The USA has a big problem called National Debt

and it’s not going away any time soon.

The USA is currently sitting with a staggering amount of $34.5 Trillion in debt. But what is this debt and what does it mean:

1. Publicly Held Debt: Debt held by outside investors, including individuals, corporations, and foreign governments. This debt is usually in the form of bonds and debentures.

2. Intragovernmental Holdings: Debt held by various federal government accounts, such as the Social Security Trust Fund.

The big concern is that the current debt is 120% of the total GDP. Due to this staggering amount of debt, Moody’s who is one of the world top credit rating agencies recently downgraded the USA from a AAA rating to a Aa1 rating. Not a massive downgrade but still concerning.

So, what is the credit rating of a country and what does it mean? The credit rating of a country is like your personal credit score. The better your credit score is the more likely you are to get a personal or business loan. Your credit score is also determined by your willingness and ability to repay your current debt. The Same applies to the national debt of a country.

What Drives the Debt?

The US federal debt is the debt made by the US Government and several private institutions. Let’s explore the factors that contribute to the national debt:

1. Mandatory Spending: Programs like Social Security, Medicare, and Medical aid make up the majority of federal spending and are expected to grow as the population ages.
2. Defense Spending: The U.S. maintains the world’s most expensive military, with increasing budgets due to global tensions. Recent geopolitical tension in Asian, Eastern Europe and The Middle East has forced the USA to increase its military spending. Traditionally military spending is much higher under a Republican government than a Democratic government.
3. Tax Policy: The 2017 Tax Cuts and Jobs Act significantly reduced corporate tax revenues. Tax cuts are very well received by individuals but can ultimately hurt the government’s pocket.
4. Interest Payments: Like any loan, interest is due and the longer it takes to repay debt the more interest are accumulated.
5. COVID-era and post-COVID stimulus: Emergency spending packages during and after the pandemic added trillions to the debt.

Who Owns the Debt?

Roughly one-quarter of the debt is held by foreign investors, with Japan and China among the top creditors. This is however very concerning as recent trade wars between the US and other economies have escalated due to higher tariffs being imposed on products exported to the US. Tariffs can be used as a leverage tool in international trade negotiation, but not if you owe your debtors a large sum of money.

The rest is held by domestic investors, mutual funds, pension funds, and the Federal Reserve.

While foreign ownership can create vulnerabilities, especially in times of geopolitical tension, the fact that most U.S. debt is held domestically adds a layer of stability.

Is Debt Dangerous?

This is where the debate intensifies.

Critics argue that national debt poses a long-term threat to the economy.

High debt levels can:

· Crowd out private investment.

· Force higher taxes in the future.

· Reduce fiscal flexibility in times of crisis.

Supporters of more flexible fiscal policy, including proponents of Modern Monetary Theory (MMT), argue that if inflation is under control and the debt is denominated in a currency the government can issue, the risks are overstated. They point to Japan as an example, which has sustained high debt for decades without an economic collapse.

Still, the U.S. faces unique challenges. It is the issuer of the world’s primary reserve currency, and any loss of confidence in its fiscal sustainability could lead to a cascading loss of global trust in the dollar. Seeing that Crypto currency has not fully replaced the US Dollar as a global payment system, this is concerning.

It should not go unnoticed that Christine LaGarde, governor of the European Central Bank (ECB), has recently announced her plans to establish The Euro as the next global reserve currency. With the declining interest in the Pound Sterling, can we see the Euro rise as the next global reserve currency?

So how will this debt be settled?

Solving the debt problem is politically and economically complex. Possible solutions include:

1. Spending Cuts: Trimming entitlement programs are politically risky but may be necessary.
2. Tax Reform: Letting the 2017 tax cuts expire or increasing taxes on high earners and corporations could boost revenue.
3. Economic Growth: Expanding the economy increases the GDP denominator in the debt-to-GDP ratio.
4. Entitlement Reform: Modernizing Social Security and Medicare could provide long-term relief.

Currently no single solution will put an end to the debt problem, a combination of strategies together with a long term political discourse is required. But the sooner the US Government intervenes the better, because once the debt spiral goes out of hand more aggressive and more unpopular measures will have to be taken.

A Global Perspective:

Compared to other nations, the U.S. still retains several advantages: deep capital markets, a strong dollar, and high global trust in its institutions. However, these advantages are not guaranteed forever. As competitors like China push for de-dollarization and global investors diversify, the U.S. may face stiffer borrowing conditions.

What Does the National Debt Mean for Traders?

While the national debt may seem like a distant concern, it has direct and indirect effects on financial markets.

Here’s how:

1. Interest Rates and Bond Yields

As government borrowing increases, especially in a high-interest-rate environment, yields on U.S. Treasury securities tend to rise. This can lead to lower bond prices and make equities less attractive in the long run.

2. Inflation and Currency Value

High debt levels can weaken the US dollar and push up commodity prices. Certain sectors, like energy and raw material, will benefit and other sectors like consumer spending will be negatively affected.

3. Market Volatility from Political Drama

Repeated debt ceiling showdowns, government shutdown threats, or credit rating downgrades can spook markets. Traders should be prepared for short-term volatility and watch key dates for congressional negotiations and treasury reports while considering hedging strategies during high-risk periods.

4. Sector Rotation Opportunities

Fiscal policy changes driven by debt concerns often trigger sector-specific opportunities:

· Defense, healthcare, and infrastructure may gain funding despite cuts elsewhere.

· Financials can benefit from rising interest rates, while growth stocks (like tech) may face pressure.

· Precious metals like Gold, Copper and silver might become very attractive to investors

5. Long-Term Investment Sentiment

For long-term investors, persistently high debt can:

· Lead to lower economic growth if crowding out occurs.

· Result in higher future taxes, impacting corporate profits and consumer spending.

· Raise the risk of a structural shift in global markets if confidence in U.S. debt and the dollar erodes.

Conclusion:

The U.S. national debt is not an immediate crisis, but it is a growing challenge that demands attention. Interest payments are rising, political will is often lacking, and future generations may bear the consequences of today’s inaction. While the U.S. retains a unique position in the global economy, even its privileges have limits. Fiscal responsibility, long-term planning, and bipartisan cooperation will be essential to keeping the national debt from becoming a true economic burden. The clock is ticking, but the tools to manage the situation are still within reach – if the country chooses to use them.