Rollover model: The US does not need to pay off the $39 trillion principal. It simply issues new bonds to pay off maturing ones. As long as investors continue buying, the system continues functioning.
Domestic ownership: A significant portion of US debt is held by American citizens, pension funds, and the Federal Reserve itself. When the Fed holds Treasuries, the interest payments flow back to the US Treasury after operating costs, creating a circular flow.
Example: In the 2008 financial crisis and the 2020 pandemic, the Fed became the "buyer of last resort" for Treasuries, ensuring that government auctions did not fail. This backstop function is unique to countries that control their own currency.
However, limits exist: rising interest rates increase the cost of servicing debt. If the 10-year yield stays at 4.39% or rises further, annual interest costs could exceed $1.5 trillion, crowding out spending on defense, infrastructure, and education.
3. The Distinction Between Fed Rates and Bond Yields
A common point of confusion was clarified:
The Fed Funds Rate is the short-term rate set by the Federal Reserve for overnight lending between banks. It directly affects credit cards, home equity lines of credit (HELOCs), and short-term business loans.
The 10-year Treasury yield is set by the bond market and reflects long-term expectations for inflation, growth, and fiscal policy. It directly affects 30-year mortgage rates and corporate borrowing costs.
Why they often move in opposite directions:
Example: In 2024 and 2025, the Fed cut the Fed Funds Rate by 1.75% (175 basis points) to support the economy. Yet the 10-year Treasury yield rose by 0.60% (60 basis points). Why? The market looked past the cuts and feared that future inflation—driven by deficit spending and geopolitical shocks—would erode the value of long-term bonds. Investors demanded higher yields to compensate.
Example: Conversely, during the 2008 financial crisis, the Fed cut short-term rates to near zero. The 10-year yield fell because investors expected a deep recession and believed the Fed would keep rates low for years. In that case, the market agreed with the Fed's direction.
4. How Bonds Work: Price, Yield, and Holding
Bond mechanics were explained with concrete examples.
The coupon is the fixed interest payment set when the bond is issued.
The yield is the effective return based on the price paid today.
Bond prices move inversely to yields and change every trading day.
Example: If an investor buys a 10-year Treasury with a 2% coupon (issued in 2020) at a price of $820 for a $1,000 bond, the yield-to-maturity might be 4.39%. This yield comes from collecting the $10 semi-annual coupon payments plus the $180 gain when the bond matures at $1,000.
Example: If interest rates rise after purchase—say the Fed hikes rates and new bonds offer 5%—the investor's bond paying a lower coupon becomes less attractive. To sell it early, the investor would have to accept a lower price (a discount). If rates fall, the investor could sell at a premium for a profit.
Investors are not required to hold bonds to maturity. They can sell on the secondary market at any time, but the price received depends on market conditions at that moment.
5. Why Nations Hold Reserves and Why the US Holds Minimal Reserves
The conversation explored why reserve strategies differ.
The US holds minimal foreign reserves (approximately $40-50 billion) because the dollar is the world's reserve currency. The US does not need to stockpile foreign currencies; instead, the world stockpiles dollars.
Example: When Japan or China earn dollars through exports, they do not hold them as cash. They invest them in US Treasuries, which are considered the safest asset in the world. This creates a built-in market for US debt.
Other nations hold large reserves for three reasons:
Exchange rate stability: A central bank can use reserves to buy its own currency during speculative attacks, preventing collapse.
Crisis buffer: Reserves ensure a country can pay for imports (oil, food, medicine) even if foreign capital flees.
Confidence signal: Large reserves signal to international investors that the country can weather shocks, lowering borrowing costs.
Example: During the Asian Financial Crisis (1997-1998), Thailand and Indonesia had insufficient reserves. When speculators attacked their currencies, they could not defend them, leading to IMF bailouts and deep recessions. After that crisis, many emerging economies built large reserve buffers to avoid relying on the IMF.
6. Japan's 250% Debt-to-GDP: Why It's Not a Crisis
Japan's gross debt of 235-250% of GDP appears catastrophic, yet Japan continues to function. The explanation lies in several factors.
First, net debt matters more than gross debt. The Japanese government owns approximately 134% of GDP in financial assets—including the world's largest public pension fund and significant foreign reserves. After subtracting these assets, Japan's net debt is around 119-134% of GDP, comparable to the United States.
Second, ownership structure is critical. Roughly 85-90% of Japanese government bonds (JGBs) are held domestically. The Bank of Japan (BOJ) alone owns about 50% of all JGBs. When the government pays interest to the BOJ, the BOJ returns those profits to the national treasury, making the effective interest cost on half the debt essentially zero.
Example: Westpac estimated that because the BOJ holds roughly half of outstanding JGBs, almost half of the government's interest outlay flows back to the government, making the debt "fiscally neutral."
Third, Japan runs a current account surplus. Japan earns more from exports and foreign investments than it pays out, providing a natural source of domestic savings to fund government debt.
Fourth, interest costs remain low. Despite the headline 10-year JGB yield reaching 2% in 2026 for the first time in decades, the average interest rate on Japan's total debt stock remains around 1% because most bonds were issued during years of near-zero rates.
Key lesson: Gross debt alone is a misleading indicator. Ownership structure, net assets, interest costs, and current account dynamics determine sustainability.
7. China's Debt and Reserve Strategy
China's position was examined in detail.
Government debt: Official central government debt is around 60-70% of GDP—much lower than the US or Japan. However, hidden local government debt (off-balance-sheet borrowing through Local Government Financing Vehicles, or LGFVs) adds significant risk. Estimates of total local debt range from $5 trillion to $10 trillion.
Reserves: China holds $3.88 trillion in total reserves, the largest in the world. The breakdown is:
| Asset | Amount | Percentage |
|---|---|---|
| Foreign currency | $3.43 trillion | 88% |
| Gold | 2,308 tonnes (~$37.2 billion) | ~1% |
| SDRs & IMF position | $67 billion | ~2% |
Why China's debt model differs from the US:
Only about 2% of China's government debt is held by foreign investors. This means no reliance on foreign confidence and no risk of foreign investors dumping bonds.
China runs a current account surplus (projected at 4.3% of GDP in 2026), providing domestic savings to fund government needs.
Capital controls prevent speculative runs on the currency. The renminbi is not fully convertible, insulating China from the kind of "hot money" outflows that triggered crises in emerging markets.
Example: When the property developer Evergrande collapsed in 2021 with over $300 billion in liabilities, Beijing directed state banks to extend loans and restructure obligations. The crisis was contained without contagion spreading to the broader financial system—a level of control not available to the US, where the Fed and Treasury operate independently.
8. Gold's Role: Why $37 Billion Matters
A critical question emerged: If China's gold holdings are only $37.2 billion out of $3.88 trillion in reserves (less than 1%), how can this provide strategic autonomy?
The answer lies in understanding what gold represents, not its percentage of total reserves.
Gold is the only asset with no counterparty risk. A US Treasury bond is an IOU from the US government. If the US imposes sanctions (as it did on Russia in 2022), foreign-held Treasuries can be frozen or seized. A gold bar held in a domestic vault cannot.
Example: In 2022, the US and its allies froze over $300 billion in Russian central bank assets held in Western financial institutions. For central banks in China, India, and the Gulf states, this was a watershed moment. Reserves held in dollars in New York or London could be weaponized. Gold could not.
China's gold holdings—2,308 tonnes—are the 6th largest in the world, behind the United States (8,133 tonnes), Germany, the IMF, Italy, and France. The percentage appears small only because total reserves are enormous.
China has been buying gold for 16 consecutive months as of March 2026, and analysts estimate there is "substantial room for continued accumulation." The gap between China's gold share (9.7%) and the global average (15%) represents a strategic roadmap.
Many analysts believe China's true gold holdings are understated. State-affiliated entities—policy banks, state-owned enterprises, and other government vehicles—may hold additional gold not reflected on the PBOC's balance sheet.
Example: If China's true gold holdings were even 20-30% higher than reported, the strategic calculus changes entirely. A few hundred billion dollars worth of gold is sufficient to:
Settle critical imports (oil, gas, food) during a crisis
Back a payments system (digital yuan, gold-linked settlement) that bypasses SWIFT
Provide confidence to trading partners to accept renminbi
The strategic goal is not to replace dollars with gold, but to have enough gold to pivot during a crisis—and to deter that crisis from happening in the first place.
9. How Gold Protects a Nation During a Financial Crisis
The conversation addressed whether gold, as a non-yielding asset, can genuinely protect a nation.
Gold functions as monetary insurance. In normal times, it sits on the balance sheet earning no interest. In a crisis, it becomes invaluable.
| Scenario | Without Gold | With Gold |
|---|---|---|
| US debt spiral or default | Foreign reserves held in US Treasuries collapse in value. The nation loses its wealth. | Gold held in domestic vaults is unaffected. It retains global purchasing power. |
| Hyperinflation of the dollar | The purchasing power of dollar reserves evaporates. | Gold is priced in dollars. As the dollar collapses, the gold price soars, preserving real wealth. |
| Sanctions (like Russia 2022) | The nation's Treasury holdings are frozen. It cannot access its own money. | Gold is outside the US financial system. It cannot be frozen. The nation still has liquid assets. |
Example: After Russia's reserves were frozen, the Russian central bank began buying gold aggressively and announced that gold would be purchased at a fixed price in rubles. This created a de facto gold-backed floor under the ruble, stabilizing the currency despite sweeping sanctions.
10. The Shifting Global Reserve Landscape
The conversation concluded with an examination of broader trends.
The US dollar's share of global reserves has declined from 72% in 2001 to below 57% today. This is not a collapse, but a slow erosion.
Central banks are diversifying into gold. The World Gold Council reports that 77% of central banks intend to increase gold holdings over the next twelve months—the highest level of intent ever recorded.
Gold price projections reflect this structural shift:
| Institution | Price Target (end 2026) |
|---|---|
| Goldman Sachs | $4,900/oz |
| JPMorgan | $6,300/oz, with potential path to $8,000 |
| BMO Equity Research | $6,500/oz |
Why gold is rising despite high interest rates: JPMorgan and other banks note that gold is "decoupling" from traditional drivers. Historically, gold fell when rates rose (because holding gold carries no yield). Today, gold is rising because central banks are buying for strategic reasons—not for profit, but for security. This demand is price-insensitive and structural.
Summary Table: US vs. Japan vs. China
| Metric | United States | Japan | China |
|---|---|---|---|
| Gross Debt / GDP | 121-123% | 235-250% | 60-70% (central govt) |
| Net Debt / GDP | 100-119% | 119-134% | N/A |
| Foreign Holders of Govt Debt | ~30% | 10-14% | ~2% |
| Current Account | Deficit | Surplus | Surplus |
| Total Reserves | $40-50 billion | $1.2 trillion | $3.88 trillion |
| Gold Holdings (tonnes) | 8,133 (1st) | 846 (8th) | 2,308 (6th) |
| Gold as % of Reserves | ~76% | ~5% | ~1% (official) |
| Key Vulnerability | Foreign confidence, interest costs | Demographics, rising rates | Hidden local debt, property sector |
Final Observations
The US can sustain its current debt because of structural advantages no other nation possesses: the reserve currency, the deepest capital markets in the world, and the ability to borrow in its own currency. But these advantages are not permanent. Rising interest costs, declining foreign confidence, and political dysfunction are the cracks in the foundation.
Japan demonstrates that high gross debt is survivable when ownership is domestic, net assets are substantial, and interest costs are contained. The headline 250% number is deeply misleading without understanding the structure beneath it.
China demonstrates that control—over currency, capital flows, and the banking system—can insulate a country from external shocks. The trade-off is hidden local government debt and a property sector crisis that Beijing manages rather than resolves.
Gold, for all its seeming antiquity, has re-emerged as the ultimate strategic asset in a world where trust in paper is eroding. The 2022 freezing of Russian reserves taught central banks that dollars in New York can be weaponized. Gold in domestic vaults cannot. China's consistent monthly gold purchases—16 months and counting—reflect a strategy of accumulating the one asset that no foreign government can freeze, seize, or default upon.
The timeline for a US debt crisis is not tomorrow. The pressures are structural, not immediate. But as the Congressional Budget Office and International Monetary Fund both warn, the longer action is delayed, the fewer options remain and the more painful the adjustments become.
Disclaimer: This report is AI generated and based on publicly available information and analytical estimates. It does not constitute financial advice. Investors should conduct their own due diligence and consult with financial advisors before making investment decisions.
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