"Debt death spiral" risk intensifies! U.S. federal government debt surpasses $40 trillion for the first time in history, more than doubling in ten years

The scale of U.S. federal debt has hit another historic high. Amid a persistently expanding fiscal deficit and Congress’ ongoing lack of substantial countermeasures, the burden of debt interest is rapidly accumulating, raising market concerns over a possible “death spiral.”

According to data released by the U.S. Treasury on Wednesday, as of Tuesday's close, the outstanding U.S. public debt rose to $40.05 trillion, surpassing the $40 trillion mark for the first time. This milestone comes less than five years after debt broke the $30 trillion threshold in January 2022, with federal borrowing surging by more than a third during that period.

Just hours before the announcement, Treasury Secretary Janet Yellen unveiled an expansion of long-term Treasury buybacks, in an attempt to push down long-end yields that remain near multiyear highs—an element that has been a key driver of rising debt costs. Following the announcement, U.S. Treasury yields quickly fell.

Economists, the Congressional Budget Office, and Wall Street institutions generally forecast that the deficit-to-GDP ratio is unlikely to improve in the coming years, and the trajectory of debt expansion will be hard to reverse in the short term.

According to Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, while the $40 trillion threshold is bound to draw short-term attention, "it does not represent some magical tipping point for debt dynamics—this outcome had already been widely anticipated." He pointed out that the more concerning issue is the sustained rise in Treasury yields, which is continuously driving up the interest costs on a record-high debt load.

Last Thursday, the latest 30-year Treasury auction saw its financing costs hit the highest level in a quarter-century; the 10-year auction a day earlier also saw rates climb to the highest since 2007.

Investors demanding higher yields, in turn, force the Treasury to borrow more, further increasing the debt load, which may prompt investors to demand even higher rates—a cycle referred to as the “death spiral.”

Fiscal year to date, with two months left before year-end, the federal government has already spent $1.17 trillion on interest, up 15% year-on-year. Interest payments have now become the third-largest item in the federal budget, trailing only Medicare and Social Security.

The rapid accumulation of U.S. public debt did not happen overnight. Two key inflection points for surging debt were the global financial crisis and the Covid-19 pandemic—periods when tax revenues plummeted while government rescue spending soared.

According to analysis compiled by Deutsche Bank economists:

• The Bush administration’s early-2000s tax cuts are estimated to have reduced fiscal revenue by $3.3 trillion by the mid-2010s;
• The Trump 2017 tax reform cut revenues by at least $1.5 trillion over its first decade;
• The Iraq and Afghanistan wars cost more than $1.6 trillion by the mid-2010s;
• The Obama administration’s Affordable Care Act remains controversial in its impact, with some estimates adding about $500 billion in debt over its first decade;
• The Biden administration’s 2021 American Rescue Plan Act is projected to add $1.8–1.9 trillion to the deficit over ten years (excluding interest costs).

Yellen promised upon taking office in 2025 to try to reduce the fiscal deficit to about 3% of GDP by the end of Trump’s second term in January 2029. However, as of July this year, the deficit-to-GDP ratio was still as high as 6%, and it is not clear how this goal will be achieved.

Meanwhile, Trump is reportedly preparing new tax cut promises and plans to increase defense spending as he seeks to consolidate support before this November’s midterm elections.

The real effect of expense reductions claimed by the 2025 “Department of Government Efficiency” (DOGE), led by Musk, has also been found by auditors to be exaggerated, with actual savings far below DOGE’s own projections.

The statutory ceiling for U.S. public debt is $41.1 trillion. At the current pace, the government is rapidly approaching this limit. Fitch Ratings estimates that the debt ceiling will be reached by mid-2027, which is expected to trigger another round of partisan standoff and political contention over default risks.

On August 13, Fitch maintained the U.S. AA+ credit rating but also increased warnings about the current borrowing trajectory, noting “the government has yet to take meaningful action to address large fiscal deficits” and warning that as debt levels rise, the U.S. will become more vulnerable to future economic shocks.

Douglas Holtz-Eakin, former director of the Congressional Budget Office and president of the American Action Forum, issued a stern warning in a report Monday: “The federal budget is our internal enemy, the biggest threat to the foundations of economic progress, U.S. international economic standing, and national security. The only optimistic case would be real action to control the ledger—but such action does not exist at present.”

Michael Peterson, president of the Peter G. Peterson Foundation, called for attention: “Hopefully this big number will serve as a wake-up call to all of Washington. If we fail to control our debt, it will undermine Americans’ day-to-day financial resilience and drive up everyone’s mortgage, car loan, and credit card bills.”