Is America’s $40 trillion debt a problem?

Akshara (0:04)

In today's episode, we'll do one deep dive and cover another story. First, we'll talk about whether America's $40 trillion debt is a problem, and then we'll talk about India getting closer to satellite Internet.

Welcome back to The Daily Brief by Zero Da, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Tuesday, 15th September. Before we begin, our latest episode on Subtext is with Arvind Chari, Chief Investment Officer at Q India UK.

We speak to him about how foreign investors see India, especially as India experiences an outflow of foreign capital. It also covers why India keeps getting slotted into investment teams, it doesn't fit, what the country's actual growth rate has been since 1980, and why that number has barely moved through so many events in our history, the arithmetic of the capital gains tax on foreign investors, why Indian corporates aren't building factories, and much more. The link to the episode is in the description below. Coming to the first story.

So the US government crossed a historic milestone in August. Its total federal debt passed $40 trillion for the first time. Now a number that humongous brings a whole lot of doom and gloom and wild theories that US bankruptcy is coming, that the dollar is finished and so on. And it seems to happen every time US debt hits a big milestone. Now people have been making the same prediction since the 1980s. Yet here we are in 2026 and the US is still around. It still has the world's largest economy in dollar terms and one of the most innovative ones. And the dollar is still the world's main reserve currency. And there's no debt crisis in sight. Still, if US debt keeps climbing, it's natural to ask how long this can go on. Is there a breaking point where interest costs spiral out of control and the whole house of cards comes crashing down?

Now there's no single universal metric and not even the debt to GDP ratio. So when the IMF checked its own debt warning system, it found the warning thresholds were poor at predicting trouble. And another IMF study found little evidence for the magic ratio beyond with growth falls off a cliff. But that doesn't mean America's debt is entirely harmless. The Congressional Budget Office projects that debt held by the public will rise from 99% of GDP at the end of 2025 to 120% by 2036, and it calls that path unsustainable. Now public debt is complicated, to say the least, and one Daily Brief can't cover all of it. We are not selling doom or reassurance. Just a few things to watch. Now there's one important distinction. The $40 trillion headline is gross federal debt, which includes money the government owes itself, like the IO use held by the Social Security Trust Funds. Take those out and you get debt held by the public, about $32.3 trillion that day. That's the number CBO watches most because it's the borrowing that competes for money in markets. So let's start with the most common measure used to check debt sustainability, the debt to GDP metric. At the end of fiscal year 2025, debt held by the public was about 98% of GDP, which is roughly a year of everything the US economy produces. Now that sounds scary, but this metric is misleading in one crucial manner. Debt piles up over years, while GDP is one year's output. It's like comparing your home loan with your annual salary. That tells you how big the loan is, and not whether you can afford next month's EMI. Now, economist Jonathan Burke and Jules Van Binsbergen go further. For debt to GDP to mean anything over time, debt and GDP need to be tied together, like a man and his dog on a leash. Both can wander, but not too far apart. And economists call this cointegration. Burke and Binsbergen argue that the leash probably isn't there because growth and interest rates have shifted so much over the decades. And without that leash, a rising ratio doesn't tell you how close you are to a crisis. Now, that's not to say that debt to GDP doesn't matter. But it's only one way of looking at debt, and its value as a measure of a country's debt sustainability only holds under certain conditions. Another important measure of debt sustainability is managing interest payments on old debt. After all, what debt costs depends on how much you owe and the rate you pay. So, a big home loan at a low rate can come with a much smaller EMI than a much smaller loan at a high rate. Now, in a recent paper, Barry Iton-Green, Maxime Manue, and Gregory Dona looked at data for 12 advanced economies, including US data going back to 1800 They focused on the primary balance, which in simple terms is the government's budget before interest. So, a primary surplus means taxes are enough to cover spending. And they found that governments tend to run tighter budgets when their interest bill is high. Once you account for that interest bill, the size of the debt itself tells you very little. Now, this isn't proof that rising interest costs force governments to act, and the authors say so themselves. In the US since 1913, the pattern shows up mostly in the cleanups after big wars. But it's another way of thinking about the problem. Not how big the debt is, but what it costs to carry.