There has been a lot of talk lately about the rise in U.S. debt, and rightly so. This year alone, it has increased by more than $2 trillion. What is even more worrying is that interest payments on the debt continue to rise. According to the Congressional Budget Office's summary for fiscal year 2025, net interest on the public debt has exceeded $1 trillion for the first time as the debt continues to grow.
Even if the Federal Reserve continues to cut rates despite the economy's strength and persistent inflation risks, interest costs are unlikely to fall in the short term. The public debt is expected to continue to rise, especially after this year's “One Big Beautiful Bill Act,” which, according to the CBO, will add $3.4 trillion to the deficit over the next decade.
In the longer term, the outlook is not much better. The CBO's long-term budget outlook for 2025-2055 predicts that by 2055, U.S. debt could reach 156% of GDP, and it is expected to continue rising after that date. Such enormous debt could slow economic growth, increase payments to foreign holders of U.S. debt, and pose serious risks to the country's fiscal and economic health.
Given all this, the dollar index is expected to weaken, and Treasury yields are unlikely to drop anytime soon, even if the Fed maintains a loose monetary policy and the S&P 500 continues to rise.
But it’s worth remembering that the U.S. isn’t alone in this. Besides Japan, where sovereign debt exceeds $10 trillion — approximately 2.4 times the country's GDP — with interest payments consuming nearly 25% of the national budget, China is facing its own debt challenges. IMF data shows that over the past 15 years, China’s gross debt as a percentage of GDP has jumped from 33% to over 96%. With China planning to expand fiscal spending in 2026 to support growth in a challenging global environment, things are unlikely to improve soon.
At first glance, it might seem that China’s debt situation isn’t as dire as the U.S., but that figure doesn’t include hidden local government debt. Using the IMF’s broader definition, China’s general government debt jumps to an estimated 124% of GDP once off-budget local obligations are counted. Meanwhile, total non-financial debt exceeds 300% of GDP.
If China's debt burden continues to rise, it could lead to higher government financing costs, local defaults, and increased stock market volatility.
