The United States national debt recently surpassed $36 trillion, marking the highest level in history and showing no signs of slowing. Alarmingly, the time it takes for the U.S. to accumulate each additional trillion dollars is decreasing, nearing just 100 days. Since 2020, the debt has grown from $24 trillion to $36 trillion—a staggering 50% increase in less than five years.
Projections from the Congressional Budget Office (CBO) reveal that federal debt will continue to grow exponentially, even under conservative estimates. These projections do not account for potential emergencies, wars, or natural disasters, which could further accelerate debt growth.
How the Debt Has Reached This Point1
The U.S. government faces a significant spending problem, with annual deficits exceeding $1 trillion over the last five years. In 2024, government entitlements exceeded $5 trillion, while tax receipts fell short. These entitlements are mainly promises already made which will have a difficult time getting reduced compared to other spending categories. Those entitlements are as follows:
- Social Security: $1.448 trillion
- Interest Payments: $949 billion
- Medicare: $870 billion
- Defense Spending: $826 billion
- Medicaid: $618 billion
- Veteran Affairs: $325 billion
Even eliminating all other expenses would still leave the U.S. with a deficit. Reducing spending in discretionary areas, such as administrative costs and interest payments, is critical but will likely be insufficient on its own.
Historical Lessons and Potential Strategies
Countries with high debt-to-GDP ratios, such as the U.S. (currently at 120%), face challenges in reducing their debt without causing economic instability. Historical examples offer insight into possible strategies:
- Austerity: Reducing government deficits through spending cuts and tax increases. While this approach can stabilize finances, it often leads to slower economic growth, higher unemployment, and public unrest, as seen in post-2008 Greece.
- Default: Halting or restructuring debt payments, as Argentina did in 2001. Although it provides immediate relief, it damages a country's credibility and increases future borrowing costs.
- Higher Real Growth than Inflation: Growing the economy faster than inflation to lower the debt-to-GDP ratio. The U.S. successfully employed this strategy after World War II through strong economic growth and moderate inflation. However, achieving such growth requires significant structural reforms and investments.
- Hyperinflation: Eroding the real value of debt by printing excessive money. While this reduces debt, it devastates savings, destabilizes the economy, and undermines public trust in currency, as seen in 1920s Germany.
- Financial Repression: Keeping interest rates below inflation, forcing institutions to purchase government bonds, and gradually reducing debt. This was a key strategy in the U.S. post-WWII era and remains a viable option today.
The U.S. could replicate its post-WWII approach by fostering economic growth, maintaining low real interest rates, and exercising fiscal discipline. However, achieving these goals requires careful balancing to avoid severe economic and social disruptions.
Lessons from Japan2
Japan, with a debt-to-GDP ratio exceeding 400%, provides a cautionary tale. Over the past 30 years, Japan has struggled to address its debt burden, using yield curve control (YCC) to keep bond yields low and promote growth. However, this strategy devalued the yen, reducing Japanese consumers' purchasing power by over 50% globally since 2012.
Japan’s experience highlights the risks of excessive debt issuance and the potential consequences of currency devaluation. As the first developed nation facing such a debt crisis in modern times, Japan serves as a bellwether for global markets.
Looking Ahead
Reducing the U.S. debt burden will likely require a combination of strategies, including austerity, policies to spur economic growth, and financial repression. Efforts to curb government spending through initiatives like the Department of Government Efficiency (DOGE) and fostering an AI-driven economic revolution may also play a role.
The growing cost of entitlements remains a critical challenge, and addressing these obligations will be essential to achieving long-term fiscal sustainability. As the global economy evolves, monitoring how countries manage their debts and the resulting market reactions will be vital in navigating this unprecedented debt era.
For a more in-depth discussion, take a look the long read article, The Growing Debt Debacle.
1https://www.cbo.gov/publication/60843/html
2https://www.firstlinks.com.au/uploads/newsletters/2025/Firstlinks_Edition_595_24012025.pdf - (Russel Napier interview transcription with The Market NZZ’s Mark Dittli)